EARNINGS REVIEW Equity TURKEY / AVIATION Research 9 November 2015 PEGASUS AIRLINES Underperform (prev. Underperform) Lower CASK was not enough to offset hedge losses Stock Data 09 November 2015 Net income came in lower than expectations. Pegasus Airlines announced TRY 234mn net profit in its 3Q15 financials, lower than Current price TRY19.5 the consensus’ of TRY 256mn and our estimate of TRY 293mn. Target price TRY18.2 DPS TRY0.0 Enjoyed better than expected margin expansion. Top-line of TRY 1,320mn in 3Q15 is broadly in line with the market consensus Total return -7% of TRY 1,333mn but c.5% lower than our estimate of TRY 1,381mn. Current Mcap TRY1,994 mn/US$683mn There is a slowdown in the pace of contraction in passenger revenue Bloomberg Ticker PGSUS TI yields in EUR terms but not enough to prevent the company from Number of outstanding shares (mn) 102 registering 4% y/y lower RASK. The company lowered its CASK by High / Low Price Range (12M) 34.95/17.10 8% in EUR terms driven mainly by lower fuel cost as ex-fuel CASK 3-m Average Daily Turnover ($ mn) 13.0 was up 6% y/y in 3Q15. .Since CASK drops higher than RASK, the company experienced a 432bps y/y EBITDAR margin expansion. Price Performance (%) 1M 3M 6M YtD Return 1.3 -17.1 -22.8 -41.2 Higher financial expenses. Although the company’s headline Relative to BIST100 -2.0 -21.6 -19.5 -38.5 operating margins came in better than expectations, sizeable hedge losses amounting to TRY 87mn below the EBIT line resulted in less 60.00 than expected bottom-line reading. Meanwhile, adjusted net debt at 50.00 EUR 666mn as of end-September 2015 corresponds to 3.2x adj. net /EBITDAR (4Q trailing) and 1.4x adj. net debt/equity which are 40.00 higher than the levels a year ago. The company’s rapid capacity 30.00 growth necessitates expansion in fleet which in turn increase the 20.00 indebtedness of the company, mostly via higher operational lease 10.00 debt. - Maintaining our cautious stance. We perceive Pegasus’ results as slightly positive, if not neutral, despite the negative deviation at 04/13 07/13 10/13 01/14 04/14 07/14 10/14 01/15 04/15 07/15 10/15 Price (TRY) Relative Price (TRY) the bottom-line due to better than expected operating margin. However, we do not anticipate any strong share performance because of 3Q15 financials. In light of 3Q15 results and after hearing the management’s comments in today’s conference call, we will review our model assumptions but we are not planning to make material adjustments and we find it too premature to switch our cautious stance for the company in the absence of more visible and sustainable improvement in key operating metrics. Please note that the management fully maintained its full year guidance in the latest company presentation after 3Q15 results which are already within our knowledge. We have an ‘Underperform” recommendation for Pegasus with a Mustafa Görkem Göker [email protected] 12M target share price of TRY 18.2. +90 212 319 79 49 IMPORTANT: Please refer to the last page of this report for “Important Disclosures” and Analyst(s) Certifications. 10 November 2015 –Pegasus Airlines Pegasus Airlines– 3Q15 Summary Financials (*) PGSUS- IFRS, TRYm n Income Statement 3Q15 3Q14hg yoy(%) 9M15 9M14hg yoy(%) 2Q15 Chg qoq (%) Revenues 1,320 1,105 19% 2,737 2,410 14% 834 58% COGS -882 -768 15% -2,271 -1,987 14% -771 14% Gross Profit 438 337 30% 466 423 10% 63 597% OPEX -62 -46 36% -192 -164 17% -72 -14% EBIT 376 291 29% 273 259 6% -10 -4033% EBITDA 423 332 27% 404 384 5% 34 1145% EBITDAR 513 382 34% 637 521 22% 112 356% Other income, net -38 44 n.m. 30 53 -43% -23 67% Financial income, net -40 -23 79% -33 -5 n.m. 51 -178% Profit Before Tax 298 312 -5% 271 307 -12% 19 1448% Minority interest 6 2 319% 3 -1 n.m. 3 n.m. Taxes -58 -60 -4% -73 -73 0% 19 -400% Net Profit 234 251 -7% 195 235 -17% 35 562% Margins(%) 3Q15 3Q14hg yoy(%) 9M15 9M14hg yoy(%) 2Q15 Chg qoq (%) Gross 33.2% 30.5% 2.7 pp 17.0% 17.6% -0.5 pp 7.5% 25.7 pp EBITDA 32.1% 30.1% 2 pp 14.8% 15.9% -1.2 pp 4.1% 28 pp EBITDAR 38.9% 34.5% 4.3 pp 23.3% 21.6% 1.7 pp 13.5% 25.4 pp Net 17.7% 22.7% -5 pp 7.1% 9.8% -2.6 pp 4.2% 13.5 