WOOD Flash – Turkish Airlines: 2Q23 beat, revenue environment remains very strong, costs better than expected

Turkish Airlines (THYAO) seems to be en route to reaching EBITDA around, or potentially north of, USD 5bn this year, based on the strong results achieved in 1H23. This is double the level of earnings it was generating before the pandemic, now on c.30% higher capacity flown, and would represent more than 50% upside to our last published 2023E EBITDA. From an EV perspective, THYAO is worth more than any other European carrier, including the majors and Ryanair. The premium to the majors, at which it has traded historically, is well-deserved, in our view, due to its more efficient cost structure and faster growth. The key question, in our view, is the potential new mid-cycle run-rate of margins and profitability. Currently, the stock is trading at around 4.0-4.5x EV/EBITDA on this year's earnings, compared to the pre-pandemic average of c.6-7x. We are not sure the current ticket price strength is sustainable; at the same time, the continued growth of capacity could keep the EBITDA at around USD 4-5bn even next year, as long as the cost base remains contained, and ticket prices remain above the pre-pandemic level (which seems likely, given that most of the industry is operating at a higher cost base now).