AVIANCA HOLDINGS Consumer Services Airlines

Transcription

1 AVIANCA HOLDINGS Consumer Services Airlines COVERAGE (NYSE:AVH) BUY / US$20.3 per ADR - (BVC:PFAVH) BUY / COP 4,850 per share Jul 7, 2014 An Ambitious Company Set to Skyrocket We are initiating Avianca Holdings with a BUY rating and a 2014YE target price of US$ 20.3 per ADR / COP 4,850 per share, equivalent to a 23% and 26% upside respectively. Our investment thesis is that the company's stock is not pricing in all of the company s business plan upsides and is currently trading at levels that expose investors to limited downside risks when compared to its regional peers. For us, the odds favor a BUY for AVH as it is trading at substantially discounted multiples according to a market-based valuation. Avianca Holdings offers a great upside in a relative valuation basis. After adjusting for off-balance sheet debt items and comparing only operating sources of value before taxes (Adjusted EV/LTM EBITDAR), Avianca Holdings is trading at a 31% discount against its peers. If we account also for differences in taxes (LTM Adjusted EV/Unlevered Net Income) the company is trading with a 62% discount against its peers as losses of comparable companies have not been reflected in tax reductions. It is worth noting that a write down arising from the market value of cash trapped in Venezuela would reduce this upside to 27% and 58% respectively. Cost reduction initiatives are set to boost operating margin. The second phase of business plan made public for the AVIANCA-TACA merger represent synergies of about US$80 million arising from cost reductions due to increases in aircraft utilization, lower fuel burn rates and lower personnel costs. Enterprise Resource Planning with Aircraft Maintenance, Repair and Overhaul Capabilities (ERP-MRO) will also help reduce maintenance costs and increase productivity. The first phase of the business plan made public for the AVIANCA-TACA merger had been outgrown as revenue enhancing synergies were better than expected: The initial goal was for a US$190 million enhancement by 2013 but the company has reported US$219 million of revenue increase explained by the revenue enhancing initiatives arising from commercial and passenger service integration. Financial information and multiples Ticker (BVC; NYSE) PFAVH; AVH Closing Price (PFAVH; AVH) COP 3845; USD 16.5 Expected Price Return (COP) 27.18% Expected Total Return (COP) 27.18% Outstanding Shares (MM) 997 AVH Adj. Beta vs SPX 1.54 PFAVH Adj. Beta vs COLCAP 0.85 Free Float (total stocks) 33.2% ADR Program / Preferred Stocks 63.0% Colcap Weight 0.49% Market Cap (USD MM) 2,080 PFAVH Avg Daily T Value (USD MM) 1.81 AVH Avg Daily T Value (USD MM) wk range (PFAVH) [ ] 52 wk range (AVH)* [14-18,39] Source: Bloomberg and Serfinco S.A E ROaE 16.2% 5.0% 25.3% 4.5% ROaA 2.6% 0.9% 5.2% 1.0% ROIC 7.4% 4.5% 10.8% 5.7% EV / EBITDAR 6.2x 5.9x 5.5x 7.1x EV / FCFF 21.7x 20.9x 13.9x -5.1x Div.Yield 0.21% 0.20% 2.02% 0.43% AVH vs. S&P Jul-13 Sep-13 Source: Serfinco S.A. SPX AVH ADR PFAVH USD Nov-13 Jan-14 Mar-14 Source: Bloomberg Serfinco May-14 On the operating front, since 2011, route capacity optimization and efficiency achieved from the integration between AVIANCA and TACA boosted total passenger carried by 20% and capacity in terms of ASKs by 17% while load factor increased from 79.57% to 80.03% (though ASK increased at a faster pace than RPKs during 1Q2014 due to overcapacity arising from Venezuela s redeployment). Sure cash trapped in Venezuela affects value but price discount easily offsets losses. As of 1Q2014, US$319 million were subject to exchange controls in Venezuela and were pending repatriation. According to our estimations, significant losses arising from the exchange rate set by the government could add up to US$200 million if receivables from 2013 were paid at the so called SICAD II rate (US$1:VEF 49.8), however we estimate the potential loss would represent at most a 10% per share (COP 400 or US$1.70 per ADR). As the stock price is trading at a 31% discount against peers EV/EBITDAR, it seems to be incorporating a worst -case scenario. We consider the outcome from a negative scenario to have a limited impact on the stock price and, considering peers trading levels, Avianca Holdings' stock is a great opportunity to gain exposure to the airline industry at competitive prices. Rafael España Amador Consumer Services Analyst re@serfinco.com.co (571) Ext Jose F. Restrepo, CFA Equity Strategist jr@serfinco.com.co (574)

