WOOD Flash – Turkish Airlines: 4Q20 beat driven by cargo and yields

Turkish Airlines has reported stellar 4Q20 results, with strong cargo and yield performance driving margins well ahead of both our and the consensus estimates. With limited capacity, we believe the yields may remain strong even in the first part of the year, which could drive upside relative to our current forecasts. That said, at this stage, we do not see this as sufficient to change our cautious view on the stock. We see a risk that the mounting net debt, which we expect to continue to increase throughout FY21E, could necessitate a capital increase at some point during this year. While we cannot rule out that the government may act as an anchor investor and buy the shares at around the current levels, we believe the share price could come under pressure if the intention to raise capital is announced. If the company decides not to reinforce its equity, we believe the net debt may weigh on the profitability, and further increase the volatility of what is already a high beta name. We expect the cargo unit revenues to remain strong during the first part of 2021E, but we see it as likely that it will start to ease off gradually from the second half of the year and onwards, as traffic resumes and belly cargo capacity increases. While we appreciate the resilient domestic demand, we believe that long haul – an important contributor to THYAO’s profitability – is unlikely to stage a fast recovery. We also believe that the profitable business travellers are likely to return only gradually. We would use the current levels to take profits.