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Aegean Airlines | Unblemished skies over the Aegean

Robust start to 2023… – Aegean achieved a notable positive EBITDA of €19m in Q1'23, typically a quarter associated with losses, leveraging on outstanding revenue growth (>30% above Q1’19) mainly thanks to strong pricing (fares +11% yoy, +30% vs Q1’19) and healthy volumes (traffic +11% vs Q1’19). As a result, net losses narrowed to just €14m, better than -€35m in Q1’19. Cash generation was also strong, with Aegean increasing its net cash position by a whopping >€130m vs Dec’22 to €393m.

…driving c18% upgrade to our 2023e EBITDA – Given the strong Q1 and robust indications about the summer period, we have raised our 2023e revenue forecasts c5% (to €1.6bn, +22% yoy) mainly as a result of better than previously expected fares (flat yoy, c€20/pax higher vs 2019). We still anticipate c18% yoy growth in ASKs and c5pps uptick in load factors, which we expect will land near 2019 levels. While we anticipate cost challenges to remain, with CASK-ex fuel +4% yoy, we see gradual decompression in fuel costs (mostly to filter though to 2024e given hedges in place) and a lower than anticipated expense for maintenance. Overall, we have lifted materially (c18%) our 2023e EBITDA to €355m, indicating c29% yoy growth.

Base-case stepping-up – Starting from a higher base and taking into account the operating leverage ahead, propelled by the renewed fleet and the easing jet fuel prices, we have proceeded to 2-digit upgrades (c15% at EBITDA level) to our 2024e as well. We now argue Aegean can sustain c6-7% revenue growth on just slightly lower yields and average fares, thus envisaging EBITDA growth in the low-teens.

Investment plans intact – Aegean has managed to strengthen its already healthy balance sheet amidst the tough winter season, generating cash and at the same time proceeding with its re-fleeting plans (9 Airbus neo’s anticipated this year) while retaining optionality for raising the owned vs leased fleet balance. We recalibrate our forecasts to adjust for two owned-aircraft additions by year-end 2023 in the 76-aircraft fleet. As such we also adjust our investment costs higher, though we still estimate solid FCF, as a result of the strong operating performance.

Valuation – Aegean’s stock price has bounced >40% higher than its pre-pandemic levels, leveraging on the improved earnings momentum and robust summer demand trends and tourism prospects. Despite the rally (>110% ytd), the valuation remains attractive at c5.2x 1yr fwd EV/EBITDAR, as profits have also surged in tandem. With the stock trading at >20% discount vs best-in-class peers, having a very strong balance sheet and being well positioned to resume dividend payments (we have assumed €0.26 out of FY23 profits), we argue the risk-reward profile remains compelling. We value Aegean applying a 5.8x EV/EBITDAR multiple on 2023e, in line with the historic average and a bit higher than our previous assumption (5.5x) to reflect better earnings visibility and lower Greek risk premia post the elections. As a result, our PT increases to €13.9, effectively implying 5.6x 2024 adj. EV/EBITDAR, in sync with mid-cycle levels.