New International Routes To Santiago And Sydney Will Improve Connectivity But Face Geopolitical Risks

Key Takeaways

• Expansion into new international routes like Santiago and Sydney enhances global connectivity and drives revenue growth through underserved market demand.
  
• Growth in Turkish Cargo, spurred by seafreight disruptions, significantly impacts earnings, while sustainability initiatives improve cost efficiencies and net margins.
  
• Geopolitical tensions and operational challenges, including fuel price volatility and increased competition, pose risks to revenue and profitability, impacting margins and growth goals.

Catalysts

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

• The expansion of Turkish Airlines' international network, with new routes to cities like Santiago, Lima, and Sydney, is expected to enhance its global connectivity and drive future revenue growth by capturing demand from underserved routes and expanding market share.
  
• The strong performance and growth trajectory of Turkish Cargo, supported by a 50% surge in revenue and increased market share, presents an opportunity to significantly impact the company's earnings. This growth is largely driven by disruptions in seafreight and increased demand for express cargo and high-value goods.
  
• Ongoing investments in innovative financing and sustainability initiatives, such as securing sustainability-linked loans and aiming for carbon neutrality by 2050, are likely to optimize cost efficiencies and improve net margins by reducing currency risks and operational costs.
  
• Enhancements in ancillary revenue streams, including dynamic pricing for business class upgrades and increased seat selection revenues, provide a catalyst for boosting overall earnings, as these high-margin offerings align with evolving consumer preferences.
  
• Operational improvements like the introduction of the TKCONNECT platform and the expanding Miles&Smiles loyalty program are expected to decrease indirect distribution costs and enhance revenue per passenger, contributing positively to net income and margins in the long term.

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 26.1% today to 12.8% in 3 years time.
• Analysts expect earnings to reach TRY 101.6 billion (and earnings per share of TRY 48.86) by about December 2027, down from TRY 182.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting TRY 113.5 billion in earnings, and the most bearish expecting TRY 70.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2027 earnings, up from 2.3x today. This future PE is greater than the current PE for the TR Airlines industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 14.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 37.96%, as per the Simply Wall St company report.

Türk Hava Yollari Anonim Ortakligi Future Earnings Per Share Growth

Risks

• Ongoing geopolitical tensions in regions like the Middle East and the continued Russia-Ukraine conflict pose substantial risks, potentially leading to decreased revenues due to reduced operations and capacity cuts in affected areas.
  
• Aircraft delivery delays and GTF engine groundings create significant revenue management inefficiencies, impacting both revenue growth and net margins due to increased operational costs.
  
• Increasing competition, particularly in regions such as Asia and North America, could put downward pressure on yields and load factors, affecting revenue outcomes.
  
• Inflationary pressures and contractual wage increases are contributing to a hike in personnel expenses, which could negatively impact net margins and overall profitability if not offset by revenue growth.
  
• Geopolitical instability and fluctuations in fuel prices introduce uncertainty and potential increases in operating costs, which may affect earnings stability and margin goals.

Valuation

• The analysts have a consensus price target of TRY 430.99 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 TRY 494.0, and the most bearish reporting a price target of just TRY 331.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be TRY 792.3 billion, earnings will come to TRY 101.6 billion, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 38.0%.
• Given the current share price of TRY 301.25, the analyst's price target of TRY 430.99 is 30.1% 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.