American University
Sarajevo
Corporate Finance
LATAM AIRLINES GROUP
Avdo Halilovic
Corporate Governance
About company
Name: LATAM Airlines Group S.A.
Address: Pdte. Riesco 5711, 20th floor
Las Condes Santiago, Chile
E-mail: [email protected]
Website: www.latamairlinesgroup.net
www. Lan.com
www.tam.com.br
Trading Name: LATAM Airlines Group S.A.
Type: Public
Stock symbol: LFL
Fiscal years ends: 31 December
Traded in Santiago and on New York Stock Exchange, in form of ADRs, and Sao Paulo Stock
Exchange, in the form of BDRs
LATAM Airlines Group is part of Dow Jones Sustainability World Index
Business summary
“LATAM Airlines Group S.A., together with its subsidiaries, provides passenger and cargo air
transportation services in South America. It provides domestic and international passenger transport
services to approximately 135 destinations in 22 countries and cargo services to approximately 144
destinations in 26 countries; and other services, such as ground handling, courier, logistics, and
maintenance. As of December 31, 2014, the company operated a fleet of 327 aircraft, including 313
passenger aircraft and 13 cargo aircraft. The company was formerly known as LAN Airlines S.A. and
changed its name to LATAM Airlines Group S.A. in June 2012. LATAM Airlines
Group S.A. was founded in 1929 and is headquartered in Santiago, Chile.”1
Company historyIn 1929, founded by Comandante Arturo Merino Benitez, started Linea Aerea
Nacional de Chile (LAN).
Then in 1946 LAN had its first international flight from Santiago to Buenos Aires
In 1956 stat of LAN services to Lima, and then in 1958 services to Miami, U.S.
TAM-Taxi Aereo Marilia was created by five charter flight pilots.
1970 LAN connected with the Europe, and started firs flights on a new continent
TAM has founded Transportes Aereos Regionais by Captain Rolim Adolfo Amaro in 1975.In 1976
Launch of TAM services in Brazilian cities, especially Mato Grosso and Sao Paulo.
1983 – constitution of Linea Aerea Nacional – Chile Limitada, through CORFO.
LAN becomes a joint stock company in 1985, and in 1986 acquisition by TAM of
Lapsa airline from the Paraguayan government and creation of TAM Mercosur; start of Sao Paulo.
The Chilean government sells a 51% stake to local investors and Scandinavian
Airlines System (SAS) in 1989. New name from Brasil Cenral renamed TAM –
Transportes Aereos Meridonais in 1990.
Privatization of LAN completed with the acquisition of a 98,7% stake by its current controllers and
other shareholders in 1994. Acquisition by TAM of Lapsa airline from the Paraguayan government
and creation of TAM Mercosur; start of Sao Paulo in 1996. LAN lists on the New
1Website: finance.yahoo.com/q/pr?s=LFL+Profile
York Stock Exchange in 1997, becoming the first Latin American airline to trade ADRs onthis
important market.; In 1998 TAM has got a first AIRBUS A330, and started its first international flight
from Sao Paulo to Miami. TAM start services to Europe through a code sharing agreement with Air
France to Paris Charles de Gaulle, in 1999. In 2000 LAN joined the Oneworld. In 2002 LAN Alliance
with Qantas and Lufthansa Cargo. In 2007 started new Low cost model in domestic markets, capital
increase of US$320 milion, purchase orders from 32 Boeing 787 Dreamliners.In 2010 TAM officially
joins Star Alliance. 2011 LAN and TAM sign binding agreements related to the business
combination of the two airlines.2012 LATAM Airlines Group is born as a result of the business
combination between LAN and TAM.
Their capital increases for US$940,5 Millions in 2013, and in 2014. TAM joins oneworld alliance,
which becomes LATAM Airlines Group global alliance/LATAM launches its 2015-2018 strategic plan.
2
2 http://memoria2014.marketinglatam.net/english/nuestra-empresa.php#capitulo-cuatro
Ownership Structure of the company
Informations from March 31st, 2015.
