TAP - one last hurrah

All,

Please find our updated analysis here.

The restructuring has been a success, both financially and operationally. The 24s have tightened into the high 90s and our thesis has run its course. Still, for those interested in holding short term paper with a little upside and possibly a half-decent yield, these bonds still trade very wide compared to the debt of the government that guarantees it and that has just committed to injecting enough cash to take those bonds out if need be.

Investment Rationale:

- With a remaining 7% yield, our 5% position in the 24s is for sale now, but might remain on the book for a last hurrah from the impending M&A process, the favourite of which remains Lufthansa. 

- Net leverage through the bonds remains Zero and for comparison, Portuguese 2-year government bonds trade at 2.75%. 

- Even failing an investment from a larger carrier, we see a tangible chance that the 24s will be refinanced early - possibly together with the 2023 bonds due this summer.

Outlook:

- Fundamentally we are anticipating a very strong H123 in which the drop in fuel prices should be very noticeable. TAP is only 50% hedged for fuel, which is below average and that in a market where fuel is coming down from €100 and higher.

- Provided Brazil can however narrowly avoid descending into chaos, we are forecasting RPKs to remain at least stable here, but the load factor to drop off slightly on mildly improved ASK. That would be enough to make for a very profitable airline (…for the first time - caution).

- We anticipate the impending M&A process to result in Lufthansa taking a minority stake in TAP S.A., which should re-rate the bonds, if they are not yet trading at par by then.

- Failing that, we think it is not unlikely that the 24s are taken out early.

H222 Results:

- Lower Volumes were more than made up for with higher volumes, which however overcompensated for the €300m higher than expected fuel costs. All other cost items came in close to our forecast, so that EBITDA (after all finance and operating lease expenses) ended €150m higher than expected.

- Working Capital outflows were €250m less than feared, despite operations still ramping up from covid times. 

- Together, however, these two effects could not compensate for the non-payment of tranches 2 and 3 of the government’s €980m 2022 Restructuring Aid. Payment of €343m each is scheduled for December 2023 and 2024 respectively.

- Cash therefore looks now managed to remain close to €1bn for the coming periods, which should be healthy enough and leaves the bonds at approx. 0 net leverage (taking all leases into the P&L). 

Happy to discuss,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk