turkish aviation sector aviation_up… · 1q16 results review 69 model forecasts 70 do&co 72...

Baris Ince +90 (212) 384 1141 [email protected]

Sales Contact: +90 (212) 384 1155 [email protected]

TURKISH AVIATION SECTOR

Estimates reduced on weaker pricing and traffic

June 2016

June 22, 2016 Table of Contents

EXECUTIVE SUMMARY 3

Recommendations & Valuations 5

Peer Comparison 12

Running graphs 13

Recent Developments in the sector 26

Sensitivity to FX and Oil prices 31

THY 36

Model Assumptions 38

2016 Guidance vs. Garanti Securities 39

Revision in Estimates 40

How we stand alongside the consensus 40

1Q16 Results Review 41

Pegasus 48

Model Assumptions 50





TAV Airports 56

Valuation 58

Sensitivity analysis for early termination of IAA 59





Celebi 65

Valuation 67




Model Forecasts 70

DO&CO 72

Valuation 74




Model Forecasts 77

Appendix — BREXIT’s impact the region’s aviation 78

Disclaimer 88

June 22, 2016 Turkish Aviation Sector

EXECUTIVE SUMMARY

In line with the global trend among airlines, Turkish carriers’ stocks are now trading well below their historical

multiples given the challenging demand environment. Furthermore, greater capacity introductions could trigger

irrational price wars. It seems to be an industrywide problem. Normally, we would think Turkish players should

deserve a premium given their relatively lower cost base and strong growth prospects, but, because of geopolitics

and capacity constraints at Istanbul’s airports we believe Turkish carriers are really no different from global ones.

We prefer being defensive until we see a pick up in demand, which has probably been weak in June along with

aggressive capacity introductions by the carriers. Therefore, the full year performance of the carriers is highly linked

to 3Q16, in our view. As a result, until we see a convincing recovery in demand, being defensive regarding the sector

(CLEBI and TAVHL) is more prudent, in our view.

Our top pick is CLEBI among our coverage as: i) it will benefit from Turkish carriers’ aggressive capacity introductions

and strong operating figures in India (total number of handled aircraft up by 80% in 1Q16 after 58% in 2015), ii) we

believe that India will likely cover the loss of Pegasus’ ramp handling business (c5% of revenues) at Sabiha Gokcen

Airport (SAW) - India’s contribution to total EBITDA was 26% in 1Q16 vs. 19% in 1Q15, iii) since SAW is highly

congested, Pegasus’ capacity additions will be in other Turkish airports, where Celebi services Pegasus, in our view.,

iv) it has the highest ROE (c50%) and dividend yield (c10%) and v) it is the worst performer ytd and the stock is now

c35% below to the amount paid by Actera in 2013 for the acquisition of a 39.12% stake.

We are upgrading TAV Airports to Outperform from Market Perform. Even under the worst case scenario (no

operations at IST in 2019 and 2020 and no compensation), we find a 22% upside potential vs. our base of 38%. The

stock is trading at 44% and 39% discounts to its 5-year historic average 1- year forward looking P/E and EV/EBITDA

multiples, respectively.

We are downgrading Turkish Airlines (THY) to Market Perform from Outperform as the weakness in demand

continues in 2Q16 with unsupportive currency movements on the balance sheet side. Furthermore, we would like to

see a recovery in demand before becoming positive on the stock despite our conservative assumptions.

We are downgrading DO&CO to Market Perform from Outperform although we like its long-term growth prospects.

Note that stock movements are highly linked to corporate action announcements. It seems that the company is no

longer in the running to acquire a stake in Servair, the catering unit of Air France-KLM. However, a major contract

could potentially be added in Asia according to DO &CO’s management. Until a value accretive acquisition or

partnership with an airline materializes, we do not expect the stock to outperform. The company has recently guided

for single-digit growth this year vs. double-digit growth in the previous years, reflecting their cautiousness. Its

multiples look expensive as well.

Company Ticker Mcap

3M Avg

Volume Upside

Old New (TLmn) (TLmn) Old New (%) 2016E 2017E 2016E 2017E 1M 3M YTD

Pegasus Airlines PGSUS Marketperform Marketperform 1,404 27 20.92 16.00 17% 9.0 8.1 20.9 10.8 -9% -15% -28%

Turkish Airlines THYAO Outperform Marketperform 8,170 463 11.04 7.25 22% 7.4 6.2 11.9 6.2 -3% -18% -26%

TAV Airports TAVHL Marketperform Outperform 5,013 32 20.39 19.00 38% 4.7 3.9 6.6 5.2 -12% -13% -26%

Celebi CLEBI Outperform Outperform 556 3 38.00 34.20 49% 5.6 5.0 9.1 7.9 -13% -22% -35%

DO&CO DOCO Outperform Marketperform 2,744 2 371.34 350.00 24% 14.1 13.2 27.9 26.4 -14% -12% -16%

Source: Garanti Securities * EBITDA for CLEBI and DO&CO **DO & CO’s fiscal year starts on 1 April and ends on 31 March.

P/E

BIST-100 Relative

PerformancesTarget Price (TL)Recommendation EV/EBITDAR*

Selected Airlines

12M Forward EV/EBITDA Discounts LHA IAG AF DAL UAL RYA EZJ AIRARABI THYAO PGSUS average FCC average LCC Overall average

to 2yr avg -15% -19% -31% -27% -25% -14% -14% 2% -12% 13% -23% -9% -18%

to 5yr avg -22% -20% -47% -24% -20% -3% -7% 2% -9% 13% -27% -3% -18%

12M Forward P/E Discounts LHA IAG AF DAL UAL RYA EZJ AIRARABI THYAO PGSUS average FCC average LCC Overall average

to 2yr avg -27% -33% -71% -33% -18% -21% -16% -7% -33% 0% -36% -15% -28%

to 5yr avg -55% -58% -94% -18% -9% -17% -15% -7% -43% 0% -47% -13% -34%

Selected Airport Operators/handlers

12M Forward EV/EBITDA Discounts ADP FRA WIEN BEIJING SINGAPORE TAVHL CLEBI average operators

to 2yr avg -2% -13% 3% -3% 8% -36% -25% -1%

to 5yr avg 10% -8% 5% -1% 26% -39% -17% 7%

12M Forward P/E Discounts ADP FRA WIEN BEIJING SINGAPORE TAVHL CLEBI average operators

to 2yr avg -8% -10% 3% -2% 8% -38% -35% -2%

to 5yr avg 4% -11% 15% 10% 19% -44% -26% 8%

Source: Bloomberg, Garanti Securities

Passenger trends: Turkish passenger numbers grew by 4% yoy in 5M16 with 12% growth in domestic passenger numbers

vs. the 6% decrease in international passengers. The growth was 2% at Istanbul Ataturk Airport (IAA) vs. 18% at Sabiha

Gokcen Airport (SAW). In 5M16, Turkish Airlines (THY) increased its total pax figure by 8% on an annual basis, while that of

Pegasus Airlines (Pegasus) was 14%. We assume 10% pax growth for THY vs. 12% for Pegasus in 2016.

Capacity growth at full speed: THY and Pegasus plan to increase their Available-Seat-Km (ASK) by 19-20% in 2016.

Considering the pressures on demand and the carriers’ market share gain strategies, 2016 is likely to see stiff competition.

Given that the opening of Istanbul’s new airport will likely be in 2018 or after, current capacities at Istanbul’s airports will be

another issue to be closely followed. The good news is that there is an ongoing new terminal investment at IAA, providing

10mn in additional capacity to be ready within a couple of months. However, the completion of the second runaway at SAW,

doubling of capacity will most likely be in 2018 or later.