The Board of the Company is composed of nine members who are elected every two years by the
ordinary shareholders' meeting. The Board meets in regular monthly sessions and in extraordinary
sessions as the corporate needs demand. Of the nine board members, three form part of its
Directors’ Committee which fulfills both the role foreseen in the Corporations Law and the functions
of the Audit Committee required by the Sarbanes Oxley Law of the United States of America and the
respective regulations of the SEC. As of December 31, 2014, the Company had a total of 1,622
registered shareholders. At that date approximately 7.69 % of the Company’s share capital was in
the form of ADRs and approximately 0.53% in the form of BDRs. For the period ended December 31,
2014, the Company had an average of 53,300 employees, ending this period with a total of 53,072
employees, spread over 10,077 Administrative employees, 6,986 in Maintenance, 17,517 in
Operations, 9,237 in Cabin Crew, 4,009 in Controls Crew, and 5,246 in Sales.3
The current Board of Directors was elected in the Ordinary Shareholders Meeting held on April 28,
2015, in accordance with the Company’s By-Laws, and will hold office for a period of two years.
Chairman – Mauricio Rolim Amaro
Director – Henri Philippe Reichstul
Director – Juan Jose Cueto Plaza
Director – Georges de Bourguignon
Director – Ramon Eblen Kadis
Director – Ricardo J. Caballero
Director – Carlos Heller Solari
Director – Gerardo Jofre Miranda
Director – Francisco Luzon Lopez
3 http://memoria2014.marketinglatam.net/english/img/Financial_report.pdf
4
Board Committees Pursuant to Chilean Corporation Law, as amended by Law No. 19705, LATAM Airlines Group must
have a board of directors' committee composed of no less than three board members. LATAM
Airlines Group has established a three-person committee of its board of directors, which, among
other duties, is responsible for:
Examining the reports of LATAM Airlines Group external auditors, balance sheets and other
financial statements submitted by LATAM Airlines Group administrators to the shareholders.
Proposing external auditors and rating agencies to the board of directors
Evaluating and proposing external auditors and rating agencies.
Reviewing internal control reports pertaining to related party transactions.
Examining and reporting on all related-party transactions
Reviewing the pay scale of LATAM Airlines Group senior Management
4 http://www.sec.gov/Archives/edgar/data/1047716/000119312513187889/d524121d20f.htm
LATAMs board of directors has also established extra four committees to review, discuss and make
recommendations to board of directors. This include a Strategy Commitee, a Leadership Committee,
Finance Committee and a Brand, Product and Frequent Flyer program committee.5
Locking at the Forbes list, the LATAM Airlines group is globally on the #1.387 place, with the market capital of $4.8 Bilion. If we look at their sales then they are on the #816 place, and by the assets on #1.078 place.
Stockholder Analysis
According to the finance.yahoo.com LFL has 545,56 M shares outstanding. There is no information how many shares is held by insiders and how many by institutions (%).
Major holders table:
Breakdown
% of Shares Held by All Insider and 5% Owners: NaN
% of Shares Held by Institutional & Mutual Fund Owners: NaN
% of Float Held by Institutional & Mutual Fund Owners: NaN
Number of Institutions Holding Shares:
Holder Shares Reported
No Major Direct Holder info Available for LFL
5 www.latamairlinesgroup.net – Governance
Top Institutional Holders
Holder Shares % Out Value* Reported
Manning & Napier Advisors LLC 6,797,000 1.25 54,783,820 Mar 31, 2015
Baillie Gifford and Company 3,285,895 0.60 39,365,022 Dec 31, 2014
Dimensional Fund Advisors LP 3,244,187 0.59 38,865,360 Dec 31, 2014
Global Thematic Partners, Llc 3,208,292 0.59 25,858,833 Mar 31, 2015
Credit Suisse/ 2,902,770 0.53 23,396,326 Mar 31, 2015
Emerging Global Advisors, LLC 2,095,065 0.38 25,098,878 Dec 31, 2014
TIAA-CREF Investment
Management, LLC1,194,775 0.22 9,629,886 Mar 31, 2015
State Street Corporation 1,170,433 0.21 14,021,787 Dec 31, 2014
Goldman Sachs Group, Inc. 1,145,025 0.21 13,717,399 Dec 31, 2014
