Aeroflot is presently the best valued among its GEM peers. Despite SARS and the Iraq war, it has sustained stable, though moderate, operational growth in 2003. However, these positives are not yet fully reflected in its valuations.

Aeroflot shares deserve to be traded at, on average, 30—40% discounts to GEM peers on future P/E and EV/EBITDA due to company specific risks. Currently, the discounts are much wider leaving room for some 15—20% price upside.

Elsewhere, Lan Chile and Thai Airways are being offered as buying opportunities to equity investors. Presently, both airlines are valued higher than Aeroflot. Thai Airways is considered to be a play that provides exposure to the unwinding Thai economy and the expected increase in tourism in the region. We argue that SARS and chicken flu are likely to make South-Asian destinations, including Thailand, less attractive, at least in the near future.

Lan Chile is considered to be attractive based on the recovery in the local and international economy, a stable peso, which should boost passenger traffic and import, and its international expansion strategy. We consider Aeroflot close to Lan Chile in terms of high attractiveness as an investment opportunity. Different brokers suggest 14—25% upside for Lan Chile shares, which again underscores our bullish call on Aeroflot. Lan Chile is expected to increase its traffic by 2.6% in 2004, which is significantly lower than Aeroflot’s projected traffic increase of 11.2% in 2004.

Overall, we do not believe that Aeroflot’s discounts to GEM and DM peers are justified by the expected growth rates of relative air transportation markets. Indeed, the Chinese air transport is expected to grow at the fastest rate in 2003—2022 (CAGR 8%), according to Boeing forecasts, while it expects the North American market to grow by 4.1%, the Latin American by 7.3%, and the European by 4.5%. We forecast that the Russian air transport industry will grow by 7.4% (CAGR 2003—2022), which is on a par with the expected Latin American growth and only slightly below the expected Chinese growth. Therefore, Aeroflot deserves to be valued at least on a par with Lan Chile and Thai Airways, i.e. to trade 20—40% higher than it presently trades.

At out target price of $ 1,0, Aeroflot would still trade at significant discounts to GEM and DM peers, which underscores the attractiveness of Aeroflot shares at current price levels and leaves room for further stock price appreciation.