Let’s be conservative: Given the challenging demand environment due to elevated security/geopolitical risks and the global

slowdown, we witnessed weaker traffic figures compared to the introduced capacity in the sector. We believe that investors

should be ready for the worst case scenario where Turkish aviation stocks are concerned. In that regard, we applied a very

conservative approach to our forecasts. We projected a significant annual contraction in 2016E RASK (Total Revenue/Total

ASK) forecasts for THY and Pegasus by 11% (in USD) and 13% (in EUR), respectively, bringing our key operational

profitability metric, the difference between RASK and CASK (Total Cost/Total ASK) to extremely low levels. Given the ytd

trend, we assumed a 3 pps and 2 pps decline in the load factors for THY and Pegasus, respectively in 2016. Under those

assumptions, our projections suggest 3.2 pps and 0.9 pps contractions yoy in the EBITDAR margins of THY and Pegasus.

We have reduced our EBITDA forecasts for DO&CO and CLEBI by 8% on average for 2016 and 2017 and by 5% for TAV.

Guidance: A downward revision to the traffic guidance is likely for THY given the ytd trend: THY’s management targets

USD12.2bn in revenues (GSe:USD11.2bn), carrying 72mn passengers (GSe:67mn), while guiding for an increase in its ASK

to186bn (GSe:183bn) with a 78% load factor (GSe:75%). In its very recent announcement, THY announced that it has

maintained its EBITDAR margin guidance of 20-22% vs. 24.5% in 2015. Note that this margin guidance is based on the

company’s calculations and includes other income/expenses and profits from its subsidiaries. Thus, our forecasts point to a

19.5% EBITDAR margin instead of 17.0%. On the other hand, Pegasus foresees 18-20% growth in ASK and 13-15% growth

in pax figures with the load factor expected to remain stable with flat yields on the domestic side vs. the downward trend in

the load factor and yields on the international front due to capacity increases, competition and geopolitics. Our forecasts are

conservative compared to management’s on the traffic front. Pegasus’ management guides for a 2-3% decrease in CASK in

2016 with our forecast of a 7% decrease. We assume Pegasus’s EBITDAR margin to be 18.6% in 2016 vs. the guidance of

19-21%. TAV is guiding for 7-9% growth in revenues and EBITDAR for 2016 with a 10-12% improvement at the bottom line

vs. our forecasts of c3% growth across the board. Contrary to pervious years’ double-digit growth, DO&CO guides for single-

digit growth this year, which is in line with our projections.

Remaining defensive until there is a pick up in demand: We believe that the weakness in demand will continue in June due

to Ramadan. All the same, it seems that Turkish carriers are not retreating from their aggressive capacity expansion plans.

Therefore, the full year performance of the carriers is highly linked to 3Q16, in our view. Thus, it is likely that pressure on the

shares will continue until the end of 3Q16. As a result, until we see a convincing recovery in demand, being defensive

regarding the sector (CLEBI and TAVHL) is more prudent, in our view. THY and TAVHL approved a share buy-back

program and allocated TL500mn and TL100mn for the program. The program could limit the downside for the shares.

Valuation: After revisiting our forecasts and taking into account the tough demand dynamics and that the competition has

fared so far beyond our initial expectations, we cut our 2016 EBITDA margin estimates by 1.4 and 0.8 pps for THY and

Pegasus. Our valuation for the airlines is based on our target 2016E EV/EBITDAR multiple (6.8x for the both carriers). We

do not think that Pegasus Airlines deserves a higher multiple given that high congestion at its hub and THY’ upper hand in

the bilateral agreement. We value TAVHL through a sum-of-the parts (SOTP) valuation, while using DCF for Celebi and

DO&CO. We also adjusted our valuations for TAVHL, CLEBI and DO&CO following their quarterly financials. Accordingly,

we reduced our 12-month forward target share prices (TP) by 34% to TL7.25 for THY, 23% to TL16.00 for Pegasus, 7% to

TL19.00 for TAVHL, 10% to TL34.20 for CLEBI and 6% to TL350.00 for DO&CO. We are maintaining our recommendations

for Pegasus and Celebi. We upgraded TAVHL to Outperform from Market Perform as even under the worst case scenario

(see page 59), we still find an 22% upside for the shares. We downgraded DO&CO to Market Perform from Outperform on

its cautious outlook and limited visibility for a new partnership or M&A. We also downgraded THY to Market Perform from

Outperform as the weakness in demand continues in 2Q16 with unsupportive currency movements on the balance sheet

side and we would like to see a recovery in demand before becoming positive on the stock despite our conservative

assumptions.

Risks: A slowdown in passenger growth momentum, weaker than expected unit revenues or a deteriorating cost base are

the key risks for airlines. Visa-free travel to Europe for Turkish citizens would be positive for the sector players . A delay in

Istanbul’s new airport construction and new terminal tender award would be the upside risks for TAVHL. Key upside risks

include potential partnerships with new clients or M&As for CLEBI and DO&CO.

5

RESEARCH

Turkey - Sector - Aviation

June 22, 2016

RECOMMENDATIONS & VALUATIONS

THY

Recommendation: Market Perform. We believe that THY has differentiated itself on the basis of its

service quality and competitiveness. Istanbul’s geographical advantage and the airline’s relatively

low labor costs enhance THY’s competitiveness. As an emerging international travel hub, Istanbul

will enable the airline to boost its transit passenger numbers and better utilize its fleet and seat

capacity. With a young fleet, improved brand awareness and increased capacity, THY is in a position

to capture market share from EU carriers, which struggle to offer high quality service and capacity

additions with their relatively old fleets. We believe a relatively low cost structure will set the stage for

continued profitable growth for the coming years. The new terminal investment at its hub, adding a

10mn passenger capacity, could serve as a positive for the airline. Less than 2% of THY’s total

revenues are generated from Russia and transit pax (up by 18% in 5M16) are the main driver.

THY’s shares have underperformed the BIST100 index by 18% in last three months and 26% ytd.

The stock is trading at 43% and 9% discounts to its five-year historic average 12-month forward

looking P/E and EV/EBITDA multiples, respectively. We think that the bulk of the underperformance

is related to: i) its weak 1Q16 financials, ii) deteriorating demand conditions due to concerns and iii) a

likely market share war during the year given the newly introduced capacity across the board by all

carriers. In the coming months, we assume a continuing decline in the RASK given THY’s expansion

plans and increasing competition along with reduced demand due to security/geopolitical risks.

Note that after many years, 2016 will be the last year for THY in terms of a sizeable seat capacity

expansion. As such, the market would be ready for strong operating figures in 2017 and a recovery

in share prices starting from end-3Q16 if a pick up in demand materializes.

However, the weakness in demand is continuing in 2Q16 with unsupportive currency movements on

the balance sheet side. We would like to see a recovery in demand before becoming positive on the

stock despite our conservative assumptions.

Risks. A sharper than expected decline in revenue yields, a decline in economic activity and

worsening security/geopolitical conditions pose risks. The continued appreciation of the JPY and

EUR is another negative for the airline given its huge short FX position. However, the share buy-back

program at TL500mn should limit the downside risks for the shares, in our view.

New 12-month forward target price of TL7.25/share vs. TL11.04/share before. Our 12-month

forward looking target share price of TL7.25 derived from our target EV/EBITDAR multiple offers a

22% upside potential for THY. Our valuation for THY is based on the 2016E target EV/EBITDAR

multiple. To reach our target Mcap, we adjusted the net debt to 7x the aircraft related rental

expenses. We employed a 6.8 target multiple for THY, which is the five-year average EV/EBITDAR

multiple.