Wells Fargo & Company 1,023,331 0.19 12,259,505 Dec 31, 2014
Top Mutual Fund Holders
Holder Shares % Out Value* Reported
EGShares Dow Jones Emerging Markets
Consumer Titans Index Fd2,261,347 0.41 18,226,456 Mar 31, 2015
Manning & Napier World Opportunities
Series Fund2,131,567 0.39 17,180,430 Mar 31, 2015
Manning & Napier Overseas Series Fund 1,090,861 0.20 8,792,339 Mar 31, 2015
College Retirement Equities Fund-Growth
Account968,475 0.18 11,602,330 Dec 31, 2014
DFA Emerging Markets Core Equity
Portfolio839,537 0.15 8,705,998 Jan 31, 2015
Wells Fargo Advantage Small Cap Value
Fd753,000 0.14 7,959,210 Feb 28, 2015
DFA Investment Dimensions-DFA
Emerging Mkts Value712,427 0.13 7,387,867 Jan 31, 2015
iShares Latin America 40 ETF 627,704 0.12 5,059,294 Mar 31, 2015
DFA Emerging Markets Series 429,797 0.08 4,456,994 Jan 31, 2015
Vanguard International Stock Index-
Emerging Markets Stk335,113 0.06 3,475,121
Jan 31, 20156
From the tables we could see that the Manning & Napier Advisors LLC with 6,797,000, has more than double shares then the second positioned holder Baillie Gifford and Company. The difference
6 http://finance.yahoo.com/q/mh?s=LFL+Major+Holders
between second, third and fourth holder is not that much big, but there is still some kind of diversification.
Risk and Return
We have few risk factors correlated with LATAM, since they does not control the voting shares or board of directors of TAM:
The combination of LAN and TAM – where Holdco I owns 100% of the TAM common shares, and the LATAM owns 100% of the TAM preferred shares. So the result of this ownership structure is, that TAM and each airline subsidiary of TAM, retain voting and board control of TAM and each airline subsidiary of TAM, as also LATAM is entitled to all of the economic rights in TAM.
LATAM assets include a significant amount of goodwill
Failure to successfully implement LATAMs strategy would harm its business and the market value of its ADSs and common shares
Failure to successfully implement the new single brand may adversely affect LATAM business and the market value of its ADSs and common shares
Needs time to combine the frequent flyer programs of LAN and TAM
The financial results of LATAM are exposed to foreign currency fluctuations
They depends on strategic alliances or commercial relationships in many of the countries in which it operates, and business may suffer if any of its strategic alliances or commercial relationship terminates
Result of operations also can suffer if they fail to obtain and maintain routes, suitable airport access, slots and other operating permits.7
At the end of 2013, the Company provided US$ 94.3 million in derivative margin guarantees, for cash and stand-by letters of credit. At December 31, 2014, the Company had provided US$ 91.8 million in guarantees for Cash and cash equivalent and stand-by letters of credit. The fall was due at i) maturity of hedge contracts, ii) acquire of new fuel purchase contracts, and iii) changes in fuel prices, exchange rate R$/US$ and interest rates8.
Based on the information’s from Yahoo! Finance web site, beta is 1.60, and according to the Morningstar.com beta for LFL is 1,59. So there is no much difference in those data. This means that
7 http://quote.morningstar.com/stock-filing/Annual-Report/2014/12/31/t.aspx?t=XNYS:LFL&ft=20-F&d=d9d3aa34e32bbc64a7e552100f8017e3 – risk factors
8 http://memoria2014.marketinglatam.net/english/img/Financial_report.pdf
this securities are theoretically 60% more volatile than the market, or we could say that for every 1% change in the market, LFL stock will change for 1.60%.
Valuation more 05-11-15
Stock Industry S&P 500
Price/Earnings -18.9 17.4 20.5Forward P/E 9.0 --- 19.0Price/Book 1.1 4.0 2.9Price/Cash Flow 3.7 3.6 12.0Price/Sales 0.4 0.9 1.9Dividend Yield % --- --- 1.9
S&P 500 data through 05-11-15
Growth more 12-31-14
1 Year% 3 Year% S&P 500
Sales -6.4 29.4 7.1Net Income --- --- 9.6EPS --- --- 13.3Equity/Share -15.0 24.2 8.0Dividends --- --- 18.5
S&P 500 data - 3 Year%9
Comparing LFL with the industrial average we could see that Market capital is lover than industry average, but then again, sales are higher than the average for about $2,381Mil.
