Turkish Airlines: firing on all cylinders (upgraded to HOLD)

Turkish Airlines (THYAO) has had a stellar run, up c.144% ytd in USD terms, outperforming all the European airlines by a substantial margin. It has been ramping up the passenger capacity faster than the European full-service carriers (FSCs), helped by its more-efficient unit cost structure. It has also benefitted from still elevated cargo yields: at double the pre-pandemic levels, these have remained higher for longer compared to both our expectations and the market’s. While the return of belly-cargo capacity globally could drive a cargo yield normalisation, bottlenecks at ports and very long shipping times could keep them above pre COVID-19 levels. These positive effects have been amplified by the high leverage: despite the recent share price outperformance, the stock trades at an EV of c.1.2x pre-pandemic levels. This tracks the recovery of earnings, as the consensus expects the EBITDA to stand at c.1.3x pre-pandemic levels this year. From a local currency perspective, the weak TRY could continue to push the share price higher. As Turkey gets cheaper for international travellers, thanks to the weak currency, even from a USD perspective, THYAO could continue to benefit, due to higher inbound tourism. We set our new 12M price target (PT) at TRY 80.0/share, upgrading our recommendation to HOLD. We believe there could be upside for the 2022E consensus, but we see downside for the 2023E forecasts, on a mix of weaker purchasing power, cost inflation, higher funding costs and lower cargo yields. While a strong 3Q22E could drive some additional upside, investors may consider locking in profits at some point this year.