HSBC Turkish aviation report:  Still refreshing

Still attractive despite normalisation trends

Prospects for the 2024 tourism season are positive; travel agencies and hotels report  a 20% increase in early bookings from Europe compared with 2023 as of the  beginning of the year. The Tourism Ministry expects to receive 60m tourists this year  s 57m in 2023 despite concerns of a less competitive currency. Benefits for aviation  companies (airlines and airports) are not limited to direct traffic but also transfer traffic  where the country’s location provides a natural leverage.

Aviation stocks look inexpensive and defensive in the macro context

Amidst all the complexity and uncertainty created by the macro outlook (concerns of  economic slow-down after 1Q24) and accounting changes (implementation of inflation  accounting, IAS29, starting with FY23 results for non-financial companies), the aviation sector stands out in terms of exposure to a growing tourism market, FX driven revenues and still inexpensive stocks (2024e EV/EBITDA multiples of 3.5-5.9x).

We raise our target prices across the board driven mainly by FX and reiterate our Buy ratings on all three stocks

Turkish Airlines offers the highest implied upside (45%), the cheapest EV/EBITDA multiple (3.5x), strong deleveraging in recent years and a year of decent FCF in 2024, in our view. TAV should start reaping the benefits of new investments starting this year and becoming more visible next year in terms of FCF and potential  return of dividends. Pegasus continues to rank at the top of low-cost carriers in terms of operating margins and unit costs, a feature that we do not see changing in 2024.

Overall, we raise our TPs as shown below and retain our Buy ratings. While we expect unit prices and operating margins to normalise in 2024 (particularly airlines), we see the stocks as attractively valued on 2024e multiples and continue to highlight the positive FX exposure.

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.