Industry Peers Get Price Quotes Track this stock and its peers
Morningstar Stock
Grades
StockMkt Cap
$Mil Sales $Mil GrowthProfit-ability
FinancialHealth
LATAM Airlines Group
SA
4,915.0 12,094 B D C
Industry Average 7,263 9,713 C+ C C
Growth Grade: B
Fiscal year-end: 12 2011 2012 2013 2014
Sales % 27.2 73.9 33.1 -6.4
Earnings/Share % -23.7 --- --- ---
Book Value/Share % 11.0 146.5 -8.5 -15.0
Dividends/Share % 58.0 -88.5 -64.7 ---
9 http://quicktake.morningstar.com/
Morningstar has its own grade system, which helps people to quickly get handle on companys fundamentals. “A” means that the company ranks near the top of the financial services sector. Since LFL is graded B in category “Growth” then we could say that company is better one when it comes to the growth. But even there is a B grade, it is obvious that sales are drastically changed from 2011 to 2014.
Profitability Grade: D
Fiscal year-end: 12 TTM=Trailing 12 Months2010 2011 2012 2013 2014 TTM
Return on Assets % 6.7 4.4 -0.1 -1.3 -1.2 -1.2
Industry Rank 35 75 80 80 --- 80
Return on Equity % 35.0 23.4 -0.6 -5.4 -5.4 -5.4
Industry Rank 18 83 83 80 --- 80
Industry Rank (100=Worst)
ROE BreakdownNet Margin% 9.6 5.7 -0.2 -2.2 -2.1 -2.1Asset Turnover 0.7 0.8 0.6 0.6 0.6 0.6Financial Leverage --- 5.3 4.4 4.3 4.7 4.7
Grade “D” for profitability means that comparing to the industry average, LFL has lower profitability, which could be seen from the last table where return on assets (%) in 2010 was 6,7 and then in 2013 and 14 it drops to -1,2%. Return on Equity(%) is also lower than the industrial average. Negative margin means that they are not getting enough money to overcome expenses.
Financial Health Grade: C
Fiscal year-end: 12 Qtr = Current Quarter2010 2011 2012 2013 2014 Qtr
Long-Term Debt $Mil 2,876 2,979 --- --- --- ---
Total Equity $Mil 1,297 1,445 5,112 5,239 4,402 4,402
Debt/Equity --- 2.1 --- --- --- ---
S&P 500 1.4 1.4 0.8 1.0 --- 1.1
Financial Leverage --- 5.3 4.4 4.3 4.7 4.7
S&P 500 5.0 7.0 3.6 4.7 --- 7.4
Current Ratio --- 0.6 0.5 0.8 0.6 0.6
S&P 500 2.0 2.0 2.1 2.0 --- 2.1
“C” rate shows that when it comes to the Financial Health this company is somewhere in the middle, average one.
Valuation Ratios 05-11-15
Stock Industry S&P 500Stock's 5Yr
Average*Price/Earnings -18.9 17.4 20.5 ---Price/Book 1.1 4.0 2.9 3.8Price/Sales 0.4 0.9 1.9 1.2Price/Cash Flow 3.7 3.6 12.0 ---Dividend Yield % --- --- 1.9 ---* Price/Cash Flow uses 3-year average.
