THY: Strong positioning, geared to leisure travel recovery; reiterate Buy

We revise our estimates for Turkish Airlines (THY). Reflecting more upbeat expectations from management post stronger than expected FY20 results (clean EBITDA c.20% ahead of company-compiled consensus expectations), our revenue and EBITDA forecasts increase by c.11%/15% on average over 2021-23. Our 12-month price target increases by c.11% to TRY18.2, implying >25% upside.

We reiterate our Buy rating. We see improving monthly pax numbers from 2Q21 and a pick-up in summer bookings as a catalyst for share price performance, driven by a favourable base effect, easing restrictions on mobility, and increasing vaccination roll-outs globally. We see THY as a key beneficiary of recovery in leisure travel, particularly in Europe, with a large share of short-haul destinations in the region.

We expect ASK to reach 67% of 2019’s level in 2021, in line with management expectations. Given THY’s structural advantage, with a relatively large share of local currency costs, strong cargo operations (+60% yoy in FY20) and strict cost controls
that we believe can be partially sustained longer term, we expect profitability to remain resilient.

While leverage remains an investor concern, driven by lease liabilities relating to fleet expansion that is making THY one of the youngest fleets in Europe, we note significant operating leverage that should drive leverage ratios lower on recovering traffic, driving absolute profitability higher. We expect net debt/EBITDA to fall from 11x in 2020 to 4.7x by 2024E, broadly in line with the company’s historical average.



Source: Goldman Sachs