§ 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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