turkish airlines

Turkish Airlines

Team ITU Research PartnersTilbe Gizem Bircan

Alper TopkayaOsman Öztekin

M. Çağhan EraymanErman DemirTeam Mentor

Tolga Kotan

0

2

4

6

8

10Target Price: TL 8.30

(Year ended 2013)

Current Market Price: TL 6.68 (Feb 8, 2013)

BUY

Investment Summary and Company Overview

BUYRecommendation

Current Price

TL 6.68

Upside Potential

24%

Target Price

TL 8.30

Promising Aviation Market Ready to Benefit

Rising Profitability Further Improvement

Business Description

Network Coverage

Affiliates

Natural Hub : Istanbul

Expanding Network

Brand Image

Cost Advantage

Market Profile

Domestic CAGR International CAGR

High Market Growth Potential

2006 2007 2008 2009 2010 2011 2012 E 2013 E2014 E 2015 E2016 E 2017 E0

10

20

30

40

50

60

Domestic Market Growth (mn)

24% CAGR

2006 2007 2008 2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E30

40

50

60

70

80

90

International Market Growth (mn)

11% CAGR

Why BUY

WHY BUY ?

Aggressive Growth

High Profit Yield Potential

Compelling Valuation

Further Growth Potential

Aggressive Growth

Sales Forecast

Temporal Regression

Scenerio Forecasts

Functional Regression

2007 2008 2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E0

4000

8000

12000

16000

20000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sales Revenue Sales Growth Rate

Sales Revenue (mn)

17% CAGR

Future Market Potential

2012 E 2013 E 2014 E 2015 E 2016 E 2017 E0

102030405060708090

100

International Market Forecast

9 % CAGR

2012 E 2013 E 2014 E 2015 E 2016 E 2017 E0

10

20

30

40

50

60

Domestic Market ForecastPax (mn)

13 % CAGR

Aggressive Growth

Market GrowthHigh Sales Revenue Growth

Pax (mn)

Aggressive Growth

2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E0

10

20

30

40

50

60

70 PAX ( mn )

2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E0

40

80

120

160

200

70%

75%

80%

85%

ASK RPK Load Factor

Traffic Data ( mn )

Market GrowthHigh Sales Revenue Growth

THYAviation Figures

Why BUY

Aggressive Growth Rate


Accurate Valuation

Promising Potentials

WHY BUY ?

2006 2007 2008 2009 2010 2011 9M'11 9M'122

4

6

3.9 4.0 3.9 3.8 4.0 3.94.1

3.5

Personnel/ASK

($ Cent)

Effective Personel Cost Management


SAS DL UA AF-KL LH AY IAG LAN SQ* TK0

4

8

Personel/ASK

($ Cent)

Benefical AffiliatesEffective Cost Hub-to-Point & Youngest Fleet Age

‘’Optimum Supply Chain Management’’



TA LH AF BA KLM0

4

8

12

16

20

6.5

12.7

10

13

9.7


Hub-to Point Strategy Youngest Fleet Age


Benefical Affiliates High Profit Expectations

Income Statement ( Margin ) 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F

EBITDAR 22.3% 20.2% 22.9% 16.6% 14.0% 16.9% 16.4% 16.6% 17.5% 17.0% 16.9%

EBITDA 17.9% 16.8% 17.5% 11.0% 9.8% 13.7% 13.5% 13.9% 15.0% 14.8% 14.9%

EBIT 10.4% 12.1% 10.9% 5.5% 2.9% 7.8% 7.5% 8.1% 9.2% 8.8% 8.9%

Net Income (NI) 5.5% 18.5% 8.0% 3.4% 0.2% 6.7% 6.8% 6.8% 7.7% 7.3% 7.3%

10 11

12 E

13 E

14 E

15 E

16 E

17 E

7%

9%

11%

13%

15%

17%

2%

4%

6%

8%

10%

12%

EBITDA EBIT

7 8 9 10 11

12 E

13 E

14 E

15 E

16 E

17 E

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2


Hub-to-Point & Youngest Fleet Age

Why BUY



CompellingValuation


WHY BUY ?