2 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Thousand PAX Thousand Cycles Million Load Factor Positives High discount compared to its peers reduces downside risks Low fleet maintenance costs thanks to young fleet (5.3 avg age) Fleet interchange and implementation of new software with maintenance, repair and overhaul capabilities (EPR-MRO) would allow EBIT to improve by US$80 million by 2015 LifeMiles (loyalty program) is not only a revenue enhancer by itself but a potential market value booster if incorporated as a separate entity Table 1. Income Statement Negatives Redeployment capacity from Venezuela does not favor improvements in 2014 s load factor Expected limited free cash flow generation due to ambitious fleet CapEx for the next six years (US$9.15 billion) Net liability balance sheet exposure to the COP arising from pension plan obligations and COP denominated bonds may hurt balance sheet and non-operating income if COP strengthening continues Weakening balance sheet driven by exposure to Venezuela Table 2. Balance Sheet Income Statement (US$ million) E Operating Revenue 3,794 4,270 4,610 4,978 Passenger 3,183 3,551 3,862 4,171 Cargo and other Operating Expenses 3,592 3,989 4,225 4,708 Operating Income EBITDAR Other Non-Operating Income (Expense) Profit Before Income Taxes Provision for Income Tax Expense Net Profit Balance Sheet (US$ million) E Total Assets 3,976 4,321 5,179 6,055 Current Assets ,295 1,482 Cash and cash equivalents Accounts receivable, net Expendable spare parts and supplies, net Deposits and other assets Non current Assets 3,070 3,441 3,884 4,573 Deposits and other assets Intangible assets Property and equipment, net 2,309 2,700 3,233 3,877 Adjusted Operating Income* Total Liabilities and Equity 3,976 4,321 5,179 6,055 Unlevered Net income Current liabilities 1,389 1,531 1,658 1,860 Non-current liabilities 1,796 2,038 2,306 2,809 Operating Margin 5.3% 6.6% 8.4% 5.4% Equity ,208 1,379 Adjusted Operating Margin 9.4% 10.9% 12.6% 9.8% Non controlling interest Unlevered Net Margin 6.5% 4.0% 10.6% 6.2% EBITDAR Margin 14.3% 15.4% 18.0% 16.2% ROaA 2.6% 0.9% 5.2% 1.0% Net Margin 2.6% 0.9% 5.4% 1.2% ROaE 16.2% 5.0% 25.3% 4.5% * Operating Income + Rents Depreciation if Capitalizing Operating Leases ** Adjusted Operating Income After Taxes (effective rate) Adjusted ROIC* * Unlevered Net Income / Adjusted Invested Capital 7.4% 4.5% 10.8% 5.7% Source: Avianca Holdings S.A. and Serfinco estimates Source: Avianca Holdings S.A. and Serfinco estimates Figure 1. Operating Statistics Total Pax (Thousand) Total Cycles (right axis) Figure 2. Capacity Utilization ASK RPK Load Factor Avg Load Factor % 86% 84% 82% 80% 78% 76% 74% 72% 70% Source: Avianca Holdings S.A. Figure 3. Passenger Revenue Mix Colombia 87.60% Ecuador 4.50% Peru 7.90% Source: Avianca Holdings S.A. and Serfinco S.A. Source: Avianca Holdings S.A. Table 3. Valuation Ratios US$ million except per share data E Common and Preferred EPS (US$) Preferred EPS (US$) Paid DPS (US$) Payout Ratio 25.6% 96.5% 15.7% 15.0% Book Value of Common Equity ,208 1,379 Last price (PFAVH-COP) 3,290 4,525 3,700 3,845 Last price (AVH-US$) Target Price (PFAVH) 4,890 E Target Price (AVH) 20.7 E Div.Yield (Last Price) 0.21% 0.20% 2.02% 0.43% Last Traded Price/E 15.3 x 60.1 x 7.7 x 35.1 x Target P/E 44.1 x Last Traded EV/EBITDAR 6.2 x 5.9 x 5.5 x 7.1 x Target EV/EBITDAR 8.2 x Source: Serfinco estimates 2

3 Table of Contents 1) An Ambitious Company Set to Skyrocket....(Page 4) 2) Positives (Page 4) i) High discount compared to its peers reduces downside risks...(page 4) ii) Potential cost-synergies from AVIANCA-TACA s merger....(page 4) iii) Fleet optimization process and cost synergies as key drivers...(page 5) iii) Price Discount more than offsets cash trapped in Venezuela...(Page 6) iv) LifeMiles as a potential upside...(page 6) 3) Negatives (Page 7) i) Redeployment capacity from Venezuela does not favor improvements in 2014 s load factor...(page 7) ii) Expected limited free cash flow due to ambitious fleet CapEx for the next six years..(page 8) iii) Net liability balance sheet exposure to the COP may hurt non-operating income (Page 9) 4) Valuation.. (Page 10) 5) Financial Statements......(Page 14) 3

