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Barclays on Latin America Airlines: Initiating Coverage: Is the Turbulence Over?

November 1, 2011 1:13 PM EDT
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Price: $2.72 --0%

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Barclays on Latin America Airlines: Initiating Coverage: Is the Turbulence Over?

Barclays analyst, Daniel Spilberg, said, "Initiating with a 1-Positive sector view. The airline industry is cyclical, complex, and dynamic. Latin America remains underpenetrated with prospects for above-average growth. While we recognize that this characteristic has not always translated into attractive returns for shareholders, we are seeing landmarks toward market rationalization in the two largest markets in the region, Brazil and Colombia. Despite the intrinsic uncertainties (macro related and competition), we believe the sector is undervalued, especially GOL, where consensus is perpetuating trough results (implying the company does not generate enough results to pay its debt obligations, which appears to be unrealistic). Since very negative 2Q11 results, we are seeing evidence of more rational behavior in the marketplace."

"Gol Linhas AĆ©reas Inteligentes (NYSE: GOL) (Overweight): Brazilian airlines have not been generating adequate returns, in our view. Competition between new and established players has frequently led to overcapacity and an inability to increase fares when faced with cost pressures. We believe this dynamic is ripe for change. Market consolidation (LATAM creation and the Webjet acquisition) should enhance discipline. In this environment, we favor GOL, which trades at less than 5x adj. EV/normalized EBITDAR."

"Lan Airlines (NYSE: LAN) and TAN SA (NYSE: TAM) (Underweight): The merger of two giants, each a leader on one side of the continent, creating LATAM, provides ample room for value creation. We identify six important merger synergies; however, given uncertainties around the timing and challenges of the integration, we do not include them in our price targets. Since the TAM:LAN ratio was determined, TAM's fundamentals have considerably deteriorated. Since LAN already trades at a significant premium to peers, we would demand a better relative valuation to recommend these stocks."

"Copa Holdings (NYSE: CPA) (Equal Weight): We believe Copa has all the ingredients to be a OW: consistent track record of shareholder value creation, best-in group profitability, well-defended market position, world-class management team and an attractive valuation. However, our concerns around corporate governance - specifically, atypical clauses that open the door to potential substantial dilution to shareholders and easily by-passing tag-along rights - preclude us from having a positive recommendation. While we believe neither controlling shareholders nor management are willing to use these clauses, the simple fact that they exist, offer limited safety to investors, in our opinion."


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