Beneficial weak lira…mostly. We believe air transport is one of the sectors in Turkey more immune to local FX weakness. Turkish Airlines (THY) sells 70% of its tickets outside Turkey and 86% of revenue in 9M13 was in currencies other than the Turkish lira. For TAV Airports, passenger fees set in euro and dollars amounted to 61% of its 9M13 revenue (total non-lira revenue accounted for c. 70%). Pegasus (PGSUS) collected 45% of its 9M13 revenue in lira. THY and TAV also have more costs than revenue in lira, making lira weakness margin-positive. Furthermore, their debt and interest rates are usually in FX – making local interest rate fluctuations largely irrelevant for the sector (much of this debt is also at fixed rates).
Positive outlook for THY. Traffic numbers for FY13 were strong and we see THY’s revenue passenger-kilometres (RPK) growing 18% in 2014 (vs 23% in 2013). We expect over 45% of the additional available seat-kilometres (ASK) in 2014 to come from wide-body planes, with the main focus on adding capacity on African routes and to the Americas, long-haul being a more lucrative area. THY’s focus on premium passengers (with their contribution to total revenue at less than half the rate for any other flag carrier) should also provide added support to yields. The company recently confirmed its 2014 target revenue growth of 17% in dollar terms, to $11.4bn; we forecast 12% growth, believing yields will moderately soften in 2014 due to competition. The adjustments to our model incorporate average FX rates of TRY2.2/$ and TRY2.9/EUR in 2014; margin support for 2015, as the company has signed a three-year contract with trade unions that envisages lower wage rises than we expected; and a higher use of wet-lease planes in 2014. An extra 10% weakening of the lira should also add 0.4 ppt to our 2014 EBITDAR margin projections. In the light of these adjustments we upgrade the stock to BUY, from Hold, with a new TP of TRY9.1/share (previously TRY8.5/share).
Slightly worsened outlook for PGSUS. PGSUS is more exposed to the Turkish macro environment, in our view: a weaker lira has a negative impact on its margins (a 10% weaker lira would cut our PGSUS EBITDAR margin forecasts by 1.7 ppts), and as a point-to-point carrier it is more exposed to domestic travel. We see THY putting a bigger focus on the domestic market in 2014 and bringing more planes to PGSUS’s main airport, Sabiha Gokcen, and thus intensifying competition. We reduce our yield expectation for PGSUS in 2014 and also reduce our EBITDAR margin forecasts, mostly on lira weakening, although we still expect PGSUS’s EBITDAR to grow 35% in 2014. Our new TP of TRY41/share (down from TRY48/share previously), on our lower margin and yield expectations, implies limited upside potential; we therefore downgrade the shares to HOLD, from Buy.
TAV – solid performer. TAV’s shares have been the most stable in the sector throughout the recent political turmoil in Turkey. We believe this is connected with increased uncertainty about construction of the third Istanbul airport by the current consortium. We see an increasing possibility for a re-tender, but we caution that: 1) any new bidding (if it comes to that) is likely to be competitive; and 2) construction complexity (terrain, environmental issues, lack of access, likely cost overruns) should not be underestimated. Our 2014 forecasts for TAV incorporate weaker lira revenue (from catering, TGS, bus services, etc.), but a weaker lira forecast for 2014 also lifts our TP to TRY17.5/share, vs TRY15.9/share previously. As such, we downgrade TAV to HOLD from Buy.
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