4 An Ambitious Company Set to Skyrocket We are initiating Avianca Holdings with a BUY rating and a 2014YE target price of US$ 20.3 per ADR / COP 4,850 per share, equivalent to a 23% and 26% upside respectively. Our investment thesis is that company's stock is not pricing in all of company s business plan upsides and is currently trading at levels that expose investor to limited downside risks when compared to its regional peers. For us, the odds favor a BUY for AVH as it is trading at substantially discounted multiples according to a market-based valuation. High discount compared to its peers reduces downside risks. After adjusting for off-balance sheet debt items and comparing only operating sources of value before taxes (Adjusted EV/LTM EBITDAR), Avianca Holdings is trading at a 31% discount against its peers. If we account also for differences in taxes (LTM Adjusted EV/ Unlevered Net Income) the company is trading with a 62% discount against its peers as losses of comparable companies have not been reflected on tax reductions. It is worth noting that a write down arising from the market value of cash trapped in Venezuela would reduce this upside to 27% and 58% respectively. Potential synergies from AVIANCA-TACA s merger are consistently being outperformed by management. The first phase of business plan made public for the AVIANCA-TACA merger had been outgrown as revenue enhancing synergies were better than expected: consolidated operating revenue increased 21.5% from US$3,794.4 million in 2011 to US$4,609.6 million in 2013, and consolidated EBIT increased 90.2% from US$202.4 million to $384.9 million in Figure 4. Phase 1: Commercial and Passenger Service Integration Year Revenue Enhancing Initiatives Single management team Star Alliance Single Loyalty Program Single Brand Network & Commercial Integration Core System Migration SYNERGIES OBTAINED = US$ 219 MILLION Source: Avianca Holdings S.A. Serfinco S.A. Revenue Management Optimization Single Commercial Code Lifemiles Maximization Single Web page Ancillary Revenue The initial goal was for a US$190 million enhancement by 2013 but company has reported a US$219 million revenue increase explained by revenue enhancing initiatives arising from commercial and passenger service integration. Business plan arising from the AVIANCA-TACA merger focused on increasing operating margin throughout two phases: (1) Commercial and passenger service integration (i.e. revenue-related synergies) and (2) operational and administrative integration (i.e. cost-related synergies starting from 2013). On the operating front, since 2011 route capacity optimization and efficiency achieved from the integration among AVIANCA-TACA boosted total passenger carried by 20% and capacity in terms of ASKs by 17% while load factor increased from 79.57% to 80.03%. It is worth noting that capacity utilization measured by load factor could be weak throughout 2014 as capacity (ASK) is set to increase at a faster pace than revenues (RPKs) due to overcapacity arising from Venezuela s redeployment, but we do not expect that this negative impact to be a long term driver. Figure 5: Phase 2: Operational and Administrative Integration Year Cost Reduction Initiatives Fleet interchange ERP MRO Single Operations Intra Hub connectivity Management Airport Optimization Model POTENTIAL SYNERGIES = US$ 80 MILLION Source: Avianca Holdings S.A. Serfinco S.A. 4

5 Fleet optimization process and cost synergies as key drivers The second phase of business plan represent synergies of about US$80 million arising from cost reductions due to increases in aircraft utilization, lower fuel burn rates and lower personnel costs. Enterprise Resource Planning with Aircraft Maintenance, Repair and Overhaul Capabilities (ERP-MRO) will also help to reduce maintenance costs and increase productivity. For example, fleet interchangeability can increase aircraft utilization by 10%-15% by 2015, and some A320 family planes (60% of total fleet as of March, 2014) are all equipped with sharklets (a wingtip device intended to reduce fuel burn rate up to 4%). Figure = 9 Aircraft Families Figure 7. As of March 31, 2014 = 5 Aircraft Families 60% 18% 5 Fokker Cessna Grand Caravan 11 ATR-42 6 ATR-72 Source: Avianca Holdings S.A. Serfinco S.A. Future growth not only relies on fuel efficient aircrafts (15 Dreamliners and 33 Airbus 320 neo) but on increasing regional (short distance) capacity (5 ATR72) and cargo capacity (1 more Airbus A330F). As of 1Q2014, Avianca Holdings S.A. and its subsidiaries had a consolidated operating fleet of 175 aircraft. Although the current year is a transition one due to Venezuela s redeployment capacity, the company has kept up its pace of fleet interchangeability: between January and March 2014, the company took delivery of 5 new aircrafts: 2 A321, 1 A319 (all equipped with sharklets), and 2 ATR72, while grounding and phasing-out 6 Fokker 50 and 2 A321, respectively. For 2014, the company s firm contractual deliveries totalize 28 aircrafts: 4 Boeings 787, 6 Airbus A319s, 2 Airbus A320s, 6 Airbus A321s and 10 ATR72 Figure 8. Future Orders will be Key Drivers for Reducing Operating Margins 20% more fuel efficient than the % less fuel consumption than A320 family % more cargo capacity vs. current fleet Source: Avianca Holdings, Boeing, Airbus and Serfinco S.A. Increases regional capacity by replacing Fokker 50 5

