Jun
23
According to 2007 results, Aeroflot’s income appeared to be at the expected level and formed 3,807 mn USD, which is by 28% higher than in 2006. The transfer of passengers is by 20% higher than it was planned, due to favorable situation at the air services market. The fleet renewal, new planes and implementation of expenses decrease program has a positive effect on net margin. Thus, EBIT margin formed 15.2% against 12.9% the year before. It should be mentioned that Aeroflot’s efficiency appeared to be higher than other air companies have, which are also providing services at the foreign markets. The fleet renewal had a positive influence on company’s fuel expenses, which growth is appeared to be not as high as company expected. The fuel expenses increased by +11.2% including jet fuel and lubricant expenses, which increased 20-25% in 2007 in comparison with 2006.
In spite of operating results, Aeroflot’s income is appeared to be lower than we have expected and formed 313.4 mn USD (21.4% growth), while the expected figures were 35%. A negative influence on net income had written off VAT expenses of freight transportations, which were provided in 2002-2004 and they formed about 32 mn USD. However, such expenses are not expected in the near future, as almost all of them were written off in 2007.
The last year was the most successful for Aeroflot. Over 2008 and next 5 years, the company does not expect such good results. The main problem, which company has to face is а sharp growth of fuel prices. However, the prices correction can be seen in Europe, but in Russia, the prices of jet fuel market continue. For the first time the prices of jet fuel in Russia overgrew the world’s level. Since May, the stock transactions show the decrease of jet fuel prices by 8% in Europe, while the prices in Russian airports have not changed. The fuel transactions in countries of West Europe were closed at 1270 USD per t level and these figures reached 1380 USD per t in Russia. Aeroflot has certain discounts due to direct contracting. Also the company passes 50% of fuel prices to consumer in terms of fuel penalty in air ticket cost. As it was planned earlier, the average growth of air services tariffs in 2008 forms 5-6%, but now these figures are changed to 10-11% growth.
We reviewed company’s financial model, taking into account 2007 results, including future potential risks and trends of air services development. As the result, we decrease our estimation price form 4.71 USD to 4.17 USD per common share. Growth potential, according the current market situation, could form 6.19%. We change our recommendation from “BUY” to “HOLD”.
Aeroflot: Hard times are coming - June 23, 2008 (PDF)