WOOD Flash – Turkish Airlines: 2Q21 – strong cargo, ticket pre-sales and PDP inflows drive cash-positive quarter

Turkish Airlines (THYAO) has reported a good set of figures: the top line came in broadly in line with expectations, and the lower opex drove a small beat on the operating profit level. Importantly, thanks to inflows from pre-sales (USD 350m) and PDPs (USD 200m), the quarter was cash positive for Turkish Airlines, the first one since the start of the pandemic. Cargo remains a key driver of earnings, accounting for nearly 50% of revenues, owing to the still extremely strong pricing, as well as THYAO’s proactive ramp-up of cargo capacity. Management highlighted the encouraging booking trends, expecting to fly around 80% and 75% of its 2019 ASK in 3Q and 4Q21E, respectively. At USD 14bn, its net debt remains high, and THYAO expects that it may take until 2025E before it reaches its target of 3.5x net debt to EBITDA. The stock is down some 5% in EUR terms since we downgraded it to SELL last year, trailing the BIST100 index slightly, and underperforming the European equities by a little over 25% over the period. We continue to see risks ahead: the rising number of COVID-19 cases in Turkey; the high indebtedness, potentially necessitating an equity injection; and the exposure to the long-haul transit segment, which could take years to recover. However, the performance of the Cargo unit so far this year has exceeded our expectations significantly, and the rebound in passenger traffic looks promising, especially if the yields hold. On the consensus 2022E EBITDA estimate (which is broadly on a par with THYAO’s 2019 EBITDA), the stock trades at 7x. This is not cheap, almost on a par with the likes of Wizz Air and Ryanair, which have stronger balance sheets, seem better-positioned for a rebound in demand, thanks to their low-cost, short-haul models, and are likely to generate faster growth over the medium- to long-term. That said, THYAO’s high leverage can work both ways and, if the recovery in passenger traffic continues and cargo remains strong, a positive surprise in earnings could drive a significant increase in equity value, without the overall EV being affected very significantly.