Strategic growth and cost management. On the 1st of November of 2018, the Board of Directors of Aeroflot approved a new development strategy until 2023. Aeroflot aims to carry 90-100 million passengers in 2023, increase international transit passenger traffic from 5 million to 10-15 million passengers in 2023, open regional hubs throughout the Russian Federation, increase the fleet of domestic aviation technology and increase the level of digitalization.Aeroflot’s low-cost carrier Pobeda is assumed to be a key growth driver, which is expected to carry 25-30 million passengers annually. In 2018 Aeroflot took measures to reduce costs and obtained a positive effect from the optimization program introduced in order to reduce the pressure on financial results from the cost of jet fuel and the exchange rate movements.
Attractive dividend payouts. The dividend policy of Aeroflotsets the level of dividend payouts at 25% of net income. In 2018 Aeroflot paid its dividends to its shareholders for 2017 in the amount of 14.2 billion rubles, which is a relatively high level of dividend payment in the history of Aeroflot. According to our calculations, the projected dividend for 2018 is ~6 RUB/share with a dividend yield that equals to 6% relative to the current market price (14.02.2019г. the share price is 101,36 RUB/share).
Exchange rate, fuel prices and competition. In case RUB strengthens against EUR and USD, a negative currency effect on the financial performance of the Group is possible. Aeroflot at the moment does not hedge jet fuel prices. This unhedged position makes Aeroflot less competitive if there is an excessive increase in oil prices in comparison with airlines that hedge fuel prices, but also suggests a more favorable position in the event of a decrease or stabilization in oil prices. According to Bloomberg, a decrease in the average price of oil is expected (from the level of 71.69 USD per barrel in 2018 to the level of 66.38 USD per barrel in 2019), which will have a positive impact on operating expenses. However, competition within the domestic market as well as against foreign airline companies can put pressure on Aeroflot's revenues and on the development of long-haul air traffic of the airline company Rossiya, which is mainly focused on the medium price segment.
Recommendation is to Buy with 12M TP 130 RUB/share. We expect EBITDA margin to be 20% in 2019 and 21% in 2020. We assume that Aeroflot’s operating indicators will demonstrate a positive dynamics on the forecasted horizon, which, in the absence of unforeseen factors, should ensure stabilization and improvement of financial indicators. Taking into the consideration the high potential of developing the air network transportation in the Russian Federation’s market, we recommend to Buy Aeroflot shares with 12М TP 130 RUB/share.
