Company Reports

Turkish Airlines                       
OVERWEIGHT

Flying high above                                                                                  May 12, 2023

• Initiating with an Overweight rating…  We like Turkish Airlines’ strong market positioning and expect decent momentum in passenger numbers to translate into solid profitability amid a normalization in margins. We believe that the stock is attractively valued and expect strong seasonality to support the share price in the near term. We set our ex-dividend target price at TL284.6/share, implying a 109% upside potential. THYAO currently trades at 2023E EV/EBITDA of 3.9x and P/E of 3.5x.

• Strong demand momentum… As of April’23, the number of passengers reached 23.6mn, with an annual increase of 33.6%. In the first four months, 65% of the passengers were international passengers and 35% were domestic passengers. We believe that Turkey’s location advantage to 60 countries within a 3-hour flight distance and relatively cheap TL will create high potential for the 2023 tourism season. Due to the differentiation of regional aviation practices during Covid, flights to China were stopped and the wide-body aircraft had been utilized in 4 new destinations opened to America. With the resumption of flights to China, the contribution of the Far East began to increase and increased by 74% y/y in the first four months. We believe that the improvement in the geographical composition of Turkish airlines’ passenger distribution will not only reduce geographical risks, but also support the continuation of the strong demand momentum.

• Noteworthy capacity increase… We assume that the fleet of 411 aircraft as of 1Q23 will reach 432 by the end of 2023. We believe that with these new aircraft purchases, there will be an increase of 18% y/y in ASK. Despite this strong increase in capacity, we believe that the load factor of Turkish airlines will be 82.7% in 2023, together with the increase in the number of passengers. We believe that there will be a 3.7% y/y decrease in RASK because of the increasing competitive environment partially reducing the pricing power and our forecast that the decline in cargo unit revenues will continue. However, we believe that ex-fuel CASK will increase by 6.2% due to reasons such as an increase in personnel costs, purchase of new aircraft, and increase in aircraft maintenance costs. We believe that the EBITDA margin, which was 26.8% in 2022, will normalize to 23.4% in 2023 with the contraction in the RASK-CASK spread.

• Solid cash generation helps with debt management… Turkish Airlines’ net debt stood at US$8.4bn in 1Q23. We believe that strong investment expenditures for new aircraft purchases will be partially offset by solid cash generation and that net debt will reach US$9.5bn at the end of the year. We believe that the net debt/EBITDA ratio will be maintained at around 2.0x with the support of strong balance sheet management and operational performance.

• Attractive multiples… Turkish Airlines trades at 2023E EV/EBITDA of 3.9x, which is 25% below its historical median of 5.2x. THYAO also trades at 2023E P/E of 3.5x which is 26% below its historical median of 4.7x.

• Key risks... We think that increase in fuel costs and appreciation of TL could be the main risks that may represent downside risks to our estimates and target price.