Pegasus Airlines IPO – THYAO Implications

Pegasus Airlines is making a debut today on Istanbul stock exchange under a ticker PGSUS TI (Bloomberg). According to Bloomberg  35.3mn shares (22.5mn primary) were placed at TRY18.4 ($361mn offer size) valuing the company at TRY1,882mn ($1,045mn).

 

Brief portrait – second largest after THY, but not a close rival

-          After IPO 66% will be owned by Esas Holding – Sabanci.

-          Turkish second largest airline after THYAO but working off a low-cost airline model.

-          Uses Sabiha Gokcen – Istanbul’s Asian side airport as its main hub. THY is currently based at Ataturk Airport and lobbied for building third giant airport in Istanbul with 150mn potential capacity, mostly geared to fit its own ambitious expansion plans.

-          Flies to 29 domestic and 41 international destinations essentially competing almost on all routes with THYAO (the latter flies almost anywhere these days!)

-          Operates 40 Boeing 3.4 y old airplanes but placed an order to buy 100 (57 firm orders) new Airbuses with deliveries starting 2015-16. THY has 201 planes in the fleet (2012YE, ex wet lease) and plans to operate 423 airplanes by 2021.

 

In general, PGSUS displays quite similar to low-cost airline metrics – low costs per available seat kilometre (lowest of all in terms of employees per ASK) and low revenue per ASK and with the result of having relatively high profitability: eg 3ppts above THYAO on 2012 numbers and in line with Ryanair.

 

Pegasus was priced at the IPO (looking back at 2012 numbers) overall in line with low cost airlines but at a substantial premium to THYAO – 35% on EV/EBITDA and almost 100% on P/E. On one hand this may look justified due to better margins of PGSUS but (1) THYAO, in our view, is displaying financial performance and metric closer to low-cost airlines than to flag carriers as well, (2) generates better absolute returns on ASK (higher EBIT/ASK), (3) in our view will continue growing dynamically over the next few years, (4) gets state support and is clearly a ‘designated’ Turkish carrier.

 

Note that while we keep our EBITDA margin unchanged at 14% for THYAO going forward, both the company itself and consensus seems to believe the EBITDA margin may reach 18% in couple of years. That would be above Pegasus current one and at the top end of not just flag carriers but also low cost airlines. We think PGSUS pricing underpins THYAO attractive valuation, further highlighted if one believes THYAO can deliver growing margins! We have just issued a report on THYAO (see attached) where we argue the stock should be priced closer to 7x EV/EBITDA and 13x P/E – or above its current trading multiples albeit still below those of PGSUS.