HSBC: Turkish Aviation sector

Normalisation on track and risks appear more manageable: Air traffic in Turkey is
exhibiting a strong recovery since June thanks to an uplift in domestic passengers,
joined also by a surge in international tourism demand from July. Total airport
passenger activity in July reached 70% of the same period of 2019, up from 47% in
June and 30% in May.

Trends support strong revenue and cash generation for aviation players in Q3, and a surge in their profitability, especially given an ongoing cost focus. The delta variant still poses risks, but the path to normalisation could be less bumpy than H2 last year. Since the first implementation in Jan-21, the rate of vaccinations in Turkey has reached 75% (single dose) and 57% (double dose).

Upgrade Turkish Airlines to Buy from Hold: amidst the continued impact of the
pandemic globally, air cargo fares remain solid and comprise the main change in our
assumptions giving a boost to our EBIT and net profit forecasts for TK. Monthly traffic
suggests summer is progressing strongly and the airline could be in a sweet spot of
surging passenger revenues in Q3 along with continued strength in cargo profitability,
which may also extend into Q4. Our new target price (TRY16.9) implies c32% upside.

The stock trades on 2022e EV/EBITDA of 5.9x (adj EV/EBITDAR of 5.1x). The pursuit
of strategic options in cargo (alliances/partnerships) post the ongoing spin-off and a
spin-off of also the low-cost unit (Anadolu Jet) are medium-term potential catalysts.

Maintain Buy on Pegasus and TAV: Pegasus offers strong operating leverage to a
recovery in passenger volumes, via a flexible cost base. We expect the low cost
carrier to reach 75% of its FY19 capacity (ASK) and 57% of total passengers this
year, improving to 105% and 90% in 2022. Strong ancillary revenue/pax (2Q21 close
to pre-pandemic levels), declining monthly cash burn (net cash generation in 3Q21e)
and a comfortable cash/liquidity position are the other positives.

The stock trades on 2022e adj EV/EBITDA of 4.6x. TAV is well positioned to capture the summer demand increase as its portfolio consists mainly of tourism-driven airports, led by Antalya Airport. The two-year contract extensions (as compensation for the COVID-19 losses) at all five airports operated in Turkey are still not priced in, in our view. Almaty Airport included, we expect TAV to exceed its 2019 revenue and profit (ex- Ataturk Airport) as early as 2022e. The stock trades on 2022e EV/EBITDA of 6.3x.



Source: HSBC Global Research