This week, Qatar Airways announced plans to spend $613 million USD for a 10% stake in Chile-based LATAM Airlines, the biggest carrier in South America. Though the transaction has yet to become official — LATAM shareholders must approve the move — it signifies that there is a market for international airlines that may want to make a similar investment in Avianca, according to Bancolombia.
“In our opinion, the transaction — still pending approval — demonstrates the interest of large global players to get market exposure to Latin America, where in recent years the airline industry has grown substantially,” wrote Bancolombia analysts in a note to investors.
Their note put Qatar Airways’ investment at an EV/EBITDAR multiple of nearly 8.6 times. If Avianca, which has been trying to cut costs amid a tough operating climate in Latin America, were to get the same investment, the target price through a relative valuation would be $1.33 USD per share.
This is an encouraging sign for the stock, according to Bancolombia’s analysts. “Based on the above, we believe that Avianca’s stock still shows a fairly significant discount vs. our fundamental valuation and relative valuation, and therefore we reaffirm our buy recommendation,” they wrote.
Most airlines in Latin America are having a difficult time, with Avianca struggling to overcome the region’s economic downturn. The carrier surprised investors with a report of losses in the fourth quarter of 2015 and saw Fitch Ratings lower its rating two notches, down to B, in March.
The same month, Avianca introduced a new CEO, Hernán Rincón, in what it called “the beginning of a new phase in which strengthening of the organization is crucial to cope with the changes of the environment.” Two months later, Rincón oversaw the delay of an aircraft purchase order with Airbus to push back receiving new inventory in a cost-cutting measure.
“The agreement reached with Airbus S.A.S. represents an important reduction in capital expenditure for the company of $1.4 billion over the next 30 months,” said the company in a statement at the time. “During the same period, the company will continue with its cost-reduction initiatives that will further strengthen its capital structure and increase its free cash flow.”
Given all the difficult news, reports have continued to surface about a takeover. The airline has sought as much as $500 million USD from investors, and in June, both United Continental Holdings and Delta Air Lines were rumored to be considering bids to purchase all or part of Avianca, according to the Wall Street Journal.