For a whole month, Turkish Airlines’ (TA) fleet has stood idle because of COVID-19, burning USD 11mn each day, and the company only sees flights resuming in June. With a 48% YoY traffic decline in 2020F, we forecast a 48% YoY slump in revenues (USD 7bn). Due to the hedge, TA could not benefit from low oil prices and the company is to see an 80% YoY decline in EBITDA (USD 506mn) for 2020F. We forecast a net loss of USD 1bn in 2020F.
Thereafter, we see traffic rebounding 96% YoY in 2021F (+1% to the 2019 level), revenues growing 94% YoY to USD 13bn (+2%) and EBITDA up 538% YoY to USD 3bn (+25%). Our new 12-month TP of TRY 11.50 implies an ETR of +9%, so having had the stock Under Review, we set a Hold recommendation.
TA trades at 2021F EV/EBITDA of 5x, the same as the 3-year average. The TA/EU airlines spread has widened 47% and there is the risk of a correction in the short term.
USD 11mn every day
This is the company’s cash burn while its fleet is grounded. On our calculations, TA’s strong balance sheet can allow it to survive for two months of no flights and six months of a steady recovery afterwards. While we do not account for any sizable bailout from the government, President Recep Tayyip Erdogan has already promised support if needed.
2020 is challenging…
Coronavirus is to wipe 48% off TA’s traffic this year, resulting in a 48% YoY decline in revenues to USD 7bn, in our view. We forecast EBITDA declining 80% YoY to USD 506mn and the net loss at a historical high of USD 1bn.
…and we already see that in 1Q20F…
RPK fell 15% YoY in the first quarter, while PLF contracted 4pp to 76%. Whereas yields could fall as well, we see revenues dropping 17% YoY to USD 2bn, with EBITDA at zero. The record net loss was at USD 480mn.
…but expect a recovery
We think that Turkish airline traffic will return to its pre-crisis levels in 7-8 months. As a result, we envisage 2021F traffic growing 72% YoY (+2% to 2019). For Turkish Airlines, this means a 96% YoY rebound in traffic (+1% to 2019), 94% YoY growth in revenues (+2% to 2019) and a 538% YoY surge in EBITDA (+25% to 2019). On the long-term horizon, the company benefits from the low oil prices of USD 30-50/t.
Valuation and risks
The stock trades at 2021F EV/EBITDA of 5x, the same as the 3-year average. Downsides risks include a longer industry recovery, while on the upside traffic could rebound faster. We also note that Turkish Airlines’ stock has been quite resilient during the pandemic: the TA/EU airlines spread widened 47%, so a correction is another downside risk.
Excerpt from VTB Capital equity report
You can follow our English language YouTube videos @ REAL TURKEY: https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg
And content at Twitter: @AtillaEng
Facebook: Real Turkey Channel: https://www.facebook.com/realturkeychannel/