AZUL - Gol Airlines: Looks Like A Buy But Is A Hold

2023-05-23 16:30:28 ET

Summary

• Gol Linhas Aéreas Inteligentes' results are impressive.
• The outlook for 2023 is equally impressive.
• Despite all of the positives I am seeing, the stock seems to be a more comfortable hold than buy.

As part of my airline coverage, I am also covering South American airlines and more specifically Brazilian airlines. I have a buy rating on Azul ( AZUL ), but to date, I did not analyze Gol Linhas Aéreas Inteligentes ( GOL ). I did discuss the formation of Abra Group last year, but that was not a specific discussion on the prospects of Gol stock. In this report, I will be analyzing the most recent results and attempting to put a price target on the stock.

The Risks Of A Brazilian Carrier

There is a risk that is not specific to Gol but should be addressed, and that is the Brazilian real. The currency is a commodity currency, meaning that it moves more or less in line with commodity prices. That also means that, in case of macroeconomic softening, Brazilian carriers might be plagued by an added currency pressure on top of the impact on demand. This is something that investors should be aware of.

A Look At Gol's Q1 2023 Results

I don't want to provide an extremely long overview of the results. Sometimes, less is more, and the Q1 2023 highlights show most of what you need to know. Capacity grew by 11% while unit revenues grew 37.7% and combined with slightly higher load factors that led to 50.6% higher passenger revenues and 32.6% higher overall revenues, which also incapsulates some weakening in cargo revenues. Unit costs were up 20%, but a better indicator of efficiency or cost control is the unit costs excluding fuel which grew 12% which mostly reflects inflation. So, the story of Gol is not exceptional at all: The demand environment is strong for passenger services, weaker for cargo and costs are affected by higher fuel costs as well as cost inflation. With an operating margin of 16.2% and aircraft utilization of 11.7 hrs per day, Gol had a great quarter.

A Very Promising Outlook For 2023

The outlook for 2023 is as promising as the results that Gol already showed. Capacity is expected to be up 15 to 20 percent with net revenues of R$19.5 billion and an EBITDA of 24% as compared to 25.2% in the first quarter while net-debt-to-EBITDA is set to come down to 6x from 7.9x. Unit costs are expected to fall around 8% compared to the first quarter. So, what we do see is that costs will decline as the capacity expands, but driven by inflation, the unit costs remain elevated.

Gol Stock: Surprisingly Not A Buy

When going through the results and the outlook, the only thing I was thinking is "How big of a buy is this going to be according to my valuation model?". The model developed for subscribers of The Aerospace Forum calculates the enterprise value and projects the EBITDA for the coming three years. Surprisingly, but likely driven by its modest cash pile in comparison to its debt, a 16% upside by 2025 rolled out of the model, making the stock a hold rather than the buy rating that I would have expected. If Gol deleverages at an accelerated pace, I could see things getting closer to a buy, but for now, I would mark the stock a hold.

Conclusion: Gol Is Operating Nicely But Stock Is A Hold

The improvement that Gol has shown in its operations and metrics are impressive, and the outlook for 2023 is extremely strong. However, driven by its debt pile, the company seems to be a hold rather than a buy, at least for now. I wouldn't rule out that somewhere in the future the buy signals will get stronger, but for now, I mark shares a comfortable hold.

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