XP sees potential for 18% upside for Azul shares and maintains neutral recommendation (Image: Herbert Pictures/iStock)
A XP Investments updated its estimates for the Azul (AZUL4), introducing a target price for 2025 of R$6.60 per share — an upside potential of 18%. The firm maintains its recommendation neutralbased on a highly uncertain dilution scenario and a currently high leverage profile.
By the end of 2024, the estimate is an EBITDA (earnings before interest, taxes, depreciation and amortization) of R$5.9 billion, in line with the guidance and consensus.
The firm's analysts comment that, despite the company having reached a successful out-of-court settlement with lessors and suppliers, Azul has entered what they classify as a “dilution dilemma”.
- See more: US interest rate cuts could be a 'trigger' for the appreciation of a specific group of stocks; find out which ones
The airline settled part of its aircraft lease through an instrument convertible into shares which, in XP's assessment, although offering a liquidity buffer, implied a significant risk of capital dilution.
“Instigated by negative equity triggers (mostly FX/fuel related), Azul’s share price entered a downward spiral since mid-23, fueled by the convertible capital structure that implied that ‘the lower the share price moved, the lower it should move’.”
XP highlights that the conversion at the current share price implies a severe dilution of 56% for Azul shareholders.
Additional volatility at Azul
Analysts note that as the Q3 2024 to Q4 2027 share conversion schedule approached, with low share prices (and high implied dilution), liquidity/dilution concerns arose amid media speculation about a potential capital raise or bankruptcy filing, causing the stock to fall further.
“Finally, in recent sessions, the stock has reacted to talks about a potential new deal with lessors, which, according to a Reuters article, could limit capital dilution to ~20%. If confirmed, this would be a big positive, as it would imply R$1.8 billion in debt reduction (120% of Azul's market value before the renegotiation news)”.
According to a survey by Elos AytaAzul registered a 54.2% appreciation in just three days, between the trading sessions of September 12 and 17, after reaching its lowest historical price. In the period, this is the best performance among the stocks that make up the Ibovespa.
Despite the recovery seen in recent days, AZUL4 remains 90% below its historical peak on January 28, 2020, when it reached R$62.41. Still, in the year to date, the shares have fallen 62%.