Turkish Airlines: Cargo and FX remain near-term drivers

Cargo-driven FY21 sets a high base for FY22e profits. With revised forecasts in this note, we expect Turkish Airlines (TK) concluded FY21 with all-time high EBITDA and net profit (cUSD1bn), indicating a big swing from FY20 (net loss of cUSD0.8bn). 4Q21 saw further support, in our view, from continued strength in cargo yields and FX, pushing annual results to record high levels for the airline. While pandemic effects continue to disrupt the global logistics industry as of early 2022 and therefore keep air cargo fares at elevated levels, we assume softer cargo yields and uptrend in costs (particularly staff) to put pressure on TK’s FY22 performance. 2022 is unlikely to offer a sequential earnings growth story due to the high base of 2021.

Yet, we think that the overall recovery story (out of the COVID-19 disruption) is intact: our FY22e profit, at c86% of FY19 (in USD terms), should still place TK among the top
performers in the global network carriers universe, in our view.

FY22 performance depends mostly on cargo yields. We assume average annual cargo yield to decline by 26% y-o-y this year (from above USD2,000/ton in 2021e to cUSD1,500/t) and a further 15% in 2023e. However, the pace of normalisation depends highly on the return of belly capacity and marine container capacity in full-force, which in turn will be shaped by the pandemic. We do not anticipate a major drop in air cargo fares at least until summer 2022.

However, the current FX/TRY levels, if sustained, advocate for a strong tourism season (incoming passenger traffic). Along with rising costs, particularly staff (who have been given back the payroll cuts applied in 2020 plus additional wage rises for the solid recovery performance in 2021 as well as high inflation in Turkey), we view 2022 as a year of continued top-line growth but weaker margins and profits y-o-y. Our revised estimates point to 20% revenue growth and 9%/32% drop in EBITDA/net profit in 2022.

Retain Buy, raise TP to TRY36.20 from TRY23.60. With revised forecasts and a higher USD/TRY rate (in setting our TP in TRY), we reach a new DCF-based TP of TRY36.2. We see the valuation multiples compelling at 2022e PE of 4.1x and EV/EBITDAR of 4.9x. One of the positives, in our view, is the modest fleet and capacity growth plans, with higher focus on improving utilisation of the existing fleet.

This should mitigate the risk of a lagged recovery or a negative path the pandemic might take. Upcoming move to the new cargo premises at Istanbul Airport (offering substantially higher handling capacity) and a resumption of cargo spin-off plans (currently on hold for further risk/reward assessment) are among potential catalysts.



HSBC Global Research