Copa Holdings S.A. Cl A (NYSE:CPA) Downgraded by Citi

Copa Holdings S.A. Cl A (NYSE:CPA) trades down 9% Thursday after Citi downgraded the Panama-based cargo and passenger airline to Neutral from Buy. Citi analysts cut their price target on shares of  Copa (NYSE:CPA)  to $148 from $170.

Below are the highlights outlined by the analyst at Citi:

Venezuela’s decision to sever diplomatic and commercial ties with Panama is part of a stunning turn of events. This announcement followed Venezuela’s decision to exclude airlines from participating in economic roundtables earlier this week. These actions go against our previous belief that Venezuela was eager to maintain international commercial air service. This more negative political posture materially increases cash repatriation and operating uncertainties for Copa (NYSE:CPA), prompting our downgrade to Neutral.

What happened — On Wednesday, after the market’s close, Venezuelan President Nicolas Maduro announced that his country was severing diplomatic and commercial ties with Panama. According to newswires, Maduro accused Panama of trying to destabilize his administration, after the Panamanian government had requested a hearing with the Organization of American States (OAS) regarding Venezuela’s situation. Related statements by Maduro, as reported by various news agencies, also suggest that Venezuela would reject OAS decisions regarding this matter.

Copa’s exposure — Citi estimates that Venezuela accounts for 10% of Copa’s 2014 revenue and 11% of this year’s EBIT. The EBIT figure reflects declining longterm margins in that market. Although inflation spikes following f/x devals boost both airfares and customers’ salaries, airlines’ non-dollar input costs also increase. At the end of 2013, Copa had US$487M in cash trapped in Venezuela. This level increased by almost US$100M over 4Q13, or a sequential increase that’s almost half the size of the quarter’s adj. EBITDAR of US$214M. While this has prompted some observers to conclude that Venezuela accounts for almost half of Copa’s EBITDAR, we believe this argument ignores the fact that Copa must use repatriated cash from other operations to pay day-to-day parent company expenses. Therefore, we believe the above sequential increase overstates Venezuela’s contribution to cash generation and ops — Copa’s Venezuela cash balance would be materially lower were the carrier able to use that cash to pay day-to-day expenses incurred in that market.

Copa (NYSE:CPA) trades in the lower end of its 52-week range of $106.40 to $162.83.


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