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Up, up and away

4 Jun 2013 By Christopher Swann

The JetBlue of Brazil needs some sky-high optimism from investors for its coming stock-market debut. Azul, which like its American peer was founded by David Neeleman, may be the country’s third-largest carrier. Based on its U.S. cousin’s valuation, though, Azul is worthless.

The five-year-old airline – backed in part by private equity firm TPG, which has a proven track record in the industry – has a good niche. Azul is the sole operator on more than two-thirds of its routes, thanks to offering direct flights rather than the usual transfers in Sao Paulo. And its fleet of smaller jets fills up quickly so is more efficient than flying half-empty larger planes.

But Azul is losing money: its pre-tax loss widened 60 percent last year to 171 million reais ($81 million). Meanwhile, its net debt, including lease obligations, adds up to 6.2 billion reais.

It’s still growing, though. EBITDAR, which excludes the cost of aircraft rentals, more than doubled last quarter, including an acquisition. If that continues, the airline should generate 1 billion reais this year, according to Morningstar. Using the same six times multiple of EBITDAR that Cowen Securities estimates for JetBlue this year would give Azul an enterprise value of 6.1 billion reais, leaving its equity worthless.

Even Neeleman doesn’t sound like he expects growth to keep doubling. Brazil’s economy is running out of steam. And success comes with a price: the more passengers Azul attracts, the more it will have to spend buying larger planes.

Assume Azul’s EBITDAR jumps another 25 percent next year. On JetBlue’s 2014 EV/EDITDAR multiple of 5.3, according to Cowen, the Brazilian carrier’s stock would hit 572 million reais. That doesn’t look enough to finance growth as well as provide an acceptable return to investors who started the company with 400 million reais in 2008.

Only by comparing Azul to the industry’s leaders does the math start to work. Panama’s Copa Holdings commands an enterprise value of 9.4 times 2013 EBITDAR. That would translate into a more respectable market value of 3.2 billion reais for Azul.

Copa, though, has grown its profit virtually every year for more than a decade. New Azul investors will have to believe the company will keep climbing fast and encounter no economic or operational turbulence to justify jumping on board.


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