2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12
Revenue USD Mil
2,506 3,034 3,525 4,534 3,674 4,391 5,585 9,722 12,925 12,094
Gross Margin %
3.7 11.2 — 36.6 31.3 31.4 27 21.4 22.2 20.4
Operating Income USD Mil
142 303 413 536 301 490 507 276 586 541
Operating Margin %
5.7 10 11.7 11.8 8.2 11.2 9.1 2.8 4.5 4.5
Net Income USD Mil
147 241 308 336 231 420 320 11 -281 -260
Earnings Per Share USD
0.46 0.75 0.9 0.98 0.67 1.22 0.93 0.03 -0.58 -0.48
Dividends USD0.13 0.26 0.64 0.61 0.07 0.28 0.45 0.05 0.02 —
Payout Ratio %
29.6 34.9 70.8 62.4 9.9 23.1 47.9 196.3 — —
Shares Mil1,611 322 342 342 342 343 343 416 488 546
Book Value Per Share USD
1.56 1.94 2.89 2.23 3.21 3.79 4.21 10.38 9.49 8.07
Operating Cash
277 490 707 729 846 1,125 763 1,204 1,409 1,331
Flow USD Mil
Cap Spending USD Mil
-592 -920 -840 -832 -539 -1,048 -1,395 -2,449 -1,425 -1,496
Free Cash Flow USD Mil
-315 -430 -133 -103 307 77 -632 -1,245 -17 -165
Free Cash Flow Per Share USD
-0.2 -1.34 -0.39 -0.3 0.9 0.22 -1.84 -2.99 -0.03 -0.3
Working Capital USD Mil
-105 -170 -29 -28 -114 -611 -979 -2,433 -1,530 -2,195
Margins % of Sales 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12
Revenue 100 100 100 100 100 100 100 100 100 100
COGS 96.3 88.81 — 63.4 68.67 68.62 73.02 78.61 77.79 79.58
Gross
Margin 3.7 11.19 — 36.6 31.33 31.38 26.98 21.39 22.21 20.42
SG&A 13.78 13.31 — 20.74 7.34 7.56 15.85 17.21 16.73 16.02
R&D — — — — — — — — — —
Other 80.57 76.71 88.27 4.04 15.8 12.66 3.84 1.34 0.95 -0.08
Operating
Margin 5.65 9.97 11.73 11.83 8.19 11.16 9.07 2.84 4.53 4.48
Net Int Inc & Other
1.33 -0.48 -1.28 -2.99 -0.63 0.27 -2.23 -1.54 -6.73 -3.94
EBT Margin 6.98 9.5 10.44 8.83 7.55 11.43 6.85 1.3 -2.2 0.54
Profitability 2005-12 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12
Tax Rate %16.16 16.26 16.24 16.16 16.03 16.16 16.16 80.73 — 448.25
Net Margin %
5.85 7.95 8.75 7.4 6.29 9.56 5.73 0.11 -2.18 -2.15
Asset Turnover (Average)
1.26 1.2 1.03 1.03 0.69 0.7 0.77 0.69 0.6 0.56
Return on Assets %
7.38 9.51 9.03 7.62 4.33 6.68 4.44 0.08 -1.3 -1.21
Financial Leverage (Average)
4.27 4.68 3.95 4.39 5.25 5.23 5.29 3.99 4.32 4.65
Return on Equity %
31.28 42.74 38.2 31.88 20.85 35.04 23.35 0.33 -5.42 -5.39
Return on Invested Capital %
24.74 34.46 31.94 16.88 9.87 12.88 9.07 2.55 2.87 1.74
Interest Coverage
— — 5.83 5.84 — 4.23 3.75 1.43 0.39 1.15
Key Stats LFL
Stock Ind Avg Relative to Industry
Price/Earnings TTM — 17.4
Price/Book 1.1 4.0
Price/Sales TTM 0.4 0.9
Rev Growth (3 Yr Avg) 29.4 12.5
Net Income Growth (3 Yr Avg) — 87.0
Operating Margin % TTM 4.5 9.2
Net Margin % TTM -2.2 5.3
ROA TTM -1.2 4.2
ROE TTM -5.4 23.1
Debt/Equity — 1.7
– Avg +LATAM sensitivity exchange rate
Depreciation of exchange rate R$/US$ affects negatively the Company for a rise of its costs in US$, as everything in life, the exchange risk has also its positive side in a way that it affects the value of contracted derivate positions.
Appreciation (depreciation)of R$/US$
Effect at December 31,2014 Milions of US$
-10% -9.98
+10% +9.9810
This table presents the sensitivity of derivate FX Forward instruments agrees with reasonable changes to exchange rate and its effect on equity.
