Gol Linhas Still High Risk

Morgan Stanley warned that Gol Linhas Aereas Inteligentes SA (ADR) GOL is still a "high risk play" despite upgrading the stock to Equal Weight from Underweight and raising target price to $23 from $6.50.

"[W]e continue to see the stock as a high risk play given the company's still elevated leverage (6.2x net debt to EBITDAR for 2016e), a challenging Brazilian air market, and our expectation that it may need to raise new equity in the next several years," analyst Josh Milberg wrote in a note.

The analyst, however, acknowledged the "dramatic improvement" in the airline's financial position due to strengthening of BRL and its restructuring efforts (major fleet reductions, refinancing, cost cuts initiatives).

Milberg expects EBIT margin of 6.1 percent in 2016, in line with the high end of company guidance of 4–6 percent and implies about 6.7 percent margin in the second half, 120bps above the first half of 2016.

"We think this is a respectable number, specially considering some non-recurring costs GOL should incur related to the early returns of aircraft in 3Q/4Q16e," Milberg noted.

That said, the analyst still believes the airline would "struggle" to generate positive free cash flow to equity and require about 10 percent EBIT margin to breakeven. Also, if the BRL weakens, the company's earnings would affect badly and share gains would reverse.

"While we are shifting to a Equal-weight rating on GOL we continue to believe it presents elevated risk and that it has yet to fully overcome its weak financials," Milberg added.

At time of writing, ADRs of GOL rose 2.21 percent to $23.15, higher than the Morgan Stanley's revised $23 price target.