We reiterate our Neutral recommendation on TAM S.A. (TAM) and remain optimistic on its proposed merger with LAN Airlines S.A. (LFL), to be christened LATAM Airlines Group S.A. (LATAM). According to the agreement, LAN will become the parent company with a 73% stake in TAM and the shareholders of TAM will receive 0.9 shares of LATAM for each share of TAM. It will be an all-stock transaction of approximately $2.7 billion.
The merger is expected to provide annual synergies of approximately $400 million, out of which approximately $133 million will be realized in the first year of the close of transaction and $267 million in the next two years. Passengers and cargo customers of both companies will stand to benefit from the increase in the number of flights, destinations and connections. Thus, following the announcement, TAM ADS rose by 4.1% and has increased by 26.0%.
However, the incessant appreciation of the US Dollar remains a concern, which hurt TAM’s second quarter results, which were a net loss of US$0.84 per ADR, much below the EPADR of US$0.14 according to the Zacks Consensus Estimate. During the corresponding period of 2009, EPADR was US$2.68.
However, net revenues were US$1,450.8 million, up from US$1,085.9 million in the second quarter of 2009 primarily due to a 50.3% increase in international cargo revenues based on higher volume and higher international prices.
TAM’s continuous fleet development and renovation strategy remain encouraging. During the second quarter, the company received one new A320 aircraft and two A330 aircraft with a total of 143 aircraft at the end of the second quarter. This is expected to increase to 151 aircraft by the end of fiscal year 2010.
Nevertheless, the global airline industry, which is not expected to show significant recovery in 2010, and the huge volatility in oil prices force us to remain on sidelines. The stock also currently retains its short term rating – “Hold” with the Zacks #3 Rank.
LAN CHILE-ADR (LFL): Free Stock Analysis Report
TAM SA-ADR (TAM): Free Stock Analysis Report
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