3rd Airport

150 mn. Passenger Capacity

First phase in 2016

Merger with LH : All is possible

Second biggest airline company

Impressive hub network

Economy of scale

Increasing bargaining power


Why BUY





WHY BUY ?

Weighted Calculation DCF Multiples

Target Price of THYAO

TL 8.30

DCF ( Discounted Cash Flow)

Peer Comparison(P/E, EV/EBITDA, EV/EBITDAR)

Long Term Drivers Short Term Drivers

65% 35%


TL 8.10 TL 8.67

DCF Components TL 8.10

5- Year Projected Cash Flows TL 2.42

Terminal Value of Cash Flows TL 5.68

Cost of EquityWACC 6.5 %

Cost of Equity 9.0 %

Terminal Valueg

2.0 %

(1970-2012*)

High Correlation with GDP growth.




P/E EV/EBITDA

2012 E 2013 E 2012 E 2013 E

Grand Average of Aviation Market 11.8 (x) 10.3 (x) 7.9 (x) 7.6 (x)

Turkish Airlines 8.1 (x) 6.5 (x) 7.7 (x) 6.8 (x)

Discount Rate -31% -37% -7% -25%

Current Price TL 6.68

Target Price TL 9.73 TL 10.53 TL 7.16 TL 8.33


Potential Risks

Fuel Price Volatility

Airport Capacity

Currency Exchange Rate

Increasing Competitiveness

Impact

ProbabilityHigh

Hig

h

Risks Factors

Swap and Option Based Derivatives

New Airport with 150 Million Passenger Capacity

Natural Hedging

Cost Advantage by using Group Strategy

Shields for Risk Factors

Potential Risks

Sensitivity of Risk Factors

Source: Team’s Estimates

1% Load Factor 1% Pax Yield 1% Currency 1% Oil 1% Staff0%

2%

4%

6%

8%

10%

12%

14%

EBITDAR EPS

Potential Risks

Monte Carlo

0

0.5

1

1.5

2

2.5

3

3.5

4

Buy 78%

Hold 17%

Fre

quen

cy

Price (TA Group)

Sell 5%

DCF Price Target Sensitivity to “g 2 %”

Conclusion

Summary of Claim

Ready for Market Penetration

Attractive Valuation

High Profit Position

Strong Market Growth

24 % Upside Potential

Table of Appendices

Appendix 1: Income StatementAppendix 2: Balance SheetAppendix 3: Statement of Cash FlowAppendix 4: Income Statement (Vertical Analysis)Appendix 5: Balance Sheet (Vertical Analysis)Appendix 6: Key Financial RatiosAppendix 7: Multiple Peer ValuationAppendix 8: Discounted Cash Flow (FCFF) ValuationAppendix 9: Sensitivity of EBITDAR and EPSAppendix 10: Regression Based ForecastsAppendix 11: Regression Based ForecastsAppendix 12: Scenerio Based ForecastAppendix 13: SWOT AnalysisAppendix 14: Subsidiaries and Affiliates Appendix 15: Utilization of AffiliatesAppendix 16: Risk AssesmentAppendix 17: Revenue and PAX StructureAppendix 18: Company’s Cost Per ASKAppendix 19: Corporate Governance and Social ResponsibilityAppendix 20: Annual GDP Growth ExpectationsAppendix 21: Aviation Factor Estimations

Income Statement

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Income Statement (In Millions $) 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F

Total Revenues 3734 4718 4556 5440 7019 8388 9708 11311 12980 15522 18670

Cost of Sales & Service -2326 -3117 -2817 -3694 -5030 -5789 -6660 -7799 -8831 -10688 -12827

