Turkish Airlines’ (TA) stock has been under pressure during the last month: it has lost 9%after the change of the Turkish Central Bank governor in March, and then another 6% on the news that Russia is about to suspend flights with Turkey (See our Aeroflot – Flights to Turkey might be cancelled, but the impact would be small, of 12 April).
In dollar terms, the total decline has been wider: 24% due to lira depreciation. We think the current correction might be a good opportunity to start building a position in the name. There are several reasons why the story is resilient to the aforementioned turbulence.
TA is the second largest exporter in Turkey, with 90% of sales being USD and EUR nominated.
Actually, its P&L benefits from the weak lira. Around 50% of its current sales come from the cargo segment, which enjoys elevated yields (4Q20 yields were up 107% YoY).
Another 25-30% of sales come from European and US flights, which consists of resilient and nonelastic ethnic/transit passengers.
TA does not participate in the main tourist traffic between Turkey and Russia, a market which is dominated by charter airlines.
Any borders closures are in our view likely to last for 2-3 months and not affect the high season, July-September.
As of YE20, the company had USD 1.8bn of cash (the exact amount it burned in 2020).
Therefore, we do not expect them to require any bailout in 2021 (as they did not require any in 2020).
Keeping our model unchanged, we reiterate our 12mo TP of TRY 15.50 and change our recommendation from Hold to Buy (ETR +29%). The stock trades at just 4.7x 2022 P/E vs. the 16.6x of peers.
One major risk for the stock in the short term is potential exclusion from the MSCI Turkey index in May, which could drive USD 117mn of passive outflows (0.5x 1month ADTV).
Turkish Airlines (THYAO TI) is currently a borderline deletion candidate and its fate in the index will depend on both its stock price and the prices of other constituents. At current prices, the stock would be excluded from the index.
Other risks for sentiment coming from any political turbulence in Turkey, but we see TA as strong dollar nominated story, so we recommend buying the dips.
Excerpt, report by VTB Capital
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