6 Sure cash trapped in Venezuela weakens liquidity but price discount easily offsets potential losses. As of 1Q2014, the company s cash and cash equivalents were reported to be US$586 million, of such cash US$319 million were subject to exchange controls in Venezuela and were pending to repatriation. According to our estimations, significant loses arising from the exchange rate set by the government could add up to US$200 million if receivables from 2013 were paid at the so called SICAD II rate (US$1:VEF 49.8), however we estimate the potential loss would represent at most a 10% per share (COP 400 or US$1.70 per ADR). As the stock price is trading at a 31% discount against peers under an EV/EBITDAR base, it seems to be incorporating a worst-case scenario. It is worth noting that the negative pressure in cash flows results from future CapEx, 2014 s company commitments for aircraft acquisition are just above US$1.9 billion but obligations for the next 6 years are close to US$9.15 billion (4.5x current market cap) LifeMiles as a potential upside The incorporation of LifeMiles as a separate entity offers a free-up-value opportunity as today s book value of Life Miles' assets is not individually recognized in financial statements; a separate entity clears the path for an IPO and would reduce net liabilities for the parent company by US$130 million (every point not broken is a liability, but a point broken does not necessarily equate into full profitability). Today, LifeMiles is the frequent flyer program of Avianca-Taca; it is intended to support growth and ensure operational flexibility by maximizing the number of partners and increasing the program s attractiveness for greater number of members. The program burn to earn ratio was 85% by 1Q2014 (+6.3% Y/Y). The less the miles are redeemed, the higher the revenue reported but the purpose of the program is to enhance loyalty. When valuing Life Miles as a separate entity and assuming its shares go public, 35% of current market price could be explained by the program (US$5.6 per ADR and COP 1,332 per preferred share), using Multiplus (LATAM) and Smiles (GOL) last Price-to-Sales ratios (8.9x and 3.5x respectively). However we believe market will not give publiccompany status to a program that currently does not has financial statements. We prefer to wait-and-see for information inside LifeMiles own financial statements as Avianca Holdings management has stated it does not has any intention to list the program through Even though Life Miles' recognized revenue represents only 3% of Avianca Holdings revenue, loyalty programs have their own value by itself as they could help complementary business (or partners) to (1) acquire new customers, (2) increase the spending of existing customers, (3) improve the natural retention rate of customers (churn rate) and (4) shift spending to higher margin products. It could be an ecosystem for several companies (not only airlines) and flyers. Figure 9. LifeMiles Possible Public Market Value Frequent Flyer Program Revenues (million) Price Per Share Outstanding Shares Market Cap (million) P / Sales Multiplus BRL BRL ,173,912 BRL 5, x Smiles BRL 1, BRL ,165,925 BRL 5, x Lifemiles (AVH) USD 142 USD ,987,288 USD x Lifemiles (PFAVH) USD 142 COP 1, ,987,288 USD x Source: Avianca Holdings, Multiplus, Smiles and Serfinco S.A. Figure 10. Life Miles Public Market Value Impact in Current Prices Lifemiles' Public-Market-Valuation as a Percentage of Current Market Value AVH 35.3% PFAVH 34.8% Source: Serfinco S.A. 6

7 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Million Load Factor Redeployment capacity from Venezuela does not favor improvements in 2014 s load factor Avianca Holdings S.A. began an adjustment that would reduce exposure and risks associated with the Venezuelan market. It has reduced service from 7 daily flights, to 1 daily flight from Bogotá to Caracas and 1 daily flight from Lima to Caracas. However, efficient redeployment of capacity has a maturation cycle of between 6 to 12 months and the path for improving load factor while maintaining yield will not be as clear as it was in It is worthwhile mentioning that Avianca s operating flexibility and positioning in local markets has allowed the company to transfer capacity to domestic markets in Colombia and within the North America network. Figure 11. Since January, frequencies to Caracas have been reduced by 71% Bogotá Caracas Lima Caracas Source: Avianca Holdings S.A. Serfinco Figure 12. While Incremental frequencies to Cucuta and within San Jose-Guatemala have increased by 6 and 7 respectively Bogotá Cúcuta + San José Guatemala + Source: Avianca Holdings S.A. Serfinco Although load factor is currently in the lower bound of the cycle, the excess of capacity in international markets has been particularly stronger when compared to historical trends. The company s target for 2014 is in the 77%-79% range. Figure s Load Factor vs. its 3-Year Average Figure 14. Domestic Markets Have Been Stronger Than Int l 3,600 3,300 3,000 2,700 2,400 2,100 1,800 ASK RPK Load Factor Avg Load Factor Source: Avianca Holdings S.A. Serfinco 88% 86% 84% 82% 80% 78% 76% 74% 72% 70% 90.0% 87.5% 85.0% 82.5% 80.0% 77.5% 75.0% 72.5% 70.0% Domestic International Lineal (Domestic) Lineal (International) Source: Avianca Holdings S.A. Serfinco 7