Fuel Cost -904 -1427 -990 -1406 -2395 -2812 -3311 -3852 -4340 -5100 -6237

Personnel Cost -782 -909 -782 -1141 -1339 -1384 -1602 -1866 -2129 -2794 -3267

Other Cost -640 -781 -1045 -1147 -1296 -1594 -1748 -2081 -2362 -2794 -3323

Gross Profit 1408 1601 1739 1746 1989 2599 3048 3512 4149 4834 5843

Operating Expense -574 -647 -694 -845 -1004 -1184 -1371 -1597 -1852 -2223 -2668

EBITDAR 834 954 1045 901 986 1414 1678 1915 2297 2611 3175

Rental Expense -164 -162 -249 -305 -296 -268 -283 -303 -325 -338 -373

EBITDA 670 792 796 596 690 1146 1394 1612 1972 2273 2802

Depr. & Amort. -281 -221 -301 -297 -486 -496 -573 -661 -744 -925 -1107

EBIT 389 571 495 299 204 650 821 951 1229 1348 1695

Other Income 166 -118 -25 13 -141 47 47 47 47 47 47

Others Operating Income 174 44 57 91 95 154 178 207 238 284 342

Others Operating Expenses -8 -162 -82 -79 -236 -95 -109 -128 -145 -175 -210

Non- Operating Income (Financial Related) -270 553 8 -75 27 0 0 0 0 0 0

Earnings Before Taxes (EBT) 285 1006 478 237 89 698 868 998 1276 1395 1742

Tax Expenses -81 -132 -115 -51 -76 -140 -174 -200 -255 -279 -348

Net Income (NI) 204 874 363 185 13 558 695 799 1021 1116 1394

Source: Team’s Estimates and Company’s Annual Report

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Balance Sheet

Balance Sheet 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F

Cash and Equivalents 412 334 724 526 820 1258 1456 1697 1947 2328 2800

Net Trade Receivables 211 231 295 374 403 525 543 702 727 991 1064

Inventory 97 65 99 111 133 178 180 239 236 339 351

Other Current Assets 557 1103 740 1247 799 1246 1327 1413 1505 1603 1707

Total Current Assets 1277 1733 1858 2258 2155 3208 3507 4051 4415 5261 5922

Net Fixed Assets 2777 3343 3195 4168 5873 6668 7646 7823 8161 9003 9666

Other Long Term Assets 173 156 639 462 657 1065 1602 2165 2801 3627 4537

Total Long Term Assets 2950 3499 3834 4630 6530 7733 9248 9988 10962 12630 14203

Total Assets 4227 5232 5692 6888 8685 10941 12755 14039 15376 17891 20125

Short-Term Lease Obligations 193 277 274 319 418 487 538 580 611 689 776

Trade Payables 313 288 371 476 529 703 805 949 1067 1301 1551

Other Liabilities 513 529 648 848 1144 1292 1429 1588 1747 1974 2238

Short Term Liabilities 1019 1094 1293 1643 2091 2482 2772 3117 3425 3963 4564

Long Term Lease Obligations 1347 1850 1711 2384 3771 5026 5840 5962 5949 6785 6999

Other Liabilities 274 313 400 437 440 454 470 489 510 535 560

Long Term Liabilities 1621 2163 2111 2821 4211 5481 6310 6451 6459 7320 7559

Total Liabilities 2640 3257 3404 4464 6302 7963 9082 9567 9884 11283 12123

Shareholders' Equity & Capital 151 116 581 647 635 672 672 672 672 672 672

Other Components of Equity 1436 1859 1707 1777 1748 2306 3001 3799 4820 5936 7330

Total Shareholders' Equity 1587 1975 2288 2424 2383 2978 3673 4471 5492 6608 8002

Total Liab. & SHE 4227 5232 5692 6888 8685 10941 12755 14039 15376 17891 20125


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Statement of Cash Flow

Cash Flow Statement 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F

Cash flow from Operation 368 884 914 1313 1233 1941

Net Income 558 695 799 1021 1116 1394

Depreciation 496 573 661 744 925 1107

Trade Receivables -122 -18 -159 -25 -264 -73

Inventory -45 -2 -59 4 -103 -12

Trade Payables 174 102 145 117 234 250

Other Operating Act. -693 -465 -472 -547 -675 -725

Cash flow from Investing -1291 -1551 -837 -1082 -1767 -1770

Net CAPEX -1291 -1551 -837 -1082 -1767 -1770

Fixed Asset -795 -978 -176 -338 -842 -663

Cash flow from Financing 1361 865 163 19 914 301

Short Term Lease 69 52 41 31 78 87

Long Term Lease 1255 813 122 -13 836 214

Issue of Stock 37 0 0 0 0 0

Net Cash Change 438 198 240 250 381 472

Beginning Cash 820 1258 1456 1697 1947 2328

Ending Cash 1258 1456 1697 1947 2328 2800


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Income Statement (Vertical Analysis)

