Launch Of AJet And TKCONNECT Will Diversify Revenue Amid Rising Operational Costs

Key Takeaways

• Expansion into new markets and enhanced ancillary revenue generation diversify income streams, strengthening Turkish Airlines' global connectivity and earnings potential.
  
• AJet's low-cost growth and sustainability commitments optimize costs, enhance competitiveness, and align with future regulatory needs, boosting profitability and brand value.
  
• Heightened geopolitical tensions, operational constraints, and intensified competition could suppress growth, pressure margins, and affect financial outcomes amidst macroeconomic uncertainty.

Catalysts

Provides air transport and aircraft technical maintenance services in Turkey and internationally.

• Expansion into new markets, such as Melbourne, Sydney, Denver, Toronto, and Santiago, can drive future revenue growth as they increase the number of served countries and international destinations. This expansion strengthens Turkish Airlines' position as a global connector. This is likely to impact revenue positively.
  
• The launch and expected growth of AJet in the low-cost segment, supported by a new fleet and lean corporate structure, aims to optimize unit costs, enhance competitiveness, and increase profitability. This could lead to improvements in net margins over time.
  
• The increase in ancillary revenue generation initiatives, such as TKCONNECT and modern airline retailing capabilities, promises to boost revenue streams beyond core passenger and cargo operations. This increase in diversified revenue streams is expected to improve earnings potential.
  
• Cargo performance has been strong, with a 35% increase in revenue, despite challenges. The ongoing investments, including the expansion of cargo handling capacity, position Turkish Airlines to capitalize on global trade dynamics and e-commerce growth, positively impacting future earnings.
  
• Commitment to sustainability, including climate transition plans and compliance with environmental targets, positions the airline favorably for future regulatory environments, potentially reducing costs and enhancing brand value, therefore positively impacting net margins.

Türk Hava Yollari Anonim Ortakligi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Türk Hava Yollari Anonim Ortakligi's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.2% today to 11.0% in 3 years time.
• Analysts expect earnings to reach TRY 93.0 billion (and earnings per share of TRY 55.97) by about March 2028, down from TRY 113.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting TRY104.9 billion in earnings, and the most bearish expecting TRY81.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from 3.7x today. This future PE is greater than the current PE for the TR Airlines industry at 7.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 33.94%, as per the Simply Wall St company report.

Türk Hava Yollari Anonim Ortakligi Future Earnings Per Share Growth

Risks

• Heightened geopolitical tensions and macroeconomic uncertainty could suppress demand and negatively impact passenger revenue.
  
• Constrained aircraft production and GTF engine issues could limit growth, affecting revenue and leading to higher operational costs.
  
• Intensifying competition, particularly in international routes, could pressure passenger yields and reduce net margins.
  
• Cost pressures from increased personnel expenses due to inflation adjustments might decrease profit margins.
  
• Variability in currency exchange rates could negatively impact financial outcomes; specifically, a depreciating euro may hurt net income despite benefiting balance sheet valuations.

Valuation

• The analysts have a consensus price target of TRY454.846 for Türk Hava Yollari Anonim Ortakligi based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of TRY575.0, and the most bearish reporting a price target of just TRY331.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be TRY845.1 billion, earnings will come to TRY93.0 billion, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 33.9%.
• Given the current share price of TRY301.25, the analyst price target of TRY454.85 is 33.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.