Pegasus Airlines (PGSUS TI) - Unappealing risk-reward profile: Downgrading to Hold
Unappealing risk-reward profile
Factoring in the headwinds from the Covid-19 pandemic and our updated macro forecasts, we downgrade Pegasus to HOLD after cutting our TP by 63% to TRY43.80. We assign equal weights to 2020E EV/EBITDA(R) of 6.5x and 2021E of 5.87x (adjusted the 2020E target of 6.5x based on 2020E WACC of 10.2%), to reflect potential recovery metrics into our target value. Even though we assume a re-initiation of flights by June 2020, we expect mediocre cash generation as we assume a muted demand recovery for international flights in 2020.
Pegasus reported net loss of TRY402m in 1Q20, weaker than our loss estimate of TRY288m and Research Turkey loss estimate of TRY299m. The divergence at the bottom-line came from TRY88m (EUR13m) loss related to fuel hedge contracts in place for April and May 2020. EBITDA came in at TRY210m in 1Q20, in-line with BNPPe of TRY222m, but lower than consensus of TRY231m.
Pegasus Hava Tasimaciligi is a low-cost airline group based in Turkey. Co. provides reasonably-priced transportation opportunities on point-to-point basis in short and medium range flight lines on its domestic and international network. Co. primarily provides transportation opportunities from its main hub in Istanbul Sabiha Gokcen International Airport, but also offers scheduled flights from other domestic hubs, primarily in Adana, Antalya and Izmir. Co.'s fleet is composed of 49 airplanes in total. Co.'s flight network consists of 76 locations (45 abroad and 31 domestic flight locations in 30 countries). Co. also provides cargo services and provides various training services.
TEB Investment equity research analysts and strategist team consists of 8 analysts with an average finance sector experience of 15 years and special focus on international investors.
With our 6 equity research analysts we cover 93 companies across 21 sectors, reflecting 80% of the total market capitalization of all BIST companies and 86% of the BIST100 companies. Our strategy team provides in depth top-down and bottom-up market views with insight on FX and bond markets by publishing sectoral and strategic reports both in English and Turkish.
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