Income Statement 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F

Total Revenues 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0%

Cost of Sales & Service -62,3% -66,1% -61,8% -67,9% -71,7% -69,0% -69,6% -69,6% -68,4% -69,4% -69,9%

Fuel Cost -24,2% -30,2% -21,7% -25,8% -34,1% -33,5% -34,1% -34,1% -33,4% -32,9% -33,4%

Personnel Cost -20,9% -19,3% -17,2% -21,0% -19,1% -16,5% -16,5% -16,5% -16,0% -17,5% -17,5%

Other Cost -17,1% -16,6% -22,9% -21,1% -18,5% -19,0% -19,0% -19,0% -19,0% -19,0% -19,0%

Gross Profit 37,7% 33,9% 38,2% 32,1% 28,3% 31,0% 30,4% 30,4% 31,6% 30,6% 30,1%

Operating Expense -15,4% -13,7% -15,2% -15,5% -14,3% -14,1% -14,0% -13,9% -14,1% -13,7% -13,2%

EBITDAR 22,3% 20,2% 22,9% 16,6% 14,0% 16,9% 16,4% 16,6% 17,5% 17,0% 16,9%

Rental Expense -4,4% -3,4% -5,5% -5,6% -4,2% -3,2% -2,9% -2,7% -2,5% -2,2% -2,0%

EBITDA 17,9% 16,8% 17,5% 11,0% 9,8% 13,7% 13,5% 13,9% 15,0% 14,8% 14,9%

Depr. & Amort. -7,5% -4,7% -6,6% -5,5% -6,9% -5,9% -5,9% -5,8% -5,7% -6,0% -5,9%

EBIT 10,4% 12,1% 10,9% 5,5% 2,9% 7,8% 7,5% 8,1% 9,2% 8,8% 8,9%

Other Income 4,5% -2,5% -0,5% 0,2% -2,0% 0,6% 0,5% 0,4% 0,4% 0,3% 0,2%

Others Operating Income 4,7% 0,9% 1,3% 1,7% 1,4% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8%

Others Operating Expenses -0,2% -3,4% -1,8% -1,5% -3,4% -1,1% -1,1% -1,1% -1,1% -1,1% -1,1%

Non- Operating Income (Financial Related) -7,2% 11,7% 0,2% -1,4% 0,4% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0%

Earnings Before Taxes (EBT) 7,6% 21,3% 10,5% 4,3% 1,3% 8,3% 8,0% 8,5% 9,6% 9,1% 9,2%

Tax Expenses -2,2% -2,8% -2,5% -0,9% -1,1% -1,7% -1,6% -1,7% -1,9% -1,8% -1,8%

Net Income (NI) 5,5% 18,5% 8,0% 3,4% 0,2% 6,7% 6,4% 6,8% 7,7% 7,3% 7,3%


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Balance Sheet (Vertical Analysis)Balance Sheet 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F

Cash and Equivalents 9,7% 6,4% 12,7% 7,6% 9,4% 11,5% 11,6% 12,5% 13,1% 13,5% 14,5%

Net Trade Receivables 5,0% 4,4% 5,2% 5,4% 4,6% 4,8% 4,4% 5,2% 4,9% 5,8% 5,5%

Inventory 2,3% 1,2% 1,7% 1,6% 1,5% 1,6% 1,5% 1,7% 1,6% 2,0% 1,9%

Other Current Assets 13,2% 21,1% 13,0% 18,1% 9,2% 11,4% 10,4% 10,1% 9,8% 8,9% 8,4%

Total Current Assets 30,2% 33,1% 32,6% 32,8% 24,8% 29,3% 28,0% 29,5% 29,4% 30,1% 30,2%

Net Fixed Assets 65,7% 63,9% 56,1% 60,5% 67,6% 61,0% 59,4% 55,1% 52,4% 49,7% 47,5%

Other Long Term Assets 4,1% 3,0% 11,2% 6,7% 7,6% 9,7% 12,6% 15,4% 18,2% 20,1% 22,3%

