Air Astana Group: margins attracting rivals (downgraded to HOLD)

We have downgraded Air Astana Group (AAG) to HOLD (from Buy), as we have cut our 12M price target (PT) to USD 7.0/share (from USD 10.8). We are concerned about the prospective entry of VietJet to Kazakhstan. The newcomer would need to navigate complex execution challenges successfully, to set up a profitable operation. However, even a small, but growing, new entrant could, over time, dent AAG’s dominant domestic market position and weigh on its profitability. With AAG’s CASK growth exceeding its RASK, and its FCFE down over 30% yoy this year so far, we have reviewed our estimates downwards. Although our top-line adjustments are modest, the high operating leverage means that we have cut our net profit forecasts by 22% and 16%, respectively, for 2024-25E. We remain aligned with the company’s mid-term guidance, expecting an EBITDAR margin of c.25-26% in 2025-26E. This would rank AAG among some of the highest-margin airlines globally. However, given the potential for increased competition and the uncertainty surrounding future margin trends, we believe it may be too early to consider the stock's weak performance since the IPO as a buying opportunity.