Pegasus Airlines

Turkish Airlines Valuation Summary Base

Target EV/EBITDAR mutiple (x) 5.8 6.3 6.8 7.3 7.8

2016E EBITDAR(TLmn) 5,761 5,761 5,761 5,761 5,761

Target EV (TLmn) 33,165 36,045 38,926 41,807 44,687

Less: Adj. Net debt (TLmn) 28,927 28,927 28,927 28,927 28,927

Outstanding number of shares (mn) 1,380 1,380 1,380 1,380 1,380

Target share price (TL) 3.07 5.16 7.25 9.33 11.42

Current share price (TL) 5.92 5.92 5.92 5.92 5.92

Upside/(dow nside) potential -48% -13% 22% 58% 93%

Source: Garanti Securities

6

RESEARCH


June 22, 2016

Recommendation: Market Perform. Pegasus Airlines is the number one LCC and second largest

carrier in Turkey. Given its proven track record on growth in an underpenetrated sector coupled with

its ambitious expansion plans and effective cost management, Pegasus will be one of the key

beneficiaries of increasing GDP and attractive demographics, which bodes well for discount carriers.

Using SAW as its main hub, Pegasus differentiates itself from an ordinary LCC whose business

models are based solely on point to point travel. Pegasus operates like both a network and a point to

point carrier thanks to Istanbul’s geographical advantage connecting 50 countries within three hours

flight time. Furthermore, we think Pegasus’ low cost management enables the airline to boast one of

the lowest CASK levels on the back of its young fleet and low labor costs. Although we find Pegasus’

growth prospects attractive, we doubt that Pegasus will be able to achieve cost efficiencies over its

competitors in 2016 due to exchange rate pressure, changes in its fleet mix and initial ramp handling

investments. Potential competition from THY could also put some pressure on the airline.We would

want to see some improvement in KPIs before adopting a more positive stance on the stock. We

believe progress in building a second runway at SAW will be the key factor to watch for in

overcoming the drawbacks stemming from congestion at the airport. The shares do not look cheap

and risks to Pegasus Airlines’ operations are on the downside, in our view. We believe Pegasus’

shares offer a balanced risk reward profile and we maintain our Market Perform recommendation for

the shares.

Risks. The key risks would be elevated security/geopolitical concerns, stiff competition, limited

international expansion and longer than expected congestion at its hub. The execution of its own

ramp handling would be another risk.

New 12-month forward target price of TL16.00/share vs. TL20.92/share before. We value

Pegasus using a 2016E target EV/EBITDAR multiple. In our EV/EBITDAR multiple valuation, we

apply a 2016E EV/EBITDAR multiple of 6.8x, which is the same as THY’s. Given the high congestion

at its hub and THY’s upper hand in the bilateral agreement, we do not think that Pegasus Airlines

deserve a higher multiple. Finally, to reach our target Mcap, we adjusted the net debt to 7x the

aircraft related rental expenses.

Pegasus Airlines Valuation Summary Base

EV/EBITDAR multiple (x) 6.3 6.5 6.8 7.0 7.3

GS 2016E EBITDAR (TLmn) 722 722 722 722 722

Target EV (TLmn) 4,520 4,701 4,881 5,062 5,243

Adj. Net debt (TLmn) 3,247 3,247 3,247 3,247 3,247

Minorities (TLmn) -3 -3 -3 -3 -3

Target Mcap (TLmn) 1,276 1,456 1,637 1,817 1,998

Outstanding number of shares (mn) 102 102 102 102 102

Target share price (TL) 12.47 14.24 16.00 17.77 19.54

Current share price (TL) 13.73 13.73 13.73 13.73 13.73

Upside potential -9% 4% 17% 29% 42%


7

RESEARCH


June 22, 2016

TAV Airports Recommendation: Outperform.TAV Airports is Turkey’s leading airport terminal operator. The

Company operates Istanbul Ataturk, Ankara Esenboga and Izmir Adnan Menderes Airport and is

located in Turkey’s three largest cities. TAV Airports’ business structure ensures high operating

leverage, and since passenger fees are mainly fixed, higher volumes going forward will be the major

growth driver for TAV and will also support its retail operations. In addition to a solid long-term

outlook, we believe the company should benefit from the current macro environment as the lion’s

share of revenues are based in hard currencies. It has underperformed the BIST-100 by 34% since

November 24, 2015 and by 26% ytd. We think that TAV is being heavily punished due to the

possible early termination of Ataturk Airport's operations (expected in 2018), elevated security

concerns/geopolitical risks and the lack of visibility for TAV Airports to add sizable new projects to its

portfolio. Even if we assume no compensation from the government regarding the early termination

of Ataturk Airport (no FCFs from 2019 and 2020), we find a 22% upside for the shares. If we include

50% of our anticipated FCFs from 2019 and 2020 in our model given that the company will be

negotiating over the compensation regarding the early termination, the upside increases to 38%. We

believe that TAV Airports is likely to outperform as a defensive pick with solid qualities given: i.) its

anticipated margin improvement in 1H16 vs. the contraction for airlines, ii) its position as the main

beneficiary of the anticipated recovery in demand with the high season and regional diversification,

iii) a less unfavorable currency mismatch and iv) attractive dividend payments. The stock is trading at

44% and 39% discounts to its five-year historic average 1- year forward looking P/E and EV/EBITDA


Risks. Key risks include a slowdown in passenger traffic growth, increasing political tensions in its

regions of operation, failure to replace IAA or overpaying for acquisitions.

New 12-month forward target price of TL19.00/share vs. TL20.39/share before. We value TAV

Airports using a sum-of the parts (SOTP) analysis based on our target Net Asset Value (NAV). We

employed a DCF analysis to value each of the Company’s operations separately. Our valuation is

solely based on DCF as we believe DCF analysis is the most appropriate means of reflecting TAV

Airports’ long-term growth potential and its well designed structure. We only valued TAV Airports’

existing airport operations, not taking into account any terminal value and assuming that it would

neither win any new tenders, nor would be awarded another term upon the expiry of its current

concession agreements. On the other hand, as the services companies’ operations will not end with

the expiry of operating rights at the airports, we included a terminal value in calculating the value of

the services companies.

Sensitivity analysis for early termination of Istanbul Ataturk Airport

Scenario Target Price Upside

Bear Case 16.81 22%

Base Case 19.00 38%

Bull Case 21.19 54%


No FCFs from Ataturk Airport for 2019 and 2020

Definition

50% of FCFs from Ataturk Airport for 2019 and 2020

Full FCFs from Ataturk Airport for 2019 and 2020

8

RESEARCH


June 22, 2016

Celebi

Recommendation:Outperform. We expect the Company to post an average c50% ROE over the

next two years and its net debt/EBITDA ratio to decline from 2.9x in end-2013 to 1.2x in end-2018.

Assuming a 90% pay-out ratio, we anticipate an 11% dividend yield from 2016E earnings. The bulk

of Celebi’s revenues are in FX (79%), while 59% of its costs are also in FX with no exposure to the

volatility in oil prices. The shares have underperformed the BIST-100 by 35% ytd. The loss of

Pegasus at SAW in June 2016 might be exaggerated. Celebi announced that it recorded EUR13mn

from Pegasus in 2015, corresponding to c5% of total revenues. Since Pegasus Airlines is a low cost

carrier, the real impact on Celebi’s operations would be more limited than initially thought. It is also a

beneficiary of competition among airlines given the increased traffic movements. Its geographical

diversification is another plus for the Company. We believe the strength in its operating figures in

India will continue this year. The total number of handled aircraft was up by 80% in 1Q16 after the

58% growth in 2015. India’s contribution to total EBITDA was 26% in 1Q16 vs. 19% in 1Q15. The

stock is trading at 26% and 17% discounts to its five-year historic average 12-month forward looking

P/E and EV/EBITDA multiples, respectively. It is c30% below the amount paid by Actera in 2013 for

the acquisition of the 39.12% stake

Risks. Risks include the loss of another major airline contract, a crisis in the airline sector, higher

than expected margin pressure from the loss of Pegasus Airlines, changes in the laws regarding

operation in the sector, an overly expensive acquisition and an imminent share overhang from

private equity ownership.