Total Long Term Assets 69,8% 66,9% 67,4% 67,2% 75,2% 70,7% 72,0% 70,5% 70,6% 69,9% 69,8%

Total Assets 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0%

Short-Term Lease Obligations 4,6% 5,3% 4,8% 4,6% 4,8% 4,4% 4,2% 4,1% 4,0% 3,8% 3,8%

Trade Payables 7,4% 5,5% 6,5% 6,9% 6,1% 6,4% 6,5% 7,0% 7,2% 7,6% 8,2%

Other Liabilities 12,1% 10,1% 11,4% 12,3% 13,2% 11,8% 11,3% 11,5% 11,6% 11,3% 11,3%

Short Term Liabilities 24,1% 20,9% 22,7% 23,9% 24,1% 22,7% 22,1% 22,7% 22,8% 22,7% 23,3%

Long Term Lease Obligations 31,9% 35,4% 30,1% 34,6% 43,4% 45,9% 45,8% 42,4% 38,6% 37,6% 34,4%

Other Liabilities 6,5% 6,0% 7,0% 6,3% 5,1% 4,2% 3,7% 3,5% 3,3% 3,0% 2,7%

Long Term Liabilities 38,3% 41,3% 37,1% 41,0% 48,5% 50,1% 49,5% 45,9% 41,9% 40,6% 37,1%

Total Liabilities 62,5% 62,3% 59,8% 64,8% 72,6% 72,8% 71,6% 68,6% 64,7% 63,3% 60,4%

Shareholders' Equity & Capital 3,6% 2,2% 10,2% 9,4% 7,3% 6,1% 5,3% 4,8% 4,4% 3,7% 3,3%

Other Components of Equity 34,0% 35,5% 30,0% 25,8% 20,1% 21,1% 23,1% 26,6% 30,9% 33,0% 36,3%

Total Shareholders' Equity 37,5% 37,7% 40,2% 35,2% 27,4% 27,2% 28,4% 31,4% 35,3% 36,7% 39,6%

Total Liab. & SHE 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0%


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Key Financial Ratios

Key Financial Ratio 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F

Liquidity RatiosCurrent Ratio (x) 1,3 1,6 1,4 1,4 1,0 1,3 1,3 1,3 1,3 1,3 1,3Cash Ratio (x) 0,4 0,3 0,6 0,3 0,4 0,5 0,5 0,5 0,6 0,6 0,6Quick Ratio (x) 1,2 1,5 1,4 1,3 1,0 1,2 1,2 1,2 1,2 1,2 1,2Efficiency RatiosInventory Turnover (x) 24,0 38,5 34,4 35,1 41,1 37,2 37,2 37,2 37,2 37,2 37,2Fixed Asset Turnover (x) 1,3 1,4 1,4 1,3 1,2 1,9 2,0 2,4 2,6 2,6 2,7A/R Turnover (x) 19,2 21,3 17,3 16,3 18,1 18,1 18,2 18,2 18,2 18,1 18,2

Average Collection Period (days) 18,7 16,9 20,8 22,1 19,9 20,2 20,1 20,1 20,1 20,2 20,1

Average Payment Period (days) 30,3 32,8 35,1 31,4 30,2 44,0 44,1 44,1 44,1 44,0 44,1

