EUR 356.26 For Business Accounts Only

Continuing to fly at high altitude

Yield inflection in Q2 – Aegean reported a blowout Q2, managing to grow EBITDAR 92% yoy on the back of a substantial improvement in load factors (+8.2 pps) and an inflection in yields (+3% yoy). The latter was the result of the benign balance between capacity and demand, as manifested in Aegean’s 15% increase in pax/flight, leading to a striking 17% growth in revenues. Higher unit costs (+3% ex-fuel) and an increased fuel bill (unit costs +1.5%) only partly offset the robust top line performance, thus leading to a c€9m beat relative to consensus (at EBITDA level). Mgt effectively upgraded the previous guidance for 15-30% growth in 2017 PBT, suggesting the upper end now looks safe. The latter was c6% above the consensus (prior to the results announcement), and, consequently, we expect Q2 numbers to trigger mid single-digit upgrades. The demand vs. supply balance in July-August (e.g. passengers at the AIA +8% vs. +4% increase in the number of flights) instills us with confidence that Aegean will deliver pre-tax profit in excess of €70m (+40% yoy).

Capacity discipline likely to continue in 2018, we reckon… – The aforementioned discipline in capacity along with the robust inbound traffic trends have underpinned a striking expansion of load factors in H1 2017. Looking ahead into 2018, we expect the supply backdrop to remain relatively benign, especially as LCCs’ focus seems to have moved to other markets. On the demand side, tourism trends are likely to stay robust boosting incoming leisure traffic. Domestic demand will most likely remain soft but we do see some room for an uptick as the Greek economy turns the corner and corporate travel spend accelerates. Against this background, we believe that the yield contraction will be -3% in 2018e following -2% in 2017e. This will help Aegean deliver EBITDAR in excess of €225m we estimate, quite close to the all-time high of 2017e.

… while FX has become a tailwind… – The EUR has had an extensive rally in the last few months and now stands near 2.5-year highs against the USD. Given c60% of Aegean’s cost base is USD-related, the group is faced with a tailwind in 2018 assuming no significant pull-back from current levels. Factoring in a conservative 1.15 rate (c4% below the current spot) and taking into account Aegean’s hedges (53% in 2018 at 1.13), we have increased our 2018e EBITDA by c5%.

Valuation: compelling dividend story – Aegean trades at quite substantial EV/EBITDAR discount to EMEA carriers (Turkish carriers and Air Arabia). Our PT (blended valuation using DCF at 9.5% WACC and multiples) values Aegean at c6x 2018e adj. EV/EBITDAR, namely still c15-20% discount to the current valuation of EMEA carriers. With the stock offering FCF yield >10% and operating a more conservative balance sheet structure than previously guided, we see scope for shareholder returns on top of the c€0.5 annual ordinary DPS embedded in our model. We thus reiterate our Buy recommendation.