8 Expected limited free cash flow generation due to ambitious fleet CapEx for the next six years Even though operating sources of cash flow have been ranging from US$330 million to US$540 million, future cash flow commitments arising from aircraft acquisition, operating leases and debt service are set to outpace potential cash flow by far -at least for the period Most of contractual obligations include the following aircraft acquisition commitments: 64 firm orders for the acquisition of A320 family aircraft with deliveries scheduled between 2014 and 2019 as well as 19 purchase options 15 firm orders for the acquisition of B787-8 aircraft with deliveries scheduled between 2018 and 2019 as well as 10 purchase options 15 firm orders for the acquisition of ATR 72 with deliveries scheduled between 2014 and 2015 as well as 15 purchase options 16 purchase options for Embraer In addition, the company has 11 firm orders for the acquisition of spare engines with deliveries between 2014 and In Table 4 we summarize contractual obligations Table 4. Avianca Holdings Contractual Obligations (non-cancelable) Contractual Obligations (US$ million) < after 2018 TOTAL Aircraft and engine purchase commitments 1,994 4,266 2, ,149 Aircraft operating leases Engine operating leases Aircraft debt ,522 Bonds Other debt Interest expense Total 2,655 5,413 3,611 1,131 12,810 % of Total 20.73% 42.26% 28.19% 8.83% % Source: Avianca Holdings S.A. Serfinco Table 5. Advance Payments and Aircraft Acquisition Commitments US$ million Advance Payments Aircraft acquisition commitments Total commitment 2014 $ $1,862 $1, $ $1,237 $1, $ $1,216 $1, $ $1,406 $1, $55.91 $1,389 $1, $55.91 $1,389 $1,445 Total $ $8,499 $9,149 Source: Avianca Holdings S.A. Serfinco 8

9 Even though foreign exchange gains/losses are naturally hedged in the operating section of income statement, a net liability balance sheet exposure to the COP arising from both pension plan obligations and COP denominated bonds would hurt balance sheet if COP strengthening continues. Shocks in income statement arising from depreciation of local currencies are naturally hedged as currency breakdown for revenues and expenses is quite similar. For example, 1% change in the COP/USD exchange rate affects net income only by US$1.8 million (less than 0.75% of 2013 s Net Income). Figure 15. Avianca Holdings Operating Income Breakdown Operating Costs 66.6% 19.7% 11.6% Revenue 67.0% 24.8% % 10.5% Operating Costs 64.2% 22.7% Revenue 68.0% 24.5% % USD COP EUR Other Source: Avianca Holdings S.A. Serfinco However, any change in foreign exchange quotes favoring COP against USD has the potential of hurting balance sheet via foreign translation losses much harder than operating gains achieved as (1) pension plan liabilities are denominated in Colombian Pesos and (2) Avianca S.A. (a Colombian subsidiary of Avianca Holdings S.A.) has COP 500 billion (US$260 million) of local bonds outstanding and maturing by For example, FX changes affecting balance sheet liabilities through 1Q2014 generated foreign exchange net gains equivalent to a 2.86% of total 2013 s net income as Colombian peso weakened 1.9% in the same year. Table 6. Colombian Peso Linked Liabilities As of 2Q2014, the Colombian Peso has strengthened 3.83%. We believe changes in balance sheet figures arising from change in employee benefits and COP denominated bonds may generate foreign translation losses equivalent to 5% of last twelve months net income. WRAP-UP: Significant Liabilities US$ million (as of Dec-2013) Carrying Amount % of total Liabs Bonds Colombia 259,494 7% Employee Benefits 354,970 9% Total Balance Sheet Liabilities (as reported) 3,977, % Source: Avianca Holdings S.A. Serfinco Several upsides for Avianca Holdings have been materializing throughout the last two-to-three years. The future for Avianca is about improving operating margins by reducing costs and discovering LifeMiles public-market value. Future CapEx is a significant bet that compromises cash flows but in the end it will boost competitiveness. The stock price is currently trading in a risk-off mood, mostly explained by the negative impact that both capacity redeployment and a weakening balance sheet due to cash trapped in Venezuela could have. Foreign exchange gain/loses, and a complex balance sheet should not be the drivers of a high discount as these are normal issues in the airline industry. We consider the outcome from a negative scenario to have a limited impact on the stock price and, considering peers trading levels, Avianca Holdings' stock is a great opportunity to gain exposure to airline industry at competitive prices. 9