Total Asset Turnover (x) 0,9 0,9 0,8 0,8 0,8 0,8 0,8 0,8 0,8 0,8 0,8Debt RatiosDebt Ratio (%) 62% 62% 60% 65% 73% 73% 71% 68% 64% 63% 60%Debt to Equity (x) 1,7 1,6 1,5 1,8 2,6 2,7 2,5 2,1 1,8 1,7 1,5Equity Multiplier (x) 0,4 0,4 0,4 0,4 0,3 0,3 0,3 0,3 0,4 0,4 0,4Long-Term Debt Ratio 0,4 0,4 0,4 0,4 0,5 0,5 0,5 0,5 0,4 0,4 0,4Profitability RatiosGross Profit Margin (%) 37,7% 33,9% 38,2% 32,1% 28,3% 31,0% 31,4% 31,0% 32,0% 31,1% 31,3%EBIT Margin (%) 10,4% 12,1% 10,9% 5,5% 2,9% 7,7% 8,5% 8,4% 9,5% 8,7% 9,1%EBITDA Margin (%) 17,9% 16,8% 17,5% 11,0% 9,8% 13,7% 14,4% 14,3% 15,2% 14,6% 15,0%EBITDAR Margin (%) 22,3% 20,2% 22,9% 16,6% 14,0% 16,9% 17,3% 16,9% 17,7% 16,8% 17,0%Net Prof. Margin (%) 5,5% 18,5% 8,0% 3,4% 0,2% 6,7% 7,2% 7,1% 7,9% 7,2% 7,5%RoA (%) 5,5% 18,5% 6,7% 2,9% 0,2% 5,7% 5,9% 6,0% 6,9% 6,7% 7,3%RoE (%) 12,8% 44,3% 15,9% 7,6% 0,6% 24,2% 23,2% 21,0% 21,2% 18,8% 19,0%


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Multiple Peer ValuationEV/EBITDA P/E EV/EBITDAR

2012 E 2013 E 2012 E 2013 E 2013 TargetDeveloped Market CarriersAir Canada 4,5 4,2 7,2 6,1Air FRANCE-KLM 8 6,4 - -Air New Zealand 5,6 5,4 19,4 9,3Lufthansa 4,5 4,1 - 12,6Qantas Airways 4,1 3,3 - -Average 5,3 4,7 13,3 9,3Emerging Market CarriersAir China 9,7 8,2 14,8 12,1Cathay Pacific 10,9 8,3 - -China Airlines 16,4 11 - 15,2China Eastern Airlines 7,4 6,6 9,7 8,1China Southern Airlines 7,9 6,2 15,6 9,9EVA Airways 6,9 4,8 - 10,6Korean Air 9,5 9,5 - -Average 9,8 7,8 13,4 11,2Low Cost CarriersEasyJet 7,7 9,3 7,5 9,2Ryanair 9,2 11,1 10,2 12,3AirAsia 9,1 10,2 8,6 9,3Average 8,7 10,2 8,8 10,3Grand Average / Target (EBITDAR) 7,9 7,6 11,8 10,3 6Turkish Airlines 7,7 6,8 8,1 6,5 5,6Discount Rate -7% -25% -31% -37% -14%Current Price 6,68 6,68 6,68 6,68 6,68Target Price 7,16 8,33 9,73 10,53 7,63Weighted Target Price 8,68


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2012 F 2013 F 2014 F 2015 F 2016 F 2017 F Terminal Value

EBIT 650 821 951 1229 1348 1695Tax Eff. 0,2 0,2 0,2 0,2 0,2 0,2NOPAT 520 657 761 983 1078 1356Depreciation 496 573 661 744 925 1107CAPEX -1291 -1551 -837 -1082 -1767 -1770Change in Working Capital -224 203 72 192 89 449

Free Cash Flow To Firm -499 -118 657 837 326 1141 16542Discount Factor 0,94 0,88 0,83 0,78 0,73 0,69DCF -469 -104 544 651 238 783 11351

Perpetuity Growth Rate 0,02

Market Value of Firm 12995

MV of Debt 7504

Market Value of Equity 5491

No of Shares Outstanding 1200

Target Price ($) 4,58

Currency 1,77

Target Price (TL) 8,10

Discounted Cash Flow (FCFF) Valuation


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Regression Based Forecasts

Sales Forecast

Temporal Regression

Scenerio Forecasts

Functional Regression

12 E 13 E 14 E 15 E 16 E 17 E 10%

12%

14%

16%

18%

20%

22%

24%

20%

16% 16%15%

19%20%

Weighted Sales Forecast

Team Estimate The Base


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Regression Based Forecasts


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Scenario Based Forecast

12 E 13 E 14 E 15 E 16 E 17 E

-5%

0%

5%

10%

15%

20%

25%

30%

35%

18% 19%

13%10%

14%18%

Scenerio Sales Forecast

Team Estimate The Worst The Base The Best

Lack of hub capacity. First phase of new airport launched.