New 12-month forward target price of TL34.20/share vs. the previous TL38.00/share. We are

employing DCF as our preferred valuation methodology for Celebi to better reflect its growth

prospects. Our 12-month target price indicates a 49% upside for the shares.

Valuation Target Equity TAV's Contribution % of Total

Business Method Value Share (EURmn) NAV

Airports

TAV Istanbul DCF 1,000 100% 1,000 50%

TAV Ankara DCF 122 100% 122 6%

TAV Izmir DCF 165 100% 165 8%

TAV Gazipasa DCF 56 100% 56 3%

TAV Georgia DCF 316 80% 253 13%

TAV Tunisia DCF -235 67% -158 -8%

TAV Macedonia DCF 98 100% 98 5%

TAV Medina DCF 361 33% 119 6%

TAV Zagreb Investment Value 15% 15 1%

TAV Bodrum DCF 181 100% 181 9%

Airports Total 1,852 93%

Services

ATU DCF 212 50% 106 5%

BTA DCF 119 67% 80 4%

Havas DCF 171 100% 171 9%

Services Total 357 18%

Other Net Cash/(Debt) -221 -11%

Total NAV (EURmn) 1,988

Current Mcap (EURmn) 1,527

12M-Target Price (TL/Share) 19.00

Current Share Price (TL) 13.80

Upside Potential 38%


TAV Airports - Sum of the Parts Valuation (EUR mn)

9

RESEARCH


June 22, 2016

CLEBI DCF

(TLmn) 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Revenue 691 778 868 971 1,091 1,213 1,368

Adj. EBIT 104 117 132 150 172 193 220

Taxes on EBIT -21 -23 -27 -30 -35 -39 -44

NOPLAT 83 93 106 120 138 154 176

Depreciation 39 41 43 46 50 55 61

Gross Cash Flow 122 134 149 166 187 209 236

Increase in Working Capital 20 22 25 28 31 35 39

Capital Expenditures 49 55 61 68 77 85 96

Gross Investment 69 77 86 96 108 120 136

Free Cash Flow 53 57 62 70 79 89 100

Assumptions (%)

Revenue grow th (%) -6 13 12 12 12 11 13

EBITDA grow th (%) -7 10 11 12 13 12 13

EBITDA margin (%) 20.6 20.2 20.2 20.2 20.4 20.4 20.5

Incr. in Working Capital/Sales (%) 2.9 2.9 2.9 2.9 2.9 2.9 2.9

Capital Expenditures/Sales (%) 7.0 7.0 7.0 7.0 7.0 7.0 7.0

Source:Garanti Securities

WACC Assumptions

(%) 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Risk-free Rate (RFR) 10.0 10.0 10.0 10.0 10.0 10.0 10.0

Cost of Equity 15.5 15.5 15.5 15.5 15.5 15.5 15.5

Cost of Debt 14.0 14.0 14.0 14.0 14.0 14.0 14.0

Tax Rate 20.1 20.1 20.1 20.1 20.1 20.1 20.1

Cost of Debt after Tax 11.2 11.2 11.2 11.2 11.2 11.2 11.2

Weight - Equity 23.9 26.2 28.0 30.0 35.0 40.0 45.0

Weight - Debt 76.1 73.8 72.0 70.0 65.0 60.0 55.0

WACC 12.2 12.3 12.4 12.5 12.7 12.9 13.1


Celebi 12mth Target Price (TL/Share)

Perpetuity Growth Rate 3.50% 5.00% 4.50%

WACC + 1% 25.17 29.08 27.64

WACC 29.13 34.20 32.31

WACC - 1% 34.03 40.77 38.23


Celebi 12mth Target M.Cap (TLm)


WACC + 1% 612 707 672

WACC 708 831 785

WACC - 1% 827 991 929


PV of FCF 350

Terminal Grow th 5.00%

PV of Terminal Value 635

Minorities 11

Adj. Net Debt 254

EV 719

12M Target Mcap 831


Valuation Summary (TLmn)

10

RESEARCH


June 22, 2016

DO&CO Recommendation:Market Perform. We are downgrading DO&CO to Market Perform from

Outperform. As the world’s seventh largest airline caterer, DO&CO is unique with its integrated

structure and we believe DO & CO’s business is becoming increasingly exposed to emerging

markets, providing investors with an opportunity to benefit from its strong growth prospects. THY is

the key driver of prospective growth with the airline set to add 140 aircraft to its fleet by 2023,

targeting 120mn pax compared to 61mn in 2015. In addition to the organic growth potential of its on-

going operations, the Company has always been in pursuit of inorganic growth. It has a proven track

record in acquiring companies which lack a financially-solid balance sheet structure and successfully

and profitably integrating them into its business. DO&CO acquired Hediard, a gourmet food retailer in

France, in July 2014, and Arena One, the caterer of Bayern Munich’s Allianz Arena, in December

2013. DO & CO also won the contract to provide catering for UEFA EURO 2016 in October 2014. It

also entered Korea through a partnership with Sharp Aviation. Furthermore, in February 2015, DO &

CO formed a 50/50 JV with Nespresso in which initially there will be a trial period in the Viennese

and London markets. The long awaited opening of the Istanbul Hotel will also take place in 2016. On

December 1, 2015, the Company sold “Haas Haus” to Atilla Dogudan Privatstiftung, which is the

Chairman’s investment company, under the same conditions that DO&CO had acquired the premise.

After this disposal, the Company now has low indebtedness and is ready for future acquisitions, in

our view.

Although we like the its growth prospects in the long term, stock movements are highly linked to

corporate action announcements. It seems that the company is no longer in the running to acquire a

stake in Servair, the catering unit of Air France-KLM. Until a value accretive acquisition or

partnership with an airline materializes, we do not expect the stock to outperform. In the earnings call

in the beginning of May, the company guided for single-digit growth this year vs. double-digit growth

in the previous years, reflecting their cautiousness. Its multiples look expensive as well.

Risks. The loss of any of the major airline contracts, especially THY (to be renewed in 2016), a crisis

in the airline sector, a delay in the opening of Istanbul Hotel, longer than expected margin pressure

from newly invested operations, an overpaid acquisition and a potentially high capex requirement for

Istanbul’s new airport pose risks.

New 12-month forward target price of TL350.00/share (EUR100) vs. the previous TL371.34/

share (EUR107.00). We are employing DCF as our preferred valuation methodology for DO&CO to

better reflect its growth prospects. Our 12-month target price indicates a 24% upside for the shares.

