Aeroflot presented 2017 IFRS results

Andrey KozhokaruMarch 02, 2018

The final results of Aeroflot Group for 2017 under IFRS corresponds to our latest expectations. The Company's revenue for 2017 amounted to 532.9bn rubles (+7.5% y/y) versus forecast of 534.6bn rubles, EBITDA, including customs duties, fell to 56bn (-28% y/y) versus our forecast of 58.1bn rubles, EBITDA margin equaled to 10.5% against forecast of 10.9%, the Company's net income fell to 23bn (-40% y/y) versus our expectations of 22bn rubles.

In case of dividends payout of 50% of net income for 2017, which is our base case assumption, the dividend will be at 10.4 rubles per share.

The increase in the Group's revenue was due to the growth of operating indicators. Meanwhile, the appreciation of the ruble had a negative effect on yields on international routes and on revenues received under agreements with foreign airlines (royalties).

The Group's operating expenses increased by 13.8% y/y to 492.5bn rubles. Expenditures for aviation fuel, being the main cost item (25%), increased by 20.8% y/y to 122.7bn rubles. High growth dynamics was observed in labor costs (up to 82.8bn, +28% y/y) and selling, general and administrative expenses (up to 36.1bn, +19.3% y/y). In addition to the increase in operating indicators, the growth in operating expenses was facilitated by the dynamics of oil price, an increase in airport fees, indexation of wages and investments in marketing campaigns. At the same time, the appreciation of the ruble has had a restraining effect on FX denominated expenditures. In addition to the currency effect, the Company reduced aircraft maintenance costs for 2017 down to 36.4bn rubles (-4.7% y/y) due to the expansion of activities of A-Tekhnics subsidiary, which allowed to increase the amount of maintenance carried out within the Group.

The total debt of the Group as of December 31, 2017, amounted to 107.8bn rubles (-27.2% y/y), with a balance of cash and short-term investments of 54.9bn (+45.3% y/y). The decrease in the Group's debt was due to planned/advanced repayments and the revaluation of financial lease liabilities attributed to the appreciation of the ruble.

For 2017 Aeroflot Group transported 50.1mn passengers, increasing passenger traffic by 15.4% y/y. Passenger traffic on international routes amounted to 22.5mn (+23.3% y/y), an internal traffic equaled to 27.6mn (+9.7% y/y). With an increase in the carrying capacity of the Group by 14.2% y/y, the load factor reached 82.8% (81.4% in 2016).

On March 1, Giorgio Callegari, Deputy CEO, Strategy and Alliances announced the decision to leave his position for personal reasons.

Our opinion:

The presented annual results fit into our forecast. Meanwhile, we note the positive dynamics that provided the decrease of the Group's loss for 4Q2017 down to 4bn rubles versus 4.9bn loss for the same period in 2016. EBITDA including customs duties for 4Q2017 amounted to 2.7bn rubles against 0.8bn in 4Q2016. An increase in revenue (+11.1% y/y) with a more restrained growth in operating expenses (+9.6% y/y) ensured an improvement of results for 4Q2017.

Despite the increased rates of growth in labor, marketing, and aviation fuel expenses, we consider that the Company, in case of stable demand, will be able to transfer part of the expenses to passengers. We note a positive trend in the growth rate of RASK for regular flights at 2.8% y/y in 4Q2017 against a decrease of 3.9% y/y in 2017 and a decline of 4.8% y/y in 3Q2017. In 4Q2017, the increase in carrying capacity of foreign airlines was at 14.6% y/y against the maximum growth rate of the indicator at 21.8% y/y in 3Q2017. In case of a moderate increase in carrying capacity by market participants in 2018, according to demand level, pressure on yields may be reduced.

At the moment, we do not expect changes in the Company's business due to the resignation of Giorgio Callegari.

Taking into account that the results of the Group fit into our forecast, we maintain our Buy recommendation and 190 rubles/share 12M TP.