19 Ekim 2012 Cuma

TURKISH AIRLINES Report

Transferring coverage: HOLD with TRY4.35 TP (8% upside)
Despite strong traffic growth in recent years, yields and margins have been quite volatile and frequently weak, especially since 2010. The volatility and weakness have been caused, in our view, by THY’s efforts to grow much faster than peers and its increasing share of transfer traffic.

Margin expansion likely to slow down in quarters ahead
We forecast THY’s y-y margin expansion slowing significantly in 2H12 and 2013 and see the following headwinds: 1) the disappearance of the low-base effect, especially starting 4Q12; 2) continued weakness in yields due to efforts to grow much faster than peers especially through transfer traffic; and 3) higher non-fuel unit costs on real appreciation of the TRY.

Valuation based on blended DCF and peer comparison
We assign a lower weighting (35%) to our peer-multiple valuation as THY’s multiples relative to peers have been too unpredictable and usually at a significant discount historically. THY trades at a 30% discount based on 2013E P/E but at par on 2013E EV/EBITDA.

Concerns on long-term fleet acquisition plan and airport capacity
We have two major concerns given the stock price: 1) THY’s lack of a major long-term fleet acquisition plan to enable it to grow significantly in the long term; and 2) Istanbul Ataturk Airport’s (ISD) capacity likely being reached by 2015 or 2016. We are also not sure if the potential third Istanbul airport will be ready by 2016 given its size and other construction challenges. The most important overall risks to our valuation are major changes to fuel prices, regulatory environment, financing conditions, and macroeconomic factors that would significantly affect demand for air travel. On the other hand retrenchment by any European major network airline could present opportunities.

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