10 Valuation Our 2014YE target price of US$20.3 per ADR or COP 4,850 per share is supported by a market based valuation, adjusted by cost of capital. We also apply a subjective discount based on company s particular risks. Specifically, we: Compare last twelve months operating sources of value of Avianca s peers (EBITDAR, Unlevered Net Income and Adjusted Cash from Operations) against its Off-Balance-Sheet-Adjusted Enterprise Value. Give a subjective 5% discount bearing in mind Avianca Holdings (1) lower stock liquidity against its peers, (2) higher pressure in free cash flow due to expected aircraft acquisition commitments and (3) current lower capacity against its peers (measured by ASK). For calculating FY2014 target price, Avianca Holdings own cost of capital is used as a yield. Table 7. Valuation Summary Stock Peer's EV/EBITDAR Peer's EV/ Unlevered Net Income Peer's EV/CFO Industry Equivalent Price Subjective Discount Target Price (today) Annual Cost of Equity Target Price Dec 2014 BVC:PFAVH 7.81x 13.85x 8.85x COP 4,570 5% COP 4, % COP 4,850 NYSE:AVH 7.81x 13.85x 8.85x USD % USD % USD Source: Copa Airlines, LATAM Airlines, Gol Linhas Aereas Inteligentes S.A. and Avianca Holdings S.A. Serfinco Estimates Variable AVH Unlevered Beta vs SPX 0.27 Adjusted D/D+E * 75.07% Adjsuted D / E * 301.2% Leveraged Beta 1.07 Risk Free Rate 2.66% Market Risk 4.60% Country Risk** 1.39% Ke (USD) 8.95% Covered Devaluation 3.3% Ke (COP) 12.6% Table 8. Cost of Capital Assumptions AIRLINE BETA vs S&P 500 Adj. D/D+E Unlevered Beta COPA % 0.45 GOL % 0.16 LATAM % 0.19 AVH ESTIMATED % 0.27 Source: Bloomberg and each airline's financial statements Serfinco Estimates * Adjusted debt includes capitalized leases ** Country risk is adjusted by RPK breakdown (See revenue passenger mix on page 2 ) Financial Statement Adjustments: Capitalized Leases = Operating Lease Expense x 7 Depreciable Life of Capitalized Leases = 25 years Deferred tax assets are not treated as working capital investments Unlevered Net Income uses last twelve months effective tax rate After adjusting for off-balance sheet debt items and comparing only operating sources of value before taxes (Adjusted EV/LTM EBITDAR), Avianca Holdings is trading at a 31% discount against its peers. If we account also for differences in taxes (LTM Adjusted EV/Unlevered Net Income) the company is trading with a 62% discount against its peers as losses of comparable companies have not been reflected on tax reductions. It Is worth noting that a write down arising from the market value of cash trapped in Venezuela would reduce this upside to 27% and 58% respectively. High levels of working capital held in 2013 (i.e. cash trapped in Venezuela) makes Avianca Holdings EV/CFO multiple overvalued, however it should not be the case for 2014 as the company has reduced operations in Venezuela by 71%. 10

11 Table 9. Comparable Companies Valuation Data Last Twelve Months as of 1Q2014 (US$ Million) Copa Airlines Latam Airlines Gol Linhas Aereas Inteligentes Harmonic Mean Source: Copa Airlines, LATAM Airlines, Gol Linhas Aereas Inteligentes S.A. and Avianca Holdings S.A. Serfinco Estimates Avianca Holdings (Current) Avianca Holdings (Implicit) Market Value of Common Equity 6,273 7, ,356 1,703 + Market Value of Preferred stock Total Market Value 6,273 7,338 1,518 2,031 2,551 + Book Value of debt 1,039 8,808 2,493 2,318 2,318 + Capitalized leasings 704 3,237 2,432 1,949 1,949 - Cash and Investments 1,116 1,970 1, Market Value of Minority Interest Adjusted Enterprise Value 6,900 17,498 5,543 5,588 6,108 LTM EBITDA (1Q14) 716 1, LTM EBITDAR (1Q14) 816 1, Adjusted EV / LTM EBITDA 9.64x 11.70x 11.42x 16.82x 8.77x Adjusted EV / LTM EBITDAR 8.5x 8.9x 6.7x 7.9x 7.1x 7.7x Adj. Unlevered Net Income (LTM-1Q14)* Adjusted EV / Unlevered Net Income 12.6x 19.5x 15.7x 15.4x 12.6x 13.7x Wk Investments LTM Adj. Dep & Amortization 163 1, CFO (LTM) 868 2, Adjusted EV / CFO (LTM) 7.9x 8.4x 6.5x 7.5x 8.x 8.8x 2014 's Aircraft & engine purchase commitments 388 1, ,994 1,994 FCFF ,298-1,298 EV / FCFF 14.4x 18.7x 109.2x 22.7x -4.3x -4.7x Adjusted Net Debt to Capital 25% 65% 86% 75% 75% Adjusted Net Debt To Total Capital 9% 58% 67% 64% 58% Adjusted Unlevered Net Income: Adjusted Net Debt : Adjusted Dep & Amortization: Total Capital: Net Income assuming company is 100% equity financed and neither it rents aircrafts nor uses finance-type leases. Debt + Capitalized leases less cash and investments Depreciation including depreciation of capitalized leases Adjusted Net Debt + Book Value of Equity In Table 11 and 12, a sensitivity analysis shows that our discounted value is equivalent to a US$130 million write-off of cash trapped in Venezuela. According to the company, US$45 million have been repatriated by Jun,

