Aeroflot: Initiation of coverage

"Buy" recommendation with 12M TP of 240 rubles/share

Andrey KozhokaruSeptember 19, 2017

After the suspension of Transaero operations in October 2015 and following a subsequent consolidation of air transportation market, Aeroflot reinforced its already dominant position in the domestic market. In addition, geopolitical tensions and devaluation of Russian currency in 2014 made Russian market less attractive for foreign airlines, which caused a decrease in the competition on international routes. The launch of low-cost airline Pobeda in the end of 2014 should stimulate the significant growth of passenger traffic and increase pressure on competitors. Working on most lucrative internal and external routes, Aeroflot is best positioned to capitalize on the potential growth of unsaturated Russian air transportation market. We begin Aeroflot coverage with a Buy recommendation and 12M TP of 240 rubles per share.

Quasi-monopoly with government support. As of December 31, 2016, the share of Aeroflot Group by passenger traffic in Russian Federation equaled to 39.4% on international routes and 44.6% on internal routes. The main increase in market share for the last years came from the aspiration of the Russian Government (the Group major shareholder- 51.2%) to unite Russian state-owned airlines. Moreover, after cessation of Transaero’s operating activity in the autumn 2015 and Aeroflot received some aircrafts and routes of Transaero. As a result, Aeroflot today represents a multi-brand group with flagship Aeroflot airline and Russia, Aurora and Pobeda airlines, combined passenger traffic of which in 2016 more than 3 times outpaced its closest competitor – Group S7.                         

The success of low-cost carrier in Russia.Each airline in the Aeroflot Group has its own profile and is focused on a particular market segment. Pobeda made its first flight in December 2014, and by the results of 2016 represents 9.8% of the passenger traffic of the Group. Pobeda, in essence, appears as the sole real low-cost airline in Russia and considering the level of income of population and costs of alternative types of transportation has all the chances to increase further its passenger turnover. Despite some growth in Pobeda’s passenger traffic came from the decrease in traffic of the Group’s other companies, low-cost airline creates substantial competition on all Russian market. Taking into account partial monopolization of routes by the Group, with an effective management of the route network Pobeda airlines could compete with main market participants without direct rivalry with other airlines of the Aeroflot Group.           

A stock of organic growth.Russia is the largest country by the occupied territory, which should contribute to the increase in the intensity of air transportation usage, because of its convenience and speed. The geographical location of the Russian Federation also makes it favorable transit point between Europe and Asia. Despite the natural factors contributing to the development of air transportation in Russia, the number of air passengers per capita in the country is several times behind of those in developed economies. Given the significant potential of growth in passenger traffic at international and domestic routes, shares of Aeroflot Group are considered as one of the main investments in the development of the industry of passenger air transportation in Russia.

Buy recommendation with the target price of 240 rubles per share. Despite the worsening of macroeconomic indicators for the past several years, the Company continued to increase its core operating metrics. We expect the continuation of steady growth in passenger traffic with a moderate growth in GDP of the Russian Federation. We start the analytical coverage of the Aeroflot Group with a Buy recommendation and the target price of 240 rubles per share. 

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