11

RESEARCH


June 22, 2016

DO & CO 12 month forward Target Price (TL/share)

Perpetuity Growth Rate 1.5% 2.0% 2.5% 3.0%

WACC + 1% 243.26 266.33 293.82 327.13

WACC 314.77 350.00 393.59 448.90

WACC - 1% 420.51 479.03 555.75 660.69

Source: Garanti Securities estimates

DO & CO DCF

(EURmn) 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

Revenue 1,000 1,054 1,135 1,221 1,319 1,422 1,533 1,648

Adj. EBIT 55 58 64 70 78 84 90 97

Taxes on EBIT -11 -12 -13 -14 -16 -17 -18 -19

NOPLAT 44 47 51 56 62 67 72 77

Depreciation 42 47 51 54 58 62 67 73

Gross Cash Flow 86 94 102 110 120 129 139 150

Increase in Working Capital 8 5 1 1 1 1 1 2

Capital Expenditures 80 74 68 61 66 71 77 82

Gross Investment 88 79 69 62 67 72 78 84

Free Cash Flow -1 15 33 48 53 57 61 66

Assumptions

Revenue grow th (TL, %) 9.1 5.5 7.6 7.6 8.0 7.8 7.8 7.5

Airline Catering / Total Revenue 69% 71% 71% 71% 70% 70% 70% 70%

IEA / Total Revenue 15% 13% 12% 12% 11% 11% 11% 10%

RHL / Total Revenue 16% 16% 17% 17% 18% 19% 20% 20%

EBIT margin (%) 5.5 5.5 5.6 5.8 5.9 5.9 5.9 5.9

EBITDA margin (%) 9.7 10.0 10.1 10.2 10.3 10.3 10.3 10.3

Depr/Sales (%) 4.2 4.5 4.5 4.4 4.4 4.4 4.4 4.4

Chg in W. Capital/Sales (%) 0.8 0.5 0.1 0.1 0.1 0.1 0.1 0.1

Capex/Sales (%) 8.0 7.0 6.0 5.0 5.0 5.0 5.0 5.0


WACC Assumptions

(%) 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

Risk-free Rate (RFR) 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Equity Risk Premium x Beta 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8

Cost of Equity 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8

Cost of Debt 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

Tax Rate 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0

Cost of Debt after Tax 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8

Weight - Equity 60.4 62.8 65.0 65.0 65.0 65.0 65.0 65.0

Weight - Debt 39.6 37.2 35.0 35.0 35.0 35.0 35.0 35.0

WACC 6.6 6.7 6.7 6.7 6.7 6.7 6.7 6.7


Valuation Summary (EURmn)

PV of FCF 247

Terminal grow th 2.0%


Adj. Net Debt -19

Minorities 269

EV 904

12M Target Mcap 974


12

RESEARCH


June 22, 2016

PEER COMPARISON

We are presenting the multiples of international carriers to put THY’s and Pegasus’s valuations into

perspective. They look expensive, but both offer stronger growth. Given the different accounting

approaches and off balance sheet items, a peer comparison would be misleading.

International Comparison

Company Market

Name Currency Cap (m) 2016E 2017E 2016E 2017E 2016E 2017E

Full Service Carriers - Median 0.8 0.8 4.9 4.4 7.6 6.6

Europe - Median 0.2 0.2 2.2 1.9 5.2 4.7

INTL CONS AIRLIN EUR 13,894 0.7 0.6 3.4 2.9 6.1 5.4

DEUTSCHE LUFT-RG EUR 5,449 0.3 0.3 2.4 2.2 4.5 4.2

AIR FRANCE-KLM EUR 1,893 0.2 0.2 2.2 1.9 3.3 2.4

SAS AB SEK 5,677 0.2 0.2 1.9 1.7 5.2 4.7

FINNAIR OYJ EUR 557 0.1 0.1 1.4 1.3 6.4 5.6

US - Median 0.8 0.8 3.7 3.6 5.6 6.2

DELTA AIR LI USD 30,065 0.8 0.8 3.5 3.3 6.3 6.3

AMERICAN AIRLINE USD 17,490 0.9 0.9 4.9 4.8 5.6 5.9

UNITED CONTINENT USD 15,157 0.6 0.5 3.1 3.2 5.6 6.2

ALASKA AIR GROUP USD 7,539 1.2 1.1 3.7 3.6 8.3 8.1

AIR CANADA CAD 2,667 0.6 0.6 3.8 3.9 2.6 2.8

Latam - Median 1.1 1.0 7.4 6.5 13.5 13.2

GPO AEROMEXICO MXN 27,050 0.8 0.8 6.1 6.0 13.9 16.4

AVIANCA HOLD-ADR USD 790 0.9 0.8 7.1 6.2 10.0 5.7

LATAM AIRLINES USD 3,514 1.2 1.2 7.8 6.8 43.3 15.7

COPA HOLDIN-CL A USD 2,252 1.3 1.4 7.8 7.4 13.0 10.7

Asia - Median 0.8 0.8 5.8 4.6 8.8 7.4

JAPAN AIRLINES C JPY 1,240,448 0.7 0.6 2.9 2.7 6.1 6.9

AIR CHINA LTD-H CNY 80,558 1.5 1.4 5.8 5.6 7.9 7.3

ANA HOLDINGS INC JPY 1,051,763 0.8 0.8 5.0 4.6 12.1 10.7

SINGAPORE AIRLIN SGD 12,494 0.7 0.8 3.9 4.3 14.6 14.5

CHINA SOUTHERN-H CNY 61,003 1.3 1.2 6.0 5.8 7.6 7.6

CATHAY PAC AIR HKD 46,813 1.0 0.9 5.8 5.6 7.5 7.3

QANTAS AIRWAYS AUD 6,043 0.5 0.5 2.9 2.5 5.4 5.0

KOREAN AIR LINES KRW 1,970,315 1.5 1.4 6.1 6.3 65.8 5.7

VIRGIN AUSTRALIA AUD 882 0.6 0.5 5.9 4.5 33.5 8.2

AEROFLOT RUB 93,136 0.6 0.5 4.9 3.8 4.4 3.7

GARUDA INDONESIA USD 944 0.4 0.4 4.7 4.4 14.0 12.7

ASIANA AIRLINES KRW 865,275 0.9 0.9 8.0 7.9 n.m n.m

THAI AIRWAYS INT THB 44,529 1.1 1.0 7.3 6.3 9.8 9.7

Low Cost Carriers - Median 1.4 1.4 6.8 6.2 8.6 8.0

Europe - Median 1.4 1.4 7.4 6.2 11.5 9.2

RYANAIR HLDGS EUR 17,150 2.4 2.1 7.4 6.2 11.5 10.1

EASYJET PLC GBP 6,046 1.2 1.1 6.5 5.7 10.7 9.2

NORWEGIAN AIR SH NOK 11,983 1.4 1.4 11.5 10.4 12.1 8.4

US - Median 1.7 1.5 6.8 6.2 7.0 7.0

SPIRIT AIRLINES USD 3,120 1.7 1.5 6.9 6.2 10.9 10.5

JETBLUE AIRWAYS USD 5,306 1.0 0.8 3.8 3.5 7.0 7.0

WESTJET AIRLINES CAD 2,665 n.m n.m n.m n.m n.m n.m

AIRASIA BHD MYR 7,347 2.5 2.3 6.8 6.7 5.9 6.5

Emerging - Median 1.1 0.9 4.4 4.1 6.5 7.5

WIZZ AIR HOLDING EUR 1,425 0.7 0.5 3.4 2.4 5.6 4.6

CEBU AIR INC PHP 59,202 1.5 1.4 5.4 5.8 6.5 7.5

AIR ARABIA PJSC AED 6,113 n.m n.m n.m n.m 10.2 9.2

Gloabal Airlines Median 0.9 0.8 5.6 4.7 7.7 7.4

Turkish Airlines TRY 8,170 0.9 0.8 7.6 5.9 11.9 6.2

Pegasus Airlines TRY 1,404 0.7 0.6 15.2 11.2 20.9 10.8

Source: Bloomberg, Garanti Securties estimates

EV/Sales EV/EBITDA P/E

13

RESEARCH


June 22, 2016

We have tabulated the multiples below to provide a perspective on where TAVHL and CLEBI stand

against other international players in the sector. Most of TAVHL’s peers totally own the airports they

operate and therefore a terminal value is calculated when valuating these airports. Conversely,

TAVHL operates its airports under the BOT scheme or operational lease agreement. As a result of

this difference, we have not opted for a peer comparison in our fair value calculation. We do not rely

on a peer comparison as our key valuation tool for Celebi since most of its peers have terminal

operations, while Celebi does not. Moreover, we believe a peer comparison understates the growth

potential in the markets in which the companies operate, especially in Turkey and India given the low

trip per capita and underpenetrated market. As such, we believe near-term multiples are not

sufficient to lead to a definitive conclusion in terms of the valuation.

