TAM Posts Decent Results - Analyst Blog

Brazilian airport operator TAM S.A. (TAM) reported decent results for the third quarter of fiscal 2010 with a 31.6% increase in adjusted net income and a 23.4% rise in adjusted revenue.

Adjusted net income excludes the reversal of tariff for TAM. In September 2010, the Superior Court of Justice confirmed the decision that releases TAM from paying the additional tariff, calculated at 1% of the fare for all regular domestic tickets sold. In light of the decision, TAM reverted the accounting provision of R$585.9 million for the period from June 2001 to August 2010.

TAM reported adjusted net income of R$300.5 million (US$170.7 million) compared with an ncome of R$228.4 million (US$121.5 million) in the year-ago quarter. This was driven by the gradual improvement in the economic conditions and significant increase in air fares.

Net income was R$2.00 or US$1.14 per EPADS compared with R$1.5 or US$0.80 per EPADS in the corresponding period of 2009 and US$0.45 as anticipated by the Zacks Consensus Estimate.

During the quarter, adjusted net revenues were R$2,898.9 million (US$1,647.1 million), up from R$2,381.2 million (US$1,266.6 million) in the third quarter of 2009, primarily due to increases of 20.2% and 16.0% in passenger and cargo revenues driven by higher market demand.

Passenger revenues and the overall cargo revenues reached R$2,369.0 million (US$1,346.0 million) and R$276.2 million (US$146.9.0 million), respectively, based on the global economic recovery.

Total cost of service and operating expenses grew 12.4% year over year; based on revenues, it fell by 880 basis points due to cost optimization. EBITDAR (excluding aircraft rent) for the quarter was R$570.4 million (US$324.1 million) with a margin of 19.4% compared with R$347.9 million (US$185.1 million) with a margin of 14.6% in the corresponding quarter of 2009.

TAM continued with its fleet development and renovation strategy and received five new airbus aircraft, two new A321 aircraft, one A320, and two A319 aircraft with a total of 148 aircraft at the end of the third quarter, which is expected to increase to 151 aircraft by the end of fiscal year 2010.

Net debt at the end of the quarter increased to $7,498.6 million (US$4,385.1 million) from R$6,762.3 million (US$3,756.8 million) at the end of the previous quarter. During the quarter, cash from operating activities remained stagnant at R$434.1 million (US$253.9 million) compared with the third quarter of 2009.

During the quarter, LAN Airlines S.A. (LFL) and TAM signed an MoU to merge operations and form a new company called LATAM Airlines Group S.A. (LATAM). 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 TAM share. It will be an all-stock transaction of approximately US$2.7 billion. However, the merger is awaiting various regulatory approvals.

On combination, LATAM will become a strong competitor in the domestic market with total expected synergies of US$400 million. However, we are concerned about the global airline industry, which is not expected to show any significant recovery in 2010. The huge volatility in oil prices also forces us to reiterate our Neutral recommendation on the ADS. The ADS currently retains its Zacks #3 Rank (short term “Hold” rating).                                                       

 
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