Pegasus Airlines - ‘V' for Margin Improvement

In our May report on the Turkish aviation sector, we argued that before becoming more aggressive in our forecasts for Pegasus Airlines, we would need to see further evidence that measures taken to optimize costs and boost revenues were translating into stronger operating profits. At the time, we expected to see profit margins show a U-shaped y-o-y recovery in 2017. But, supported by stronger than anticipated passenger traffic growth, the 2Q17 results have convinced us that the measures taken by the management have likely paved the way for a V-shaped recovery this year. The 2Q17 operating results were broadly in line with our forecasts, but we expect the company to do better in the next few quarters and to hit our full-year expectations. Given our more upbeat outlook, we revise our estimates and take a bullish stance. We raise our target price to TRY32.00 per share and upgrade our recommendation to BUY. Despite having outperformed the MSCI EM index by 33% and the Europe Airlines index by 20% YTD, the stock is still trading at a 13% discount to peers based on its 2017E EV/EBITDA of 6.5.