Peer comparison not a definitive guide for DO&CO

Peer comparison sheds some light on where DO & CO stands against similar companies in terms of

valuation. The Company trades at a discount to its peers on the basis of its EV/EBITDA multiple

(unadjusted), while trading at a premium on the basis of its P/E multiple. If we adjust DO & CO’s EV/

EBITDA with its minorities, it would appear to be trading at premium. We do not rely on a peer

comparison as our key valuation tool for the Company.

Company Country MCAP (EURmn) 2016 2017 2016 2017 2016 2017 2016 2017

Gategroup Holding AG SWITZERLAND 1,253 9.2 8.0 18.0 13.7 10% 4% 98% 13%

Saudi Airlines Catering Co SAUDI ARABIA 1,859 10.7 9.9 11.9 10.9 n.m 12% 0% 11%

SATS Ltd SINGAPORE 3,046 14.9 14.1 20.5 19.2 3% 4% 7% 3%

Compass Group PLC BRITAIN 28,036 13.9 12.9 22.1 20.4 9% 6% 11% 8%

Sodexo SA FRANCE 14,841 11.1 10.4 20.9 19.2 3% 3% 5% 6%

Restaurant Group PLC/The BRITAIN 889 6.1 6.0 11.8 11.6 2% 4% -8% 3%

AmRest Holdings SE POLAND 1,103 11.3 9.9 28.3 22.7 15% 13% 16% 13%

Edenred FRANCE 3,996 11.5 10.3 19.5 17.1 3% 8% 4% 12%

Mcap Adjusted Average 12.6 11.7 21.1 19.2 7% 5% 11% 8%

DO & CO multiples 836 8.7 8.1 27.9 26.4 8% 5% 4% 8%

Discount/Premium -31% -31% 32% 38% 1% 0% -6% 1%


EV/EBITDA P/E Revenue Growth EBITDA growth

International Comparison

Company Market

Name Currency Cap (m) 2016E 2017E 2016E 2017E 2016E 2017E

Airport operators/Handlers

ADP EUR 10,079 4.4 4.4 10.7 10.5 20.9 19.6

FRAPORT AG EUR 4,470 3.2 2.8 9.7 8.4 17.0 15.6

FLUGHAFEN WIEN EUR 2,083 3.5 3.2 8.2 7.5 17.9 16.5

MALAYSIA AIRPORT MYR 10,934 3.9 3.5 9.8 9.0 96.1 50.0

BEIJING CAP AI-H CNY 29,710 4.1 3.7 7.9 7.1 16.1 14.0

SATS LTD SGD 4,606 2.4 2.3 13.8 13.4 19.5 18.7

SHANG INTL AIR-A CNY 50,197 6.0 5.6 11.3 10.2 17.6 15.4

MENZIES (JOHN) GBP 327 0.2 0.2 6.3 6.1 11.4 11.1

BBA AVIATION PLC USD 3,250 1.7 1.6 11.7 10.2 17.3 14.7

AIRPORTS OF THAI THB 551,428 11.4 9.8 18.6 15.8 28.9 24.8

AUCKLAND AIRPORT NZD 7,680 16.8 15.6 22.0 20.2 36.9 33.1

SYDNEY AIRPORT AUD 16,119 17.8 16.8 21.7 20.4 55.2 48.8

Gloabal Airport operators/Handlers Median 4.0 3.6 11.0 10.2 18.7 17.6

TAV Airports TRY 5,013 2.6 2.3 5.7 4.9 6.6 5.2

Premium/(discount) -34% -37% -48% -52% -64% -71%

Celebi TRY 556 1.1 1.0 5.6 5.0 9.1 7.9

Premium/(discount) -71% -72% -49% -51% -51% -55%

Source: Bloomberg, Garanti Securties estimates

EV/Sales EV/EBITDA P/E

14

RESEARCH


June 22, 2016

Running graphs Except DO&CO and Celebi, Turkish aviation stocks are under owned… As expected, Turkish

aviation stocks’ share prices decline with a major drop in foreign ownership.


Foreign Ownership vs. share prices

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

02.01.2012 02.01.2013 02.01.2014 02.01.2015 02.01.2016

Price THYAO F.ownership

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

21.08.2013 21.02.2014 21.08.2014 21.02.2015 21.08.2015 21.02.2016

Price PGSUS F.ownership



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0

5.0

10.0

15.0

20.0

25.0

02.01.2012 02.01.2013 02.01.2014 02.01.2015 02.01.2016

Price TAVHL F.ownership

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

02.01.2012 02.01.2013 02.01.2014 02.01.2015 02.01.2016

Price CLEBI F.ownership



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

02.01.2012 02.01.2013 02.01.2014 02.01.2015 02.01.2016

Price DOCO F.ownership

15

RESEARCH


June 22, 2016

1H performances are better for airport handlers/operators vs. 2H, while the situation is converse for

airlines.

Turkish Airlines monthly returns (%)

Source: Bloomberg

-4

-2

0

2

4

6

8

10

12

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

10 year average 1H avg 2H avg

Pegasus Airlines monthly returns (%)

Source: Bloomberg

-25

-20

-15

-10

-5

0

5

10

15


Avg since IPO 1H avg 2H avg

Nominal 1 week 1 mth 3 mths since Nov 24, 2015 2015 till Nov 13, 2015 2014 2013 YTD

CLEBI 0% -11% -26% -31% 38% 49% 139% -40% -30%

DOCO 4% -13% -15% 0% 76% 53% 74% 34% -9%

PGSUS 4% -8% -21% -25% -47% -38% -9% 0% -22%

TAVHL 4% -11% -18% -32% -1% 23% 28% 75% -20%

THYAO 1% -2% -26% -25% -23% -4% 50% 20% -20%

Relative 1 week 1 mth 3 mths since Nov 24, 2015 2015 till Nov 13, 2015 2014 2013 YTD

CLEBI -3% -13% -21% -32% 65% 56% 89% -31% -35%

DOCO 2% -14% -9% -2% 110% 60% 37% 54% -16%

PGSUS 1% -9% -15% -26% -37% -35% -28% 0% -28%

TAVHL 2% -12% -12% -34% 18% 28% 1% 102% -26%

THYAO -1% -3% -20% -26% -8% 1% 18% 39% -26%

*November 24, 2015, Turkey dow ned a Russian Jet ** November 13, 2015, Paris attacks occured

Share Performance Summary

16

RESEARCH


June 22, 2016

TAV Airports monthly returns (%)

Source: Bloomberg

-6

-4

-2

0

2

4

6

8

10

12



Celebi monthly returns (%)

Source: Bloomberg

-10

-8

-6

-4

-2

0

2

4

6

8

10



XULAS (Transportation Index) monthly returns (%)

Source: Bloomberg

-4

-2

0

2

4

6

8

10



DO&CO monthly returns (%)

Source: Bloomberg

-6

-4

-2

0

2

4

6



17

RESEARCH


June 22, 2016

Except Pegasus Airlines and DO&CO, the stocks are trading below their historical multiple

averages... In terms of 12-month forward EV/EBITDA and P/E, THY, TAV Airports and Celebi are at

a 24%, 39% and 26% discount to the averages, respectively.

