IPO Overview

Brazilian airline, Azul (Pending:AZUL) is expected to price Thursday evening (4.6) and go public on Friday (4.7). The company expected to raise $478M through the offer of its 72 million shares at a price range of $18.02 to $21.81. Of the 72 million shares being offering, 9 million are from certain selling shareholders, representing 13% of the total offering. Azul Inc. will dual list on the NYSE and on the Sao Paulo Stock Exchange in Brazil. Each ADS represents three preferred shares.

Azul had previously attempted to IPO in 2013, 1014, 2015, but postponed for various reasons. The company appears more prepared now, and recently raised new capital by selling 5% of the company to United Continental Holdings Inc.

Assuming Azul prices at the mid-point of the price range, it would command a market cap value of $2.19B and trade at a price/sales ratio of 1.07x.

Underwriters include: Citi, Itau BBA, Deutsche Bank, Banco do Brasil Securities LLC, Bradesco BBI, J.P. Morgan, Raymond James, Santander, and Banco Safra SA.

Business Summary -

Azul Inc., is the largest Brazilian airline in terms of both departures and cities served. The airline operates an extensive domestic network and flies to three international destinations: Fort Lauderdale, Orlando, and Lisbon. The airline has 784 daily departures serving 101 destinations and is the only airline on 70% of its routes.

Azul operates as a low-cost carrier and was founded in 2008 by David Neeleman, founder of JetBlue. The company operates a loyalty program, TudoAzul, which has 7M members.

(Company Website)

Management Team

David Neeleman founded Azul Inc., and serves as CEO and Chairman of the board. He is a dual Brazilian and US citizen and previously founded the JetBlue airline, where he served as CEO. Neeleman has a long history of working in the airline industry beginning in 1984. He previously co-founded Morris Air and implemented the industry's first electronic ticketing system. The company was later sold to Open Skies. He also co-founded WestJet Airlines.

José Mario Caprioli dos Santos, serves as COO and board member. Prior to joining Azul, Caprioli founded TRIP, and served as CEO (1998 - 2003). He is also the Chairman of the Brazilian Airlines Association (ABEAR). Mr. Caprioli received his education from Pontifícia Universidade Católica de Campinas where he studied business administration.

Financial Highlights

Revenue generated was $2.05B in 2016, up 6.5% from 2015, and operating margin to 5.2% in 2016. Azul has not yet generated profits and generated a net loss of $38.75M in 2016. As of December 31, 2016, Azul had cash and cash equivalents of $168M and loans and financing of $1.2B.

A slowdown in the Brazilian economy, which began in 2014, is beginning to show signs of turning around. Azul reports beginning to see signs of a recovery during the second half of 2016. Given the airline industries sensitivity to political and economic conditions, an improved economy could have a significant impact on business.

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(Sec Filing)

Competitors

Top competitors include: LATAM Airlines (NYSE:LFL), a Chile-based airline, which flies mainly to Chile, Peru, Argentina, Colombia, Ecuador and Brazil as well as has several international routes to the US and Europe. Another major competitor is Copa Airlines (NYSE:CPA), which is based in Panama which provides various domestic and international flights.

Assuming Azul prices at the mid-point of the price range, it trade at a price/sales ratio of 1.07x. This is above that of LFL (0.75x) and CPA (2.13x), but below the industry average.

(S-1/A)

Conclusion: Consider A Modest Investment

Concern about the political and economic conditions in Brazil and volatility of fuel prices add risk to this investment. However, the Brazilian market is showing signs for a rebound.

Azul Inc. is managed by an experienced management team and is holds a leading position on the majority of domestic flights.

At its current valuation we are optimistic about Azul Inc. and its prospects. We recommend a modest investment.