2023-11-11 03:07:53 ET
Summary
- GOL's 3Q23 results were decent, with a lower yield but a better load factor.
- The airline has downgraded its guidance due to lower pricing and higher non-fuel costs.
- The recent warrant issue and debt for equity swap have negatively impacted minority shareholders and GOL's equity appreciation potential.
Summary
Gol Linhas Aéreas Inteligentes ( GOL ) latest financial results were good, but not great. The main negative was that the yield was lower than expected, but the airline did have a better load factor. GOL has downgraded its guidance due to lower pricing and higher non-fuel costs, but it is still pointing to a solid outcome. The most significant highlight, in my view, is the result of the recent warrant issue, which I analyzed in this article GOL: Worst Priced In? Unfortunately, the outcome was disappointing and highlighted GOL's poor treatment of minority shareholders. My new year-end 2024 price target of US$4.9 offers an upside but has been cut from US$5.6.
Results and Guidance
The airline is continuing to post a solid margin recuperation driven by pricing or yields and aircraft utilization or load factor. EBITDA margins have now returned to pre-pandemic levels, which should support positive free cash flow generation from which GOL can reduce debt. Updated guidance suggests a decent outcome, but demand and pricing seem to be waning while costs increase. The primary positive surprises could come from fuel costs, with oil falling from recent highs, as well as the Brazilian currency appreciation. It is worth noting that there is a lower leverage indicator post-warrant issue and the creation of a US$1.2bn bond conversion.
Share Dilution
When GOL announced its warrant issue worth up to 1.8 billion, it was expected that only a few, if any, minority shareholders would participate due to the steep price structure. According to the company's press release, the controller was supposed to acquire their share. Unfortunately, the outcome was not as I had anticipated. The controllers did not purchase the warrants for R$5.82 as initially stated, but instead received them for free. Furthermore, they converted a US$1.2bn Senior Notes into Convertible Notes with a strike price of R$5.84, which is well in the money. This means the controllers can swap US$1.2bn for 990 million new shares, resulting in an increase of their stake in the company from 57% to 87%.
Although this debt swap is positive for credit quality and bond values, it cuts into GOL's equity appreciation potential. However, the fact that GOL did not enter Chapter 11 and wipe out minorities altogether is a saving grace.
Valuation
Based on my analysis, I believe that GOL's value can be best measured using a target EV/EBITDA of 5.5x, which is lower than the valuation given to Azul ( AZUL ), LATAM ( LTMAY ), Copa ( CPA ), and Volaris ( VLRS ). This is due to GOL's weak balance sheet, inconsistent execution, and subpar track record in corporate governance. Other valuation metrics have been difficult to apply due to the lack of earnings volatility, particularly because of foreign exchange gains and losses resulting from USD debt and fuel hedges.
In light of recent events, I am adjusting the price target for YE24 to R$12.2 or US$4.9 per ADR from the previous target of US$5.6. This is due to an increase in share count, with lower debt reduction resulting from the warrant and convertible bond event.
Conclusion
GOL is an airline that continues to work its way past the impact of the pandemic. They are working on improving aircraft utilization, margins, and reducing their debt. The recent warrant issue and debt for equity swap are expected to be the final major corporate restructuring events that will affect their equity.
For further details see:
Gol: The Long And Winding Road