THYAO - 12M Forward EV/EBITDA and standard deviation wrt to 5 year average PGSUS - 12M Forward EV/EBITDA and standard deviation wrt to the average since IPO

Source:Bloomberg, Garanti Securities

TAVHL - 12M Forward EV/EBITDA and standard deviation wrt to 5 year average CLEBI - 12M Forward EV/EBITDA and standard deviation wrt to 5 year average


DOCO - 12M Forward EV/EBITDA and standard deviation wrt to 5 year average


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

PGSUS avg since IPO 2yr average +2std -2std

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

THYAO 5yr average 2yr average +2std -2std

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

CLEBI 5yr average 2yr average +2std -2std

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

TAVHL 5yr average 2yr average +2std -2std

0.0

2.0

4.0

6.0

8.0

10.0

12.0

DOCO 5yr average 2yr average +2std -2std

18

RESEARCH


June 22, 2016

THYAO - 12M Forward P/E and standard deviation wrt to 5 year average PGSUS - 12M Forward P/E and standard deviation wrt to the average since IPO


PGSUS - 12M Forward P/E and standard deviation wrt to 5 year average CLEBI - 12M Forward P/E and standard deviation wrt to 5 year average


DOCO - 12M Forward P/E and standard deviation wrt to 5 year average


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

PGSUS avg since IPO 2yr average +2std -2std

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

THYAO 5yr average 2yr average +2std -2std

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

CLEBI 5yr average 2yr average +2std -2std

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

TAVHL 5yr average 2yr average +2std -2std

0.0

5.0

10.0

15.0

20.0

25.0

30.0

DOCO 5yr average 2yr average +2std -2std

19

RESEARCH


June 22, 2016

It seems the industry is de-rating the airlines. The fact that all global carriers are trading well below

their historical average multiples cause us to believe that the industry is in a down cycle given that

the challenging demand environment coupled with greater capacity introductions might lead to

irrational price wars. As seen below, there are substantial discounts to historical averages in the

industry across the board. With a cost structure somewhere between FCC and LCC, we believe that

THY should trade somewhere in the middle of the FCC multiple and the LCC multiple.



12M Forward EV/EBITDA discounts

12M Forward P/E discounts

-50%

-40%

-30%

-20%

-10%

0%

10%

20%LHA IAG AF DAL UAL RYA EZJ AIRARABI THYAO PGSUS

to 2yr avg to 5yr avg average FCC - 2yr average FCC - 5yr

average LCC - 2yr average LCC - 5yr Overall average - 2yr Overall average - 5yr

-100%

-80%

-60%

-40%

-20%

0%

20%LHA IAG AF DAL UAL RYA EZJ AIRARABI THYAO PGSUS

to 2yr avg to 5yr avg average FCC - 2yr average FCC - 5yr

average LCC - 2yr average LCC - 5yr Overall average - 2yr Overall average - 5yr

20

RESEARCH


June 22, 2016

On the operators/handler side, the picture is different: Conversely, only Turkish players are at huge

discount. In addition to security concerns regarding Turkey, we attribute this situation to their specific

conditions as the biggest asset (IAA) will likely exit from the portfolio for TAV Airports and Celebi will

be losing Pegasus at SAW, which is one of the biggest clients for the company



12M Forward EV/EBITDA discounts

12M Forward P/E discounts

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%ADP FRA WIEN BEIJING SINGAPORE TAVHL CLEBI

to 2yr avg to 5yr avg average operators - 2yr average operators - 5yr

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%ADP FRA WIEN BEIJING SINGAPORE TAVHL CLEBI

to 2yr avg to 5yr avg average operators - 2yr average operators - 5yr

21

RESEARCH


June 22, 2016

Comments from the industry players following the recent quarterly earnings show that there is a very

challenging environment ahead and capacity reductions could be in the cards.

*We complied the statements below from company presentations and various newspaper/ websites:

09/05/2016 - THY said that forward booking trends indicate that: i) there will be a weak demand

environment in 2Q16 (especially in European and Asian traffic, while Africa, the U.S. and Eastern

Europe will be relatively stronger and ii) yield pressures will decline in 2H16 (Company presentation).

10/05/2016 - Pegasus Airlines said that there is a flat load factor and yields (in TL) on the domestic

side vs. the downside trend in the load factor and yields (in EUR) due to the capacity increase,

competition and geopolitics factors (Company presentation).

22/04/2016 - American Airlines said that the revenue environment remains challenging. We don’t

view the current revenue trends as acceptable or long-term. Revenue suffered from capacity

reductions domestically and from soft foreign ticket sales based on the strong U.S. Dollar

(USAtoday).

17/04/2016 - United said it expects that a key revenue-per-seat figure will keep falling in the second

quarter, when airline fortunes usually pick up. United was prepared to reduce capacity, a method

airlines use to increase fares by reducing the supply of seats. United has already made some cuts in

Houston, Brazil, and the Middle East (bidnessetc).

21/05/2016 - United Airlines reduced its 2016 capacity growth plans by 0.5 percentage points last

month.

- Delta Air Lines is also ratcheting back on capacity growth. In Q4, domestic capacity will rise just

2.5% year over year, compared to 4%-plus growth in the first three quarters of 2016. Meanwhile,

international capacity will remain flat-to-down year over year throughout 2016, with capacity down

across all regions during Q4.

- American Airlines is also slashing its growth. Last month, the carrier announced that it will increase

international capacity just 2.5% year over year in 2016, compared to its original plan for 6% growth

(nasdaq.com).

17/05/2016 - Lufthansa said its earnings improvement will slow this year despite a strong tailwind

from lower fuel costs, signaling the continued challenges the airline faces in restoring

competitiveness. CFO Simone Menne also said the rise in oil prices in recent days is causing the

airline to be cautious about its outlook. Passengers are booking more last minute, weighing on ticket

prices. CEO Carsten Spohr said Lufthansa, which had planned to raise the number of seats on offer

by 6.6% this year, now intends to bring that to below 6%, without specifying the exact figure (WSJ

and Reuters).

29/04/2016 - IAG CEO Willie Walsh said the airline group would cut its 2016 capacity growth to

4.9% from a previously planned 5.2% (thisismoney).

18/04/2016 - Qantas said it had revised plans to increase seat capacity in April, May and June

because customers were flying less (smh).

05/04/2016 - Air France said that it faces "a high level of uncertainty" for the rest of the year, with

"downward pressure on unit revenue" as well as adverse exchange rates likely to offset much of the

savings on fuel and other costs. (morningstar).

30/05/2016 - The International Air Transport Association (IATA) said that the bulk of the slowdown

in the total international growth rate relates to European carriers – the largest region in such terms –

following the Brussels terrorist attacks in mid-March. As is usually the pattern following such shock

events, we expect traffic to recover somewhat over the coming months and for the solid upward trend

in traffic to reestablish itself. The ‘Within Europe’ market expanded by over 12% in the first quarter of

2016, helped by surprisingly robust economic growth in the region during the start of the year.

