Pegasus Airlines: flying high (HOLD - reinitiation of coverage)

We reinitiate coverage of Pegasus, the leading low-cost airline in Turkey and the region, with a HOLD and a price target (PT) of TRY 460/share (5% upside). Pegasus is enjoying a flagship year. It is driven by strong pricing, a higher share of profitable international traffic, and underpinned by an ex-fuel CASK of around EUr 2.1/ASK, one of the lowest globally. We estimate the all-in revenues per passenger (ticket plus ancillary) to reach c.EUR 120/pax this year in the international segment, c.50% above the pre-pandemic levels. This far exceeds the pricing dynamic that we see at the European carriers, a function of Pegasus’ geographic footprint, with routes to the Middle East and Central Asia. This year’s fantastic results (EBITDA c.40% above the 2019 level) mean that, even after the massive rally (stock up c.300% ytd in EUR terms), Pegasus is trading a touch below its long-term average EV/EBITDA of range c.6-7x. That said, from an EV per plane or EV per pax perspective, the stock is much more expensive than in the past. The market expects the current pricing strength to hold. The booking evidence is, so far, encouraging, and cost inflation should push the RASK up across the industry. However, the visibility on 2023E is limited, so far, and 2022E could be setting too high a bar to clear, in our view. We believe international investors could consider taking some chips off the table after the rally – as has Esas, Pegasus’ controlling shareholder, which sold a 6% stake in November at TRY 315/share, nearly 30% below the current share price. For local investors, the EUR exposure could justify a more positive view.