New Aircraft Order Positive & Value Enhancing; We Remain O/W
Operating Challenges Remain – on the positive side, we note a) the resilient demand patterns, as Greek tourism aims to sustain the 2018 record high arrivals of 33m, b) the favourable domestic market capacity conditions (termination by Ryanair of the Athens-Salonica route on 31March’19, lower airline seats in the summer season). On the other hand, slowing European growth, Brexit (albeit small impact for Aegean), rising costs, particularly fuel, and stiff competition are major challenges for the entire European airline industry.
2019 a Consolidation Year; 2019-20e EPS Raised by 4-8% - due to a) higher capacity assumptions, b) a more benign domestic competitive environment, leading to improved utilization, and c) a drop in corporate tax rates, and despite our CASK upgrades and the slight negative impact from IFRS 16 adoption. All in all, we now forecast a 13% y-o-y drop in 2019e net profit to €59.3m, mainly on higher interest costs and the absence of last year’s FX gains, based on ASK growth of 5%, modest load factor improvement and slight yield pressure (EBITDAR seen flat y-o-y).
New Aircraft Order Positive & Value Enhancing…we believe the recent order of up to 42 new aircrafts of the Α320/1neo family (valued at $5bn at list prices; first delivery in 2020e) is positive for Aegean, as it will allow it to continue its successful expansion strategy (by raising capacity) and enhance its competitiveness (through OpEx savings). Based on our estimates, the deal is also value enhancing. In addition, Aegean currently negotiates orders for direct leases for up to 20 new A/C of the A320neo family (16 commitments up to now). In our view, Aegean may also opt to directly purchase some of its existing A320ceo A/C so as to achieve its fleet ownership target of c30% and better deploy its large cash pile.
Stable Dividend Payout… at 60-65% of net earnings for as long as the latter remain around 2018 levels. That said, the IFRS 16 adoption should raise FX translation impact on the BS, esp. upon delivery of the new A/C, hence leading to a more conservative dividend payout so as to beef up equity reserves (mitigation/hedging actions are expected). Overall, we forecast DY to average 7.2% in 2019-21e.
O/W Rating / New TP of €11.20 (46% Total Upside) – from €9.7, due to our earnings upgrades and the lower WACC (at 7.0% from 7.5%), accounting also for the new A/C order. Valuation wise, Aegean trades at a discount on 2019-20e EV/EBITDA against its European peers and at a premium on 2020-21e P/E, while offering a much higher DY. Overall, our positive view on Aegean is based on: a) its supportive company/industry fundamentals, with the company benefiting from the European aviation market trend for fewer but larger airlines, b) its defensive qualities, due to the still favourable domestic tourism sector dynamics, c) its attractive relative valuation, and d) its healthy CF generation & BS (secured PDPs for new fleet)