Transportation Initiating Coverage July 2016
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Transportation Initiating Coverage July 2016 Price Upside/ We are reinitiating coverage on our LatAm Transportation Company Rating Target Downside sample, favoring the airline industry in the region over the Market Mexican airports as the latter currently trade at stretched ASUR P$265.3 -6.4% Underperformer valuations despite their attractive business models and solid Market growth outlook, while the airline sector offers interesting entry GAP P$165.4 -13.2% Underperformer points, taking advantage of pressured valuations. Market OMA P$108.8 +1.0% Performer Here is a quick summary about our thesis by company: Market AEROMEX P$44.6 +21.7% Outperformer ASUR. Despite our positive view about Cancun’ s growth potential as Market a tourist destination, we believe that current valuations are COPA US$64.0 +15.8% Outperformer assuming recent year’ s exceptional growth rates for perpetuity. We Market believe traffic’ s upward trend should begin to normalize this year, GOL R$3.5 +5.4% Performer when tougher comps start to weigh in, while in the long run, traffic Market should revert to the mean. LATAM US$7.2 +7.5% Performer GAP. All the benefits from being the most diversified operator in terms of geography, along with strong traffic growth and solid commercial initiatives are more than reflected at current prices. In addition, lower EBITDA margins from Jamaica would taint the improvements achieved in Mexico. OMA. After the recent rally witnessed in OMA’ s stock, it seems that all the expected profitability improvements—derived from more efficient terminals, along with improved operating leverage—are already reflected at current prices. AEROMEX. The company’ s long-term potential, alongside persistently low oil prices and appealing traffic growth in Mexico due to an under-penetrated aeronautical industry should aid the company’ s profitability, along with the approval and kick-off of the JV with DAL, in which both companies will share their network between the US and Mexico would allow them to boost profitability in the mid-term. COPA. The company counts with one of the strongest business models across our sample, driven by the effectiveness of its four pillars: geographic location, connectivity, infrastructure, and product. Still, the weak economic environment in the South American region has taken a toll on profitability; however we believe COPA has the necessary tools to swiftly recover after this year’ s rough patch. Mauricio Martinez Vallejo GOL. Bearing in mind that GOL serves primarily as a domestic carrier [email protected] in Brazil, leaving it more exposed to the country’ s harsh economic +52(55) 5480 5800 ext. 4187 downturn, GOL’ s management continues to seek out opportunities to bring the company afloat, aiming to endure until an economic Pablo Zaldivar recovery materializes; still, GOL stands our sample’ s riskiest pick. [email protected] +52(55) 5480 5800 ext. 4390 LATAM. The company’ s profitability should remain harshly pressured in the short term, as yields continue to weaken due to the tough economic environment in the region, together with significant local currency devaluation. GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa (“GBM”) and its affiliates may carry out and seek to do business with companies covered in its research reports. Investors should not consider this report as a single factor in making their investment decision. These materials do not constitute an offer to buy or sell any security or participate in any trading strategy. Please refer to the last page of this report for Important Disclosures. Transportation Initiating Coverage Index J. AEROMEX 56 A. Industry Investment Thesis 01 I. Investment Thesis 57 II. Valuation 59 B. The Mexican Air Transportation Industry 03 III. Financial Estimates 60 IV. Company Description 62 C. The Mexican Airport Industry 04 V. Key Figures 68 VI. Corporate Structure 72 D. ASUR 06 I. Investment Thesis 07 K. COPA 74 II. Valuation 09 I. Investment Thesis 75 III. Financial Estimates 10 II. Valuation 77 IV. Company Description 12 III. Financial Estimates 78 V. Key Figures 15 IV. Company Description 80 VI. Corporate Structure 18 V. Key Figures 83 VI. Corporate Structure 86 E. GAP 20 I. Investment Thesis 21 L. GOL 88 II. Valuation 23 I. Investment Thesis 89 III. Financial Estimates 24 II. Valuation 91 IV. Company Description 26 III. Financial Estimates 92 V. Key Figures 28 IV. Company Description 94 VI. Corporate Structure 33 V. Key Figures 97 100 VI. Corporate Structure F. OMA 35 102 I. Investment Thesis 36 M. LATAM II. Valuation 39 I. Investment Thesis 103 III. Financial Estimates 40 II. Valuation 105 106 IV. Company Description 42 III. Financial Estimates V. Key Figures 44 IV. Company Description 108 VI. Corporate Structure 49 V. Key Figures 112 116 VI. Corporate