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.

Türk Hava Yolları Teknik Analizi

Hisse orta vadeli olarak nitelendirdiğimiz yükselen hareket devam etmektedir. Ana destek noktası olarak 5,50 seviyesini takip etmekteyiz. Olası geri çekilmelerde bu seviyenin altına inilmediği sürece, hissede düşüşlerin sınırlı kalmaya devam edeceğini, yükseliş eğiliminin süreceğini, ilk etapta Aralık ayına başlarken test edilen ana direnç noktası olarak etkili olacak 6,12 seviyesinin önümüzdeki süreçte yeniden deneneceğini düşünmekteyiz. Dolayısıyla, 5,50 seviyesini stop loss kabul edip, hissede geri çekilmelerde pozisyon alınmasını tavsiye etmekteyiz.

 

Geri çekilme hareketleri içinde 5,50 seviyesindeki desteğin bozulması halinde, orta vadeli yükselen hareketin de bozulacağını, hisse üzerinde satış baskısının derinleşmeye başlayacağını düşündüğümüzden alınan pozisyonların kapatılması doğru olacağı söylenebilir. Ara destek noktaları olarak 5,80, 5,70 ve 5,56 seviyeleri izlenebilir.

 

Hissede orta vadeli olarak nitelendirdiğimiz yükseliş eğiliminin, daha uzun süreye yayılmaya başlayabilmesi için ise 6,12 seviyelerinin aşılması önemli görülmektedir. Bu seviyenin üzerinde, sırasıyla 6,50 seviyeleri ile 6,66 seviyeleri hedeflenebilir. 6,20, 6,28, 6,36 ve 6,44 seviyeleri ara direnç noktaları olarak etkili olacaktır.

 

Hissede yukarı ataklarda satış için de kısa vadeli pozisyonlarda ilk etapta 6,12 seviyelerine doğru hareketlenmelerin değerlendirmesini önermekteyiz. Bu seviyenin aşılması durumunda, daha orta vadeli pozisyonlarda satış için sırasıyla 6,50 ve 6,66 seviyeleri gözlenebilir.

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.