Since December 2017, Embraer shares have been swinging following the news of a joint venture with American planemaker Boeing. Over a year later, the deal still awaits regulatory approval and the jewel of Brazil’s aerospace sector has suffered its first annual loss in a decade. Investors are wondering how long it will take to see better returns.

Embraer posted a loss of BRL 669 million in 2018, compared to its BRL 850.7 million profit in 2017. Results for the fourth quarter were also negative, as the company saw losses of BRL 78.1 million. According to the planemaker, the performance is a result “of lower operating results and higher financial expenses.” The company also suffered some impairments over the period and faced higher development costs for its KC-390 plane.  

According to Carlos Daltozo, variable income chief at research firm Eleven Financial, “the results were soft, but in line with expectations. The market had already slashed estimates after the company lowered its forecast in January.”

Indeed, since the company changes its outlook for 2018 on January 16, Embraer shares lost almost 14 percent in value. In comparison, the Ibovespa benchmark index has risen almost 5 percent in the same period.

After reporting its fourth-quarter numbers, Embraer papers were among the worst losers on the São Paulo stock exchange but managed to recover and closed at BRL 18.79, down 0.16 percent.

Embraer boeing losses

Embraer boeing losses

Embraer boeing losses

2018 results not the most important

The results weren’t very exciting but, as Mr. Daltozo notes, the most important trigger for the shares is the joint-venture deal with Boeing that “completely changes Embraer’s fundamental analysis.” The deal was approved by Embraer’s shareholders on February but is still pending regulatory approval. The new company will comprise Embraer’s commercial plane and services divisions and is valued at around USD 5.26 billion. Boeing is expected to pay USD 4.2 billion for an 80 percent stake.

The deal is seen as positive by analysts and investors as it may open up new markets for Embraer and strengthen the company’s cash flow. Also, since France’s Airbus partnered with Canadian planemaker Bombardier, the partnership with Boeing is seen as crucial to leveling the playing field for Embraer.

However, it seems that investors will have to hold on for a bit longer. Embraer and Boeing foresee that the joint venture deal may only be finalized at the end of 2019, “if it obtains regulatory approval in a timely manner”.   

An extraordinary dividend payment of USD 1.6 billion is also on the radar, but Mr. Daltozo believes it will probably happen at the beginning of 2020. “We were expecting faster approval. Also, you have a delay with very attractive dividends. We maintain a buy rating, considering these two triggers, but in the short-term, the scenario for the stocks is negative, as investors begin to consider the cost of carrying the stock,” he said. Eleven Financial’s analysts have a target price of BRL 26.00 for Embraer shares.

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MoneyMar 14, 2019

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