12 Table 10. PFAVH s Sensitivity Analysis FROM 1Q2014 results CADIVI INICIAL CADIVI MAR 2013 SICAD SICAD II ESTIMATED REPATRIATION Potential Loss if SICAD (10.7) Potential Loss if SICAD II (49.8) US$ Million Exchange Rate 's Receivables 's Receivables Per ADR Per Share Loss as a % of Current Market Value 3.66% 10.44% Loss arising from cash trapped in Venezuela could add up to 10% of current market value. Source: Avianca Holdings S.A. Estimates by Serfinco S.A. Subjective Discount Table 11. Sensitivity Analysis for PFAVH s 2014 Target Price Cash Lost in Venezuela (million) 4850 USD 0 USD 30 USD 80 USD 130 USD % % % % % % % % % Source: Serfinco Estimates A 5% discount from a market based valuation is similar to a scenario in which funds are repatriated at an average rate higher than SICAD = VEF 10.7/USD (a US$130 million loss) Subjective Discount Table 12. Sensitivity Analysis for AVH s 2014 Target Price Cash Lost in Venezuela (million) 20.3 USD 0 USD 30 USD 80 USD 130 USD % % % % % % % % %

13 Apr/11 Aug/11 Dec/11 Apr/12 Aug/12 Dec/12 Apr/13 Aug/13 Dec/13 Apr/14 Aug/14 Dec/14 Apr/15 Recommendation Figure 16. Avianca Holdings Recommendation 5500 Avianca Holdings Date Recommendation T.P PFAVH T.P AVH 7-Jul-14 BUY , Source: Serfinco S.A. 13

14 Financial Statements Table 13. Income Statement Income Statement (US$ thousands) E Operating revenue 3,794,428 4,269,656 4,609,604 4,978,372 Passenger 3,182,953 3,550,559 3,862,397 4,171,389 Cargo and other 611, , , ,984 Total Revenues 3,794,428 4,269,656 4,609,604 4,978,372 Domestic 991,134 1,109,046 1,227,361 1,325,550 Passenger 912,946 1,009,541 1,031,299 1,113,803 Mail and cargo 78,188 99, , ,747 Internacional 2,612,701 2,925,593 3,139,775 3,390,957 Passenger 2,270,007 2,541,018 2,831,098 3,057,586 Mail and cargo 342, , , ,371 Other 190, , , ,865 Frequent flyer program 92, , , ,632 Ground operations 16,093 16,730 20,423 22,057 Leases 35,691 21,783 24,181 26,115 Maintenance 9,935 7,692 6,228 6,726 Interline 6,738 7,709 5,421 5,855 Other 29,901 49,927 43,963 47,480 Operating expenses 3,592,045 3,988,758 4,224,673 4,708,112 Flight operations 79,934 84,774 82,872 95,763 Aircraft fuel 1,123,547 1,305,396 1,325,763 1,462,323 Ground operations 279, , , ,294 Aircraft rentals 214, , , ,814 Passenger services 115, , , ,836 Mainitenance and repairs 228, , , ,006 Air Traffic 177, , , ,162 Sales and Marketing 500, , , ,571 General, administrative, and other 184, , , ,719 Salaries, wages and benefits 561, , , ,124 Depreciation and amortization 126, , , ,501 Operating income 202, , , ,261 EBITDAR 543, , , ,575 Other non-operating income (expense) (58,693) (177,936) (89,650) (178,329) Interest expense -90, , , ,283 Interest income 33,649 25,006 11,565 14,111 Derivative instruments -3,164-24,042-11,402-13,913 Foreign exchange 1,600-56,788 23,517-40,244 Profit before income taxes 143, , ,281 91,932 Provision for income tax expense (43,814) (64,705) (46,460) (33,423) Current (31,881) (49,884) (40,296) (28,989) Deferred (11,933) (14,821) (6,164) (4,434) Net Profit 99,876 38, ,821 58,508 Source: Avianca Holdings S.A. and Serfinco S.A. 14