pp Balance Sheet 3Q15 3Q14hg yoy(%) 9M15 9M14hg yoy(%) 2Q15 Chg qoq (%) Cash and cash equivalent 1,358 1,235 10% 1,358 1,235 10% 1,098 24% Trade receivables 356 316 13% 356 316 13% 389 -9% Inventories 12 5 118% 12 5 118% 10 22% LT assets 2,501 2,096 19% 2,501 2,096 19% 2,236 12% Total assets 4,643 3,818 22% 4,643 3,818 22% 3,988 16% Financial debt 1,586 1,497 6% 1,586 1,497 6% 1,419 12% Trade payables 350 240 46% 350 240 46% 267 31% LT liabilities 1,783 1,630 9% 1,783 1,630 9% 1,597 12% Equity 1,668 1,340 24% 1,668 1,340 24% 1,218 37% Total liabilities 4,643 3,818 22% 4,643 3,818 22% 3,988 16% Financial Ratios 3Q15 3Q14hg yoy(%) 9M15 9M14hg yoy(%) 2Q15 Chg qoq (%) Net debt (on B/S) 228 261 -13% 228 261 -13% 322 -29% Adj. Net debt (incl. off B/S 2,278 1,345 69% 2,278 1,345 69% 2,131 7% Net debt/equity 0.1 0.2 -5.8 pp 0.1 0.2 -5.8 pp 0.3 -12.7 pp Adj. Net debt/EBITDAR (4Q 3.2 2.3 84 pp 3.2 2.3 84 pp 3.6 -46.4 pp Receivable days 24 26 -1 36 36 0 42 -18 Inventory days 1111111 0 Payable days 36 28 8 42 33 9 31 5 Net w orking capital days -10 -2 -8 -5 4 -9 12 -22 Source: Company Data, YKY Research PGSUS 3Q15 Results Reported Expected Re por te d IFRS, (TRY, mn) 3Q15 3Q14 y/y YKY Cons. vs. YKY vs. Cons. Sales 1,320 1,105 19% 1,381 1,333 -4.5% -1.0% EBITDA 423 332 27% 407 383 3.9% 10.4% Net Income 234 251 -7% 293 256 -20.1% -8.7% EBITDA margin 32.1% 30.1% 2 pp 29.5% 28.7% 2.6 pp 3.3 pp Net profit margin 17.7% 22.7% -5 pp 21.2% 19.2% -3.5 pp -1.5 pp Source: Company Data, YKY Research (*) EBIT, EBITDA, and EBITDAR calculation methodologies might vary between us and the company and the consensus 2 Coverage Cluster Company Ticker Analyst BUY Akbank AKBNK Murat Borekci - Sezgi Bice Ozener Aksa Enerji AKSEN Elvin Akbulut Daglier Alarko REIT ALGYO Elvin Akbulut Daglier Aygaz AYGAZ Elvin Akbulut Daglier Cimsa CIMSA Akif Moroglu Coca-Cola CCOLA Akif Moroglu Dogan Holding DOHOL Akif Moroglu Emlak Konut REIT EKGYO Elvin Akbulut Daglier Enka Insaat ENKAI Elvin Akbulut Daglier Ford Otosan FROTO Mehmet Aydin Agyuz Isbank ISCTR Murat Borekci - Sezgi Bice Ozener Is REIT ISGYO Elvin Akbulut Daglier Migros MGROS Murat Borekci Otokar OTKAR Mehmet Aydin Agyuz-Efe Cetinel Park Madencilik PRKME Mehmet Aydin Agyuz Pinar Et PETUN Gizem Celik Sabanci Holding SAHOL Elvin Akbulut Daglier Tekfen Holding TKFEN Elvin Akbulut Daglier Torunlar REIT TRGYO Elvin Akbulut Daglier TSKB TSKB Murat Borekci - Sezgi Bice Ozener Turk Hava Yollari THYAO Gorkem Goker Turk Telekom TTKOM Mehmet Aydin Agyuz Turk Traktor TTRAK Mehmet Aydin Agyuz HOLD Adana Cimento ADANA Akif Moroglu Akcansa AKCNS Akif Moroglu Akfen Holding AKFEN Gizem Celik Anadolu Cam ANACM Akif Moroglu Anadolu Hayat ANHYT Sezgi Bice Ozener BIM BIMAS Murat Borekci Celebi CLEBI Gorkem Goker Eczacibasi İlac ECILC Gizem Celik Erdemir EREGL Akif Moroglu Garanti Bankasi GARAN Murat Borekci - Sezgi Bice Ozener Kardemir (D) KRDMD Akif Moroglu Kiler Gida KILER Murat Borekci Mardin Cimento MRDIN Akif Moroglu Pinar Sut PNSUT Gizem Celik Selcuk Ecza SELEC Gizem Celik Sinpas REIT SNGYO Elvin Akbulut Daglier Sise Cam SISE Akif Moroglu Soda Sanayi SODA Akif Moroglu Tat Gıda TATGD Gizem Celik Tofas TOASO Mehmet Aydin Agyuz Trakya Cam TRKCM Akif Moroglu Tupras TUPRS Elvin Akbulut Daglier Turkcell TCELL Mehmet Aydin Agyuz Ulker Biskuvi ULKER Gizem Celik UNDERPERFORM Ak Enerji AKENR Elvin Akbulut Daglier Albaraka Turk ALBRK Murat Borekci - Sezgi Bice Ozener Arcelik ARCLK Mehmet Aydin Agyuz Avivasa AVISA Sezgi Bice Ozener Ayen Enerji AYEN Elvin Akbulut Daglier Bizim BIZIM Murat Borekci Halkbank HALKB Murat Borekci - Sezgi Bice Ozener Pegasus PGSUS Gorkem Goker TAV Havalimanları TAVHL Gorkem Goker Tumosan TMSN Mehmet Aydin Agyuz-Efe Cetinel Vakifbank VAKBN Murat Borekci - Sezgi Bice Ozener UNDER REVIEW / NOT RATED Aksigorta AKGRT - Anadolu Sigorta ANSGR - Koza Altin KOZAL Mehmet Aydin Agyuz Research Rating and Important Disclosures 1. Important Disclosures This research report was prepared by Yapi Kredi Yatırim authorized to engage in securities activities in Turkey amongst other jurisdictions. Yapi Kredi Yatırim is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S.