Turkish Airlines: Outlook improves, yet valuations are stretched

Turkish Airlines shares have had a strong performance YTD, up 24% in USD terms, outperforming global peers on sustained strength in passenger traffic, yields holding up better than expected, and improved 2024 outlook for global airlines as demand/supply imbalances continue, limiting fears on rising competition. Meanwhile, the recent credit upgrades along with desire to split its LCC unit have been helpful on investor sentiment. As we head into Q4 reporting season, we fine- tune our projections, raising 2024 rev/ebitda estimates in LSD %, whilst softening


2025 estimates in expectation of delayed competition. We remain Neutral, noting rising leverage on continued capacity build up as key bottleneck for valuation with 2Y forward EV/EBITDAR multiples elevate to 5.7x, above ‘16-19 averages. We set Jun-25 PT at US$7.8 (TL335) with a target 25E EV/EBITDAR multiple at 5.5x.

• Normalization from peak profitability to be visible in Q4, yet much slower than expected. Q4 is expected to be a softer quarter on y/y, primarily due to slower passenger growth (8.5% vs 19% in 9M’23) and pax revenue yield expected to decline by 2% vs up 7% in 9M’23. However, we note that overall, 2023 exceeded initial expectations and proved to be a stronger year with ASK up 16% – 25% ahead of pre-pandemic levels and JPMe EBITDAR margin of 27.3%, in line with management’s previously upgraded guidance of 26-29%. The continued strength in traffic along with firmer than expected yields in the first nine months and lower fuel costs has continued to support profitability, offsetting the weakness in cargo operations and rising ex-fuel costs.

• Expectations are resetting for 2024 with better outlook. As shortfall in supply vs demand persists, and airlines globally commenting on strong forward booking, we build our forecasts on a better outlook, raising revenues/ EBITDA by 3% / 3% and EPS by 16%, looking for 11% and 29% decline in EBITDA/EPS this year. We believe the operational risks are evenly balanced: on one hand, resilient yield can boost EBITDA, while on the other hand increased uncertainty in Turkiye tourism after weakening pricing
competitiveness post rising service costs inflation.

• Capacity plans getting firmer, leverage on rise… THY aims to grow its capacity at LDD% in 2024, outperforming global capacity growth (8.9% by IATA) with GTF engine related groundings to be offset by operational leases. Meanwhile, company has set an ambitious plan for the next decade, targeting to increase its capacity at a CAGR of 7.6% in 2023-2033 (vs 4.8% CAGR for world), aiming a fleet size of 800+ vs 441 in 2023 of which 230 firm and 125 optional orders are already agreed with Airbus. This would suggest rising leverage in 2024/25 (from 1.5x EBITDAR in 2023 to 3.0x in 2025) which we
forecast adj net debt at US$11.6bn in 2024 and US$14.6bn in 2025.

…stretching valuations. At 4.8x 2024E EV/EBITDAR and 5.7x P/E, shares may initially appear inexpensive, yet that is a short-lived opportunity, in our opinion. Valuation look demanding into 2025 with shares trade at 5.7x EV/ EBITDAR and 7.5x P/E.





JP Morgan