15 Financial Statements Table 14. Balance Sheet Balance Sheet (US$ thousands) E Assets 3,975,688 4,320,923 5,179,037 6,054,988 Current Assets 905, ,561 1,295,188 1,482,047 Cash and cash equivalents 288, , , ,423 Restricted cash 1,815 6,547 23,538 25,421 Available-for-sale securities - 19, Accounts receivable, net 186, , , ,120 Accounts receivable from related parties 7,836 29,427 26,425 28,539 Expendable spare parts and supplies, net 45,235 48,796 53,158 57,411 Prepaid expenses 51,603 54,512 46,745 50,485 Assets held for sale 28,339 9,832 7,448 8,044 Deposits and other assets 295, , , ,604 Non current Assets 3,070,172 3,441,362 3,883,849 4,572,941 Available-for-sale securities 30,052 13,165 14,878 16,068 Deposits and other assets 221, , , ,310 Accounts receivable, net 41,755 64,540 32,441 35,036 Accounts receivable from related parties 56,167 24, Intangible assets 340, , , ,932 Deferred tax assets 70,513 73,644 50,893 54,964 Property and equipment, net 2,309,477 2,699,546 3,233,358 3,876,630 Liabilities 3,184,593 3,568,821 3,964,291 4,669,006 Current liabilities 1,388,711 1,530,825 1,658,231 1,859,618 Current portion of long-term debt 283, , , ,015 Accounts payable 449, , , ,041 Accounts payable to related parties 13,746 7,309 7,553 6,988 Accrued expenses 119, , , ,733 Provisions for legal claims 11,060 7,903 14,984 16,183 Provisions for return conditions 10,987 7,598 33,033 35,676 Employee benefits 44,390 57,241 52,392 56,583 Air traffic liability 417, , , ,773 Other liabilities 38,333 29,470 27,432 29,627 Non-current liabilities 1,795,882 2,037,996 2,306,060 2,809,388 Long-term debt 1,375,994 1,572,299 1,951,330 2,439,345 Accounts payable 19,596 3,041 2,735 2,530 Provisions for return conditions 57,792 59,297 56,065 60,550 Employee benefits 340, , , ,387 Deferred tax liabilities 2,134 2,528 7,940 8,575 Other liabilities non-current - 11,706 - Equity 778, ,958 1,208,422 1,379,355 Common stock 92,675 92,675 83,225 83,225 Preferred stock 19,988 19,473 41,398 41,398 Additional paid-in capital on common stock 263, , , ,342 Additional paid-in capital on preferred stock 279, , , ,498 Retained earnings 96,167 68, , ,035 Revaluation and other reserves 27,059 25,418 28,857 28,857 Non controlling interest 12,916 13,144 6,324 6,627 Total liabilities and equity 3,975,688 4,320,923 5,179,037 6,054,988 Source: Avianca Holdings S.A. and Serfinco S.A. 15

16 International Equity Trading Desk Andrés Jimenez Juan P. Vieira Andrés Gómez Head of Equity Head of Trading Head of Electronic Trading (574) (574) (574) Daniel Marín Andrés Upegui Jose F. Restrepo, CFA Equity Trader FX Trader Equity Strategist (574) (574) (574) Research Team María Velásquez Rafael España Alejandro Isaza Energy and Utilities Consumer Services Cement and Construction (574) Ext (571) Ext (574) Ext Nicolas Noreña Financial Services (571) Ext Bogotá Centro de Negocios Andino Carrera 11 No Piso 6 Tel: (571) Medellín San Fernando Plaza Torre 1 Carrera 43A No Piso 10 Tel: (574) Cali Carrera 100 No Torre Empresarial Oasis of 722 B Tel: (572) Bucaramanga Metropolitan Bussiness Park Carrera 29 # of 910 Tel: (577) Cartagena Torre Empresarial Protección Carrera 3 No 6A 100 Of. 801 Tel: (575) Barranquilla Centro Empresarial Las Américas Calle 77B No Tel: (575) The analyst certifies that the opinions expressed in this report accurately reflect his personal opinion about the company of concern. Also, the analyst certifies that he has not received, is not receiving and will not receive any direct or indirect payment in exchange for expressing a specific recommendation in this report. Serfinco S.A. is committed to provide independent and objective research for all the companies in the coverage universe. During the normal course of business, Serfinco S.A. intends to obtain revenue for banking investment services from all the companies in the coverage universe. The remuneration for the analyst is based, in part, on the profitability of the firm, which includes investment banking and revenues from sales. The research analyst does not have a position in the fixed positions of this covered company and does not provide any kind of services to the company. The research analyst has not taken part in any investment banking transaction of the company in concern. Serfinco S.A. was not making a market in the titles of the company in concern when this report was published. In the last twelve months, Serfinco S.A. did not receive, nor it is authorized to receive, revenues for investment banking services, services related to the title of non investment banking, or non title services rendered to the company in concern. that could affect the objectivity of this report. Therefore, investors should consider this report only as a factor for their investment decision making. However, Serfinco S.A. intends to do business with the companies covered in this report. Consequently, investors should be aware that the firm might have an interest conflict. 16