Highlights
FCF and dividend story intact but valuation less attractive after strong re-rating
Traffic outlook and operational leverage depends on currency
Raise TP to TRY310 from TRY265, downgrade to Hold
Strong re-rating takes the shine off
We continue to like TAV’s story of noteworthy FCF improvement, deleveraging and likely return of dividends in 2025-26 as ongoing expansion and renewal projects are completed. That said, we think that this is now mostly priced in. The shares have risen by 156% year-to-date, beating the Turkish index (BIST100) by 75%. Despite upward revisions to our estimates, TAV now trades at par with peers on 2024-25e PE and the discount on EV/EBITDA (average c20%) is within the “fair zone,” in our view, given limited concession duration vs global peers.
Currency poses some risks
While the 2024 summer tourism season is shaping up decently, the strong TRY is a concern for the future traffic outlook and TAV’s operational leverage performance. Türkiye’s tourism competitiveness relies on a competitive currency, and the widening gap between inflation and currency depreciation might challenge the 2025 tourist inflows while already putting pressure on operating margins (2Q 2024 EBITDA margin down c2pp y-o-y). We project 17% y-o-y growth for TAV’s international passengers in full-year 2024 (vs up 20% in H1), softening to 10% in 2025.
TAV generates c54% of its international traffic from its Turkish airports.
New potential projects
The recent bid for a 10-year O&M contract at Kuwait International Airport and interest in select future airport tenders (e.g. Montenegro) should make limited contributions due to their size, if TAV were to succeed. We think the main focus is to execute the ongoing expansion/renewal projects in an efficient and timely manner. The new international terminal at Almaty Airport was opened on 1 June 2024, as targeted. Next is the completion of investments in the Antalya and Ankara airports, targeted in 1Q 2025 and 4Q 2025, respectively. On the other hand, TAV’s contract at the Georgian airports (which generate a c75% EBITDA margin – the highest in the portfolio) is the next to expire (January 2027) for which a tender might come in 2025.
Not a story of margin expansion
We raise our revenue forecasts, partially driven by the high inflationary period (i.e. price adjustments), but lower our operating margin estimates, pressured by the currency and a growing share of lower margin services operations in the sales mix. We expect the EBTDA margin to settle at c30% in the next few years. To us, TAV is mostly a top line growth story in which the Turkish part
of the tourism traffic faces currency headwinds after 2024.
Raise TP, downgrade to Hold. Our forecast revisions and a slightly lower DCF WACC result in a higher TP of TRY310 (from TRY265). We downgrade to Hold from Buy as we see the risk/reward profile as less attractive post the strong re-rating, which is also suggested by the valuation vs peers.
Excerpt
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/