Structure G. The Airline Industry in Latin America 51 I. Hub-and-spoke vs. point-to-point 52 N. Appendix I – Mexico and the US Aviation 118 Agreement H. The Mexican Airline Industry 53 119 O. Appendix II – Oil Price Latest Update from I. Brazil’ s Airline Industry 54 our O&G team P. Chile’ s Airline Industry 55 GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa (“GBM”) and its affiliates may carry out and seek to do business with companies covered in its research reports. Investors should not consider this report as a single factor in making their investment decision. These materials do not constitute an offer to buy or sell any security or participate in any trading strategy. Please refer to the last page of this report for Important Disclosures. Transportation Initiating Coverage A. Industry Investment Thesis We are reinitiating coverage on the LatAm Transportation sector, favoring the airline industry in the region over the Mexican airports as the latter currently trade at stretched valuations despite their attractive business models and solid growth outlook. Still, we believe the airline sector offers interesting entry points, taking advantage of pressured valuations after the economic turmoil seen in the last year and the region’ s long-term potential growth. An under-penetrated Mexican aeronautical industry should support solid traffic growth. Mexico’ s air passenger traffic has grown at an 8.9% CAGR in the past 5 years driven by the country’ s solid economic development, as the industry is characterized by an extreme sensitivity to economic cycles. Going forward, we believe that our sample should benefit from the growth potential in Mexico, as the country has a very low per capital expenditure in commercial airlines (US$46 per year) when compared to other countries. Thus, we are estimating an average growth rate of 5.8% for the 2016-2020 period. As for South America, the severe economic slowdown should take a toll on profitability. As we have witnessed throughout the past year, the profitability of South American carriers has been tainted by Brazil’ s tough economic environment, due to the steep decline in consumption. Moreover, the slowdown in most countries throughout the region has pressured further their financial performance. Still, we should note that the region—especially Brazil—possesses enormous long-term potential, as according to aircraft manufacturers, domestic traffic in LatAm is expected to grow at a 5.5% 20-year CAGR—considerably above the world’ s 4.8%. Mexico’s Total Air Passenger Traffic Brazil’s Domestic Air Passenger Traffic —figures in millions of PAX —figures in millions of PAX 100.0 CAGR 2015-2020: 5.8% CAGR 2015-2020: 2.5% 140.00 90.0 80.0 120.00 70.0 100.00 60.0 50.0 80.00 40.0 60.00 30.0 40.00 20.0 10.0 20.00 0.0 0.00 2015 2015 2016e 2017e 2018e 2019e 2020e 2016e 2017e 2018e 2019e 2020e Source: GBM FX depreciation continues to impact our sample, albeit in different proportions. Local currency depreciation has been a widespread occurrence throughout emerging markets, affecting the performance of our sample in different ways. Airlines come out as the main losers, as over 50% of their cost structure is linked to the US dollar. Still, carriers are able to naturally hedge their exposure through increased international sales, as fares tend to be priced in USD. On the other hand, airports enjoyed higher traffic inflows, in particular on tourist destinations, as Mexico became a cheaper destination. Cost containment and capacity rationalization remain vital for airlines. Despite lower fuel prices, carriers must maintain their focus on cost reduction in order to improve long-term profitability, especially South American carriers, as they seek to offset top-line weakness amidst economic turmoil. Furthermore, capacity management continues to be critical for our sample, as stable yields should be achieved by avoiding oversupplied markets. GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa (“GBM”) and its affiliates may carry out and seek to do business with companies covered in its research reports. Investors should not consider this report as a single factor in making their investment decision. These materials do not constitute an offer to buy or sell any security or participate in any trading strategy. Please refer to the last page of this report for Important Disclosures. 1 Transportation Initiating Coverage FX Depreciation on Main LatAm Currencies Sample’s Demand and Capacity Growth —figures in millions 110% 350,000 84.0% 90% 300,000 83.0% 250,000 70% 82.0% 200,000 81.0% 50% 150,000 80.0% 30% 100,000 79.0% 10% 50,000 0 78.0% -10% 2015 2016e 2017e 2018e 2019e 2020e Jul-13 Jul-14 Jul-15 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Jan-13 Jan-14 Jan-15 Jan-16 ASK RPK Load Factor MXN CLP '00 COP '000 BRL Source: GBM Potential industry consolidation due to the region’s long-term appeal.