Passenger demand in the new era remains unclear
Starting from June, airlines in Turkey are planning to restart their operations, with limited services. This would be an important test to see the demand and passenger behavior in post COVID environment. Besides the uncertainty over demand, pace of easing in regulatory measures following the first wave of pandemic would have significant impact on air traffic. Conservatively, we expect the business related passenger traffic would permanently decline compared to pre-COVID period. These passengers constituted c. 12% total pax in 2018, yet were twice as profitable, according to studies. This share should be lower for TAV, as its major airports are located in touristic destinations. Nevertheless, we expect a 61% y/y contraction in total passenger traffic in 2020 for TAV, following a slow, U-shaped recovery with 60% growth forecast for 2021. It is highly unlikely that the company may exceed its 2019 passenger traffic before 2023, in our view.
Cost control has become the priority
As the operations stalled in late March, cost control became a priority for the company. The Company applied “short-term working allowance” for its workers based in Turkey, cut unnecessary fixed costs, where available and postponed some investments. Thanks to these initiatives, operational expenses were halved in April and May to c. EUR20mn per month levels. Management is also in talks with the authorities for possible delays in airport rent payments, which may further support the liquidity. As of 1Q20, TAVHL has a cash position of EUR785mn, suggesting that the company does not have any liquidity issues in the short-run.
Almaty acquisition: positive contribution to take time
The company recently announced the acquisition of Almaty Airport in Kazakhstan. The airport has a capacity of 7m passengers per annum and served 6.5mn passengers (3mn international) in 2019. This will be first fully owned airport of the company. The consortium, where TAV will have at least 75% stake acquired the airport for an EV of USD415mn and the deal is expected to be closed in 3Q20. The acquisition also includes the jet fuel operations in the airport. Although the trailing acquisition multiples of 9x P/E and c. 6x EV/EBITDA seem attractive, slowdown in aviation industry, and the USD150-200m capex required for the terminal capacity extension to 14m by 2023 may prolong the payback period of the investment for the company. Nevertheless, the airport may contribute positively to the bottom line (c. EUR5mn), starting from 2021. Currently, we used the announced acquisition price for Almaty Airport in our TAVHL valuation.
Cutting TP from TL21 to TL19.50; downgrade to Market Perform
We made some changes in our sum-of-the-parts valuation (Page 2), in order to reflect sharp slowdown in aviation industry. Our new target price stands at TL19.50 and change our recommendation to Market perform, as our new TP implies a limited upside of 13%. With the expected slow recovery the company is trading relatively high 2021 EBITDA margin of 13.6x. Peer multiple comparison is on Page 3, yet we note estimate volatility render comparison difficult at this stage.
EVREN GEZER, RESEARCH YF Invest
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