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Pegasus: Upcoming tourism tide looks priced in

  • We expect air travel to pick up starting from June 2021. We forecast 3Q21E ASK to be 11.2bn
  • We are revising up our 12-mnth TP by 2% to TL78.5, implying 18% upside potential
  • We are keeping our rating at Marketperform

We expect air travel to pick up starting from June 2021. We forecast 3Q21E ASK to be 11.2bn implying 88.0% of its 2019 levels and PAX to be 6.6mn implying 75.2% of its 2019 levels.

In 2021E, we expect EBITDA margin to increase to 26.0% from 14.7% in 2020 mainly due to less idle aircraft on ground and domestic revenue yield increase.

Based on our 2022E estimates, PGSUS is currently trading at 5.3x EV/EBITDA multiple, implying 20% discount compared to its global peers. PGSUS has been trading historically at c.%16 discount to its global peers.

We are revising up our 12-month TP by 2% to TL78.5, implying 18% upside potential and we are keeping our rating at Marketperform.

Better operating performance compared to European competitors. In 2020, PGSUS managed to decrease its revenue less than its competitors by flying more frequently than its peers. PGSUS managed to control both its fuel and non-fuel costs and posted a positive EBITDA in 2020 while competitors have posted a negative EBITDA. By posting a better operating performance PGSUS managed to decrease its financing needs.

Upcoming tourism tide to raise all boats. Due to Covid-19, foreign visitors to Turkey declined 71.7% in 2020 to 12.7mn visitors from 45.1mn in 2019. Considering the pace of growth in past visitor numbers, we believe as the lockdowns around the world ease and vaccination programs continue, there will be a rapid recovery positively affecting Turkish aviation industry.

Smaller fleet provides advantages in profitability and potential in growth. As of 31 December 2020, PGSUS operates 93 aircraft whereas Ryanair and Wizz Air operates 457 and 137 aircraft respectively. During 2020, airline companies had to ground a portion of their fleets. We believe since PGSUS has a smaller fleet, they will be able to make a greater portion of their fleet operational during the upcoming recovery.

Amid Covid-19 concerns, fleet expansion remains a major risk until EBITDA reaches 2019 level. In 2020, PGSUS negotiated a deal to postpone future aircraft deliveries which provides PGSUS flexibility. We believe as the recovery in short-haul flights will outperform long-haul flights and leisure travel will outperform business travel. Thus, we expect PGSUS to have a rapid recovery compared to competitors which will decrease the financing needs.


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