Measuring Investment Return
Top of FormAirlines : Total Returns ( % )
Bottom of Form
10 http://memoria2014.marketinglatam.net/english/img/Financial_report.pdf -table redesigned by author
Stock Name MarketCa
p
5-Day YTD 1-Month 3-Month 1-Year 3-Year 5-Yea
LATAM Airlines Group SA 4,915.48 -4.66 -24.79 -0.22 -14.11 -41.38 -30.51 -12.24
Airlines -1.34 -1.39 3.46 2.45 37.87 34.81 21.58
Here we can compare total return (%) of Airlines industry and LFL corporation, for 5 years.
11 http://quote.morningstar.com/stock-filing/Annual-Report/2014/12/31/t.aspx?t=XNYS:LFL&ft=20-F&d=d9d3aa34e32bbc64a7e552100f8017e3
From this statement we can see that even two giants in this industry have connected their know-how, assets and ect., company is still losing money. Revenue in the 2014 was lower than in 2013. But then the other incomes are increased in the 2014, but only for a few thousand of US$. The expenses are lower what is logical because, they are selling less products, so then they are producing less. If anything is good than it is the fact that the Loss is much lower in 2014. Then it was in 2013., so we could probably expect that in this year they get some profit.
12 http://memoria2014.marketinglatam.net/english/img/Financial_report.pdf - originally taken
Next table shows revenues by geographic area. From the table we can see, that their biggest income is coming by operating in Brazil, then in Chile and U.S.A. is on third place. If we compare 2014. Year revenues with 2013. then we can see, that in Peru it has increase, but mostly everywhere else it has dropped.
Management Effectiveness
Return on Assets (ttm): 1.57%
Return on Equity (ttm): -4.62%
Capital structure choice
Options on LFL are as following:
13 http://finance.yahoo.com/q/op?s=LFL+Options
Company wants to maintain an appropriate level of capitalization that enables them to have safe access to the financial markets for carrying out their objectives, and to optimize return for shareholders and stay in a good financial position.
Capital of the company at December 31,2014 was composed of ThUS$ 2,545,705 divided into 545,547,819 common stock of a same series and there is no par value. No special series of shares and no privileges.
Form of stock certificates:
Disablement
Loss
Issuance
Exchange
Replacement
Other circumstances – transfer of shares
In the table bellow can be seen movement of fully paid shares:
Dividend policy Dividends per share
Companys policy about dividends is that distributed dividends are going to be equal to the minimum required by the law, so this by the current regulations means 30% of the net income. For the last fiscal year they did not reach the required minimum, so they did not pay a dividends.
A framework for analysing dividendsCash flow from dividends -
As we can see Return on Equity % (ROE) has changed negatively for 5,39%
This chart represents the 5year change of dividends and earning.
Valuation
Well since we know that this new group is founded in the last 2 years, then it will need a time for
people to understand what have happen and to start believe to them. As it is mentioned earlier,
everything on the business of this company depends on the strategy, and how it is going to work, are
they going to fulfil it or fail. They had a loss for the last 3 years, and if we compare those data, we
can see that they are walking slowly but safely to the positive result and a good profit, and we could
expect it in this year. Return on the investment capital is positive, and there is a slice a problem with
the equity and voting which is increasing risk. With regards to the previously shown information, we
could say, that this company is going to succeed, and that they will make a profit, soon or later.
References:
Website: finance.yahoo.com/q/pr?s=LFL+Profile
memoria2014.marketinglatam.net/english/nuestra-empresa.php#capitulo-cuatro memoria2014.marketinglatam.net/english/img/Financial_report.pdf
http://www.sec.gov/Archives/edgar/data/1047716/000119312513187889/d524121d20f.htm
www.latamairlinesgroup.net – Governance
finance.yahoo.com/q/mh?s=LFL+Major+Holders
http://quote.morningstar.com/stock-filing/Annual-Report/2014/12/31/t.aspx?t=XNYS:LFL&ft=20-F&d=d9d3aa34e32bbc64a7e552100f8017e3
quicktake.morningstar.com/
http://www.gurufocus.com/term/deb2equity/NYSE:LFL/Debt%2Bto%2BEquity%2B
%2528%2525%2529/LATAM%2BAirlines%2BGroup%2BSA
http://www.latamairlinesgroup.net/phoenix.zhtml?c=81136&p=irol-irhome