Turkish Airlines: Mounting debt and a long road to recovery (downgraded to SELL)

Turkish Airlines (THYAO) is much better positioned than the European majors, in our view, in both the near term, due to the fast, and very profitable, ramp-up of the cargo operations and aggressive cost cuts; and the longer run, thanks to the favourable geographical location and substantially lower unit costs. That said, unlike most of its peers (e.g., Aeroflot, the European majors, Emirates, etc.), THYAO has not raised equity and is relying on debt, so far, to get through the crisis. Its leverage has increased rapidly as a result. We do not have a high conviction that the carrier would tap the market for equity, but not doing so may affect its capacity to fund future expansion negatively, in our view. We believe the consensus forecast is fairly optimistic and, if the traffic recovery fails to live up to expectations, we see a risk of downgrades. We believe that shorting the stock may be too risky as, if we are wrong and the earnings stage a fast recovery, the upside could be substantial, thanks to the leverage. That said, with the pandemic not over yet, we would use the 30% November rally to take profits. We have downgraded our rating on THYAO to SELL, setting our new 12M price target (PT) at TRY 11.2/share.