Turkish Airlines: can it get any better? (stays HOLD)

Turkish Airlines (THYAO) is having a flagship year. The stock is up around 400% ytd in USD terms, outperforming both the global (down -5% ytd) and European (up 16% ytd) airlines massively over the period. Its performance is amplified by its leverage: the stock is “only” some 30-40% more expensive in EV terms, relative to the pre-pandemic (2017-19) levels. THYAO started to ramp up capacity proactively early in the pandemic, and has since benefitted from a high passenger yield, amplified by the growing share of international in the mix. The pricing in cargo also remained strong in 9M22. Combined with good cost control (weak TRY and cost savings achieved in the pandemic), we estimate this could translate into 2022E EBITDA of c.USD 4.5bn, at an ASK of around 8-9% above 2019. The 2023E earnings visibility is low at this point, and we cannot rule out that the run will continue. However, extrapolating this year’s stellar results forward could set a high bar to clear, in our view. Against the backdrop of a global slowdown, we expect the cargo yields to continue to decline. We also see a risk that the international passenger yields may soften, as purchasing power weakens and airlines continue to ramp up capacity gradually. Another bout of TRY appreciation could send the stock higher in Lira terms, which may justify a more positive view for the locals. That said, for international investors, we believe the current levels could be an opportunity to take profits. Following the beat in 3Q22, we have increased our 12M price target (PT) to TRY 115/share, while we maintain our HOLD rating on the stock.