Aeroflot: Challenging near term; attractive outlook (stays HOLD)

Following the successful RUB 80bn capital increase, we believe Aeroflot now has sufficient liquidity to make it safely through the winter. The group benefits from a resilient domestic market, with significant potential for organic growth, as people switch from long-distance buses and trains to air travel. With unit costs matching those of leading European LCCs, we see Pobeda as perfectly placed to stimulate the demand. We believe Pobeda is the optimal growth engine of the Group, while we expect the geographical position of the Moscow hub to enable the premium Aeroflot Airline to capture the fast-growing transit traffic between Europe and north Asia. These are attractive long-term fundamentals, especially considering that, even before the pandemic, the stock was trading at an undemanding valuation. We believe the near-term outlook may remain challenging, however. While the advances in vaccine development are an important positive, we believe that deployment could take months, and that there is a good chance that traffic next summer could still be affected by the pandemic, at least to some extent. The consensus for Aeroflot is too bullish, in our view, and we expect estimates downgrades. Last, but not least, owing to its single-country focus, there is a risk that a continued increase in the number of COVID-19 cases in Russia could result in restrictions on domestic travel, and delay the recovery of international transit traffic. For the time-being, we maintain our HOLD rating, setting our new 12M price target (PT) to RUB 72/share.