· We are initiating our coverage of Turkish Airlines with a 12M TP of TL 9.86/shr (exc. dividend) indicating a total return potential of 28%. Thus, we are attaching an “OUTPERFORM” recommendation for the stock.
· Thanks to its logistically advantageous position, low operational costs and sound growth plan, we believe the company is at a beneficial position compared to its major competitors in Europe that suffer from capacity rationalization problems and cost cutting measures.
· Currently at 6.3x 2013 EV/EBITDA multiple, the stock is trading at 7% discount to its peer group median. Yet, we argue that its strong position in the sector and growth potential deserves higher multiples.
Sound growth plan… The company is to increase its fleet size to 429 from the current size of 233 until 2021. We expect this expansion to reflect to the P&L with a CAGR of 16% at the top-line from 2012 to 2020.
Advantageous logistic position… Turkish Airlines is able to reach 168 out of its 196 international destinations with narrow body planes. Furthermore, 40% of worldwide international traffic remains within narrow body range of Istanbul. Narrow body planes have ~15% lower operating costs when compared to wide body planes, while they render secondary cities and multiple frequencies to major cities feasible.
Risks… The major risks are: i) sharp increases in oil prices ii) weaker than expected € against US$, iii) slower than expected passenger traffic growth iv) deterioration in load factor due to rapid fleet expansion v) any significant delays in the construction of the 3rd airport of Istanbul and vi) political tension in the region.