SWOT ANALYSIS Strengths Weaknesses

1. Impressive Flight Network 1. Airport Insufficiency

2. Innovative Marketing Strategies 2. High Leasing Expenses

3. Young Fleet 3. Lack of Scale

4. Affiliates and Subsidiaries

5. Government Support

Opportunities Threats

1. Growth of The Economy 1. Volatile Costs

2. International and Domestic Market Expansion 2. Threats of Potential Entrants

3. Increasing Air Transportation Usage 3. Substitution of Products

4. Instruction of New Airports 4. Currency Shifts

5. Government's Effective International Economy Policy 5. Political Risks

Source: Team’s Estimates and Institutions & Research Papers

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Source: Company’s Data

Subsidiaries and Affiliates

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Utilization of Affiliates

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Source: Marsh

Risk Assestment

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87%

8%

4% 1%

Split By Revenue

PAX Cargo Charter Other

60%

14%

13%

8%5%

International Pax Breakdown

Europe Middle East Far East Africa America


Revenue and PAX Structure

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2006 2007 2008 2009 2010 2011 9M'11 9M'120

1

2

3

4

5

6

7

8

9

10

7.58.0

9.0

7.2

7.98.5

8.9

7.9

3.9 4.0 3.9 3.8 4.0 3.94.1

3.5

2.1 2.2

3.1

1.82.2

3.0 3.13.0

1.51.9 2.0

1.6 1.8 1.7 1.7 1.5

Cost Per ASK ( $ cent )

CASK Personnel/ASK Fuel/ASK Others/ASK


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Annual GDP Growth 2011 to 2031

South Asia

China

Asia Pacific

Africa

Southeast Asia

Latin America

Middle East

CIS

World

Ocenia

North America

Europe

Norheast Asia

0 1 2 3 4 5 6 7 8

7.1

6.5

4.6

4.4

4.3

4.1

3.9

3.4

3.2

2.8

2.6

1.9

1.3

Source: HIS Global Insight

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2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E

Pax (m) 25,1 29,1 32,6 39 45,4 51,3 54,7 60,1 67,8

Pax Growth (%) 11% 16% 12% 20% 18% 12% 7% 10% 13%

Load Factor (%) 70,9% 73,7% 72,6% 77,7% 78,6% 78,8% 79,2% 77,6% 77,4%

ASK (bn) 56,6 65,1 81,2 96,1 110,3 127 142,1 166,9 196,6

ASK growth (%) 22% 15% 25% 18% 15% 15% 12% 17% 18%

RPK (bn) 40,1 47,9 58,9 74,6 86,2 102 117,2 141,5 171,2

RPK growth (%) 17% 19% 23% 27% 16% 18% 15% 21% 21%

Source: Team’s Estimates and Company Data

Aviation Factor Estimations

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Years Central Bank of Turkey OECD Fitch

2013 E 4,0% 4,2% 3,8%

2014 E 5,0% 5,2% 4,5%

2015 E 5,0% 5,5% 5,0%

2016 E - 5,6% 5,0%

2017 E-2030 E - 4,1% -

GDP Growth Forecasts Between 2013-2017

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Number of Aircrafts Between 2013-2017

Years 2007 2008 2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E

Our Expected 100 127 133 158 179 202 220 232 239 256 280

Company's Expected 100 127 133 158 179 200 214 224 234 240 232

EV/E

BITD

ARAccurate Valuation


2004 2005 2006 2007 2008 2009 2010 2011 2012 E 2013 E0

2

4

6

8

10

EV/EBITDAR multiple Previous Years

Target 6x

Turkish Airlines 5,6

Discount Rate -14%

Target Price 7,63

Cost Comparison

SAS DL UA AF-KL LH AY IAG LAN SQ* TK0

4

8

12

16

20

CASK Fuel/ASK


2006 2007 2008 2009 2010 2011 9M'11 9M'120

2

4

6

8

10

7.58.0

9.0

7.2

7.98.5

8.9

7.9

2.1 2.2

3.1

1.82.2

3.0 3.13.0

CASK Fuel/ASK

Cost Per ASK

($ Cent)($ Cent)

turkish airlines

Business

current market price

target price tl

current price tl

cost of equitywacc

dcf componentstl

gdp growth

upside potential

pax yield