Turkish Airlines: buy the dip (upgraded to BUY)
Throughout the past year, with our Hold on Turkish Airlines (THYAO), we have stood apart from the Bloomberg consensus, in which all the other analysts rate the stock a Buy. Over the past year, our more cautious stance has proven justified – the shares have underperformed the global airlines by 27% in USD terms over the LTM. Following this underperformance, we have revisited our estimates and upgraded our rating to BUY, with a new price target (PT) of USD 8.8/share (TRY 464/share), with 26% USD upside, primarily on valuation grounds. Including its long-term financial assets, THYAO trades currently at an EV (excluding leases) of below USD 4bn, while we expect the EBIT to exceed USD 2bn this year. This implies an undemanding EV/EBIT multiple of under 2x. Margins have come under pressure from rising personnel costs, GTF-related parking expenses, and normalising yields post COVID-19. Nevertheless, THYAO continues to deliver strong FCF generation, supported in part by solid returns on its liquidity. Over the past three years, the FCFE (after lease payments and taxes) has totalled almost USD 7bn – more than USD 2bn p.a. Even assuming lower profitability and higher capex ahead, its net cash could feasibly cover the company’s entire market cap by the end of the decade. While we remain mindful of both country and sector risks, we view the current valuation as compelling for one of the fastest-growing, large-scale airlines globally, with a proven record of profitability and cash generation.Turk Hava Yollari is engaged in the airline industry with the airline flying to 103 destinations, throughout Turkey and internationally. As of the year end, Co. maintains 66 aircrafts with a total seat capacity of 10,672, and leases a A300-200 cargo aircraft. Co. has various services for their customers which include: various ways of checking in and on-line ticket sales.
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