Aegean Airlines: high net cash position and strong FCFF yield (upgraded to BUY)

We have upgraded our rating for Aegean Airlines to BUY (from Hold), following the recent dip in the share price. We adjust our 12M price target (PT) to EUR 11.3/share, only slightly higher than the former level (EUR 11.0/share), driven mainly by incorporating a marginally more constructive outlook on fares next year. This reflects comments made by several airlines, which have reported in recent weeks, which are pointing towards a more constructive outlook for pricing, as persistent shortages of planes and engines could weigh on the industry’s capacity growth next year. A key reason underpinning our positive view is what we expect to be Aegean’s relatively robust cash generation potential, especially when considered against the backdrop of its high cash position. Excluding leases, more of half of Aegean’s market cap is in cash, and its EV is less than EUR 400m currently. If Aegean generates over EUR 100m in FCFF this year, it would be trading at over a 25% free cash flow yield, on the EV. The key risk for our positive view includes the continued compression of margins. This could come from pressure on EU consumers (e.g., from the tariff-induced further deterioration of the economy, continued USD strength (which could weigh on fleet financing costs), and a sudden jump in oil prices, among other things). Positive drivers include: a continued recovery in the purchasing power of the Greeks; an extension of the holiday season into the shoulder months; the de-escalation or end of the regional conflicts; and, eventually, the resolution of the GTF engine issue.