TURKISH AIRLINES - Notable margin expansion: BUY

TP raised 4% to TRY 10.8 on a slightly better margin outlook
We raise our EBITDA margin forecasts 0.3ppt and 0.6ppt to 15.4% and 16.3% for 2013 and 2014 on a slightly better margin outlook on the back of 2Q13 results. Following the raises, we increase our blended DCF and peer multiple TP for Turkish Airlines 4% to TRY10.8 per share.

2.5ppt y-y EBITDA margin expansion in 2Q13
The 2.5ppt y-y improvement in THY’s EBITDA margin in 2Q13, more than double our estimate, to 16% has made us raise our margin expectations. However, we choose to be cautious on the upgrade as a large portion of the positive surprise seems to have come from lower than expected fuel acquisition costs, a cost item difficult for THY to control.

High growth and volume player at major discounts to peers
THY’s average P/E multiple for 2013E and 2014Ê is more than 40% below those of its peer average. While the stock has traded at major discounts to peers in the past, we don’t think this is fully justified any more given its significantly higher growth prospects. We value THY based on our DCF (75% weight) and peer comparison (25% weight) analysis. Maintain BUY.

Second quarter results were better than our estimates
THY posted a bottom line of TRY144m in 2Q13 (down 29% y-y, BNPP estimate: TRY224m, CNBCE Consensus: TRY293m) on EBITDA of TRY737m (up 42% y-y, BNPP: TRY635m, Consensus: TRY727m) and revenues of TRY4.61b (up 20% y-y, BNPP: TRY4.52b, Consensus: TRY4.76b). The 2.5ppt y-y improvement in EBITDA margin to 16% was more than twice our expectation. The positive surprise came from lower than expected unit costs, especially from lower fuel acquisition prices for the quarter, and slightly better than expected yields. Bottom line missed our expectation on a sizeable deferred tax charge and higher than expected financial expenses.

 

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