28 Mart 2013 Perşembe

TURKISH AIRLINES Report

§  Downgrading to Hold on rich valuation. Following 2012 financials, we roll over our EV/EBITDAR target multiple valuation to blended 2013/2014 numbers (prev. 2013 only) and revise up 12M TP to TRY7.70/sh (prev. TRY7.50/sh). Since new TP implies limited 7% upside potential, we downgrade Turkish Airlines to Hold.
§  Long term growth story intact... In order to support its narrow body fleet (both in terms of expansion and replacement) Turkish Airlines agreed to order total 117 Airbus aircraft (A321-200, A320/A321 NEO) of which 82 firm delivery and 35 optional. The deliveries are scheduled between 2015-20, mainly after 2018 when 3rd airport in Istanbul becomes operational. Thus, we still believe that Turkish Airlines is a true growth story, taking into account its competitive advantages (e.g. geographical location advantage, favourable unit cost) and fleet expansion program.
§  …but current valuation is stretched. Turkish Airlines outperformed ISE100 by 110% since 2012, as it posted record high air traffic figures and strong improvement in its financials. The stock trades at 5.9x 12M forward adj. EV/EBITDAR, 7% premium to its historical average of 5.5x (since 2010). We believe that most of the positives are already priced in, while further positive signs about 2013E yield outlook remains an upside risk, as it would lead to higher EBITDAR and inevitably higher valuation.
§  We don’t expect any corporate action in near term. We maintain our view that a closer cooperation between Turkish Airlines and Lufthansa would be joint business agreements in some markets (e.g. Middle East, Africa), rather than a merger/acquisition type partnership. Due to complexity of such an alliance, we do not expect a quick decision. An increased cooperation would be a major positive catalyst and would rerate the stock, due to expected synergies that could result in revenue increases and cost savings.
§  A local LCC, Pegasus, is planning an IPO soon. This will likely bring attention to attractive growth potential of Turkish aviation market. Pegasus’ IPO price and multiples should have an impact on Turkish Airlines valuation.

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