22

RESEARCH


June 22, 2016

Then the question arises — Whether Turkish players deserve premium or not?. . Normally, we would

think Turkish players should deserve a premium given their relatively lower cost base and strong

growth prospects, but, because of geopolitics and capacity constraints at Istanbul’s airports we

believe Turkish carriers are really no different from global ones. They are among the largest

underperformers ytd and since late November.

YTD share performances (USD) in selected airlines


60

72

84

96

108

120

132

144

MSCI World Airlines Index THYAO LHA IAG

DAL UAL QAN Cathay

PGSUS AIRARABI Bloomberg World Airlines Index MSCI Europe Airlines Index

AF EZJ RYA

Share performances (USD) in selected airlines since the Russian Jet down on 24 November 2015


70

86

102

118

134

150

MSCI World Airlines Index THYAO LHA IAG

DAL UAL QAN Cathay

PGSUS AIRARABI Bloomberg World Airlines Index MSCI Europe Airlines Index

AF EZJ RYA

23

RESEARCH


June 22, 2016

YTD share performances (USD) in selected airports operators/handlers


60

72

84

96

108

120

TAVHL CLEBI ADP FRA WIEN BEIJING SINGAPORE

Share performances (USD) in selected airports operators/handlers since the Russian Jet down on 24 November 2015


50

66

82

98

114

130

TAVHL CLEBI ADP FRA WIEN BEIJING SINGAPORE

24

RESEARCH


June 22, 2016

YTD share performances (USD) in selected caterers


0

20

40

60

80

100

120

140

DOCO GATE SAUDI SATS COMPASS SODEXO RESTAURANT

Share performances (USD) in selected caterers since the Russian Jet down on 24 November 2015


0

20

40

60

80

100

120

140

160

DOCO GATE SAUDI SATS COMPASS SODEXO RESTAURANT

25

RESEARCH


June 22, 2016

Lessons from the past — Do not let short-term weakness blur the solid fundamentals, be ready for

strong operating figures in 2017 and a recovery in the share prices starting from end-3Q16 if a pick

up in demand materializes... Normally, we are not troubled Turkish carriers’ capacity introductions as

there were 32 and nine per annum net additions to the fleet of THY and Pegasus since 2012 without

hurting their operational profitability. However, this year differs from the 2012-2015 period as demand

is not strong enough to match the capacity increase in 2016 given the global slowdown and security

concerns. Therefore, the pressure on revenue yields is the main theme surrounding airlines stocks.

Given this backdrop, it is no surprise to see a margin contraction for Turkish carriers, which was also

signaled by THY in the beginning of the year when it guided for a 2.5-4.5 pps decline in its EBITDAR

margin. However, it is worth noting that after many years, 2016 will be the last year for THY in terms

of a sizeable seat capacity expansion. As seen below, THY will increase its seat capacity by 1% in

2017 after the 16% in 2016. Therefore, we expect an increase in THY’s load factors and operating

margins in 2017. Less capacity by THY should also mean an easing in the competition for Pegasus.

In that context, we think 2016 will be similar to 2011 given the tough competition, negative impact on

passenger volumes due to political unrest in MENA and the Japanese earthquake in 2011. THY

registered a 25% increase in its ASK and sought market share gains in 2011. THY’ shares lost 53%

in value (underperformed the BIST100 index by 24%) in 2011, yet gained 196% (vs. 52% for the

index) in 2012. We expect a similar pattern for THY in the coming period.

Turkish Airlines 2011-12 vs. 2016-17


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-5%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

YoY change in seat capacity YoY change in ASK

YoY change in load factors EBITDA margin (rhs)

When the "SELL" recommendations at peak, THYAO shares started strong run

Source: Bloomberg

26

RESEARCH


June 22, 2016

RECENT DEVELOPMENTS IN THE SECTOR

Terrorist attacks raise security concerns in Turkey

There were five terorist attacks in Turkey’s largest two cities since October 2015. Those attacks

increased concerns about security in Turkey. Following those incidents, we witnessed a capacity

reduction in tourism. The Brussel atacks in March 2016 also hit global demand in the sector.

The 2016 European Football Championship in June in Paris might revive demand. As seen below,

the bookings from Turkey for the tournament period ( June 10-10 July) were up 26% yoy, according

to ForwardKeys.

Total International Arrivals Performance in Each Region. (Pre-Paris attacks, between Paris and Brussels attacks, Post Brussels attacks)

Total International Arrivals in Each Region on the Book. April 15th to August 31st 2016. (based on issued bookings as of Apr 4th 2016)

Source: ForwardKeys

27

RESEARCH


June 22, 2016

Capacity issues at Istanbul airports

As of 2015, IST and SAW handled 61mn (up 8% yoy ) and 28mn (up 20% yoy ) passengers

respectively vs. their estimated capacity of 65mn and 33mn. Those suggest 93% and 90% utilization

in terms of passengers. First of all, there is an ongoing new terminal investment at IST, providing

10mn in additional capacity to be ready within a couple of months. There is an idle satellite runway

that could be used under tough circumstances at SAW. The second runway construction at SAW has

finally started. The second runway is expected to be completed in 2018, but the two runways will not

become operational until 2Q19 as the first runway will be shut down for maintenance. We expect that

SAW can comfortably handle the demand until the end of 2020 once the two runways become

operational. With the second runaway, capacity at SAW will reach 50mn and this will be sufficient to

handle the growth until 2020. It is highly likely that Istanbul’s new airport will become operational by

then and the congestion at the SAW will no longer be an issue.

%Var. and %Share of Arrivals On the Book from Supporters’ Countries to Host Cities in France in 2016 (June 9th to July 10th 2016 vs June 11th to July 12th 2015)

Source: ForwardKeys

Tourist numbers in Turkey

Source:TUIK

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

YoY change Tourist numbers

Current

Expected Upgrade

by July 2016 Current

Expected Upgrade

in 2019

ATM/hour 61 76 31 38

Active Usage Hours 21 21 21 21

Daily ATM 1,281 1,596 651 798

Pax per Aircraft 138 138 140 140

Daily Pax ('000) 177 220 91 112

Annual Pax (mn) 65 80 33 41

Upside 25% 23%


SAWIST

28

RESEARCH


June 22, 2016

Turkish Air Traffic figures ytd

In 5M16, total passenger traffic increased by 4.0% yoy to 65.9mn. Domestic passengers were up by

11.5% to 40.8mn and international passengers registered a 6.2% decrease to 25.1mn. Recall that in

2015 total passenger traffic increased by 9.4% yoy to 181.4mn. Domestic passengers were up by

14.1% yoy to 97.5mn and international passengers were up by 4.4% yoy to 83.9mn. Meanwhile, total

passenger traffic at Istanbul Ataturk Airport (IAA), the flagship airport of TAV Airports (TAVHL) and

the main hub of Turkish Airlines (THYAO), reached 5.2mn (1.7mn domestic, 3.4mn international) in

May 2016, declining by 5.2% (up 2.2% in 5M16 vs. 12.6% in May 2015). The annual decline at IAA

was 6.1% for international (a 12.4% increase in May 2016 and 8.7% in 5M16) vs. a 3.1% contraction

(a 13.1% increase in May 2015 and a 4.4% increase in 5M16) for domestic passengers in the month.

On the other hand, total passenger traffic at SAW , the main hub of Pegasus Airlines (PGSUS),

reached 2.7mn (1.8mn domestic, 0.8mn international) in May, indicating 10.5% yoy growth (up by

17.7% in 5M16 vs. 23.3% in May 2015), driven by the 15.4% growth on the domestic side vs. the

1.2% growth on the international front. We project that total passenger traffic will reach 233mn by

2018E, following an 8.8% CAGR between 2015-2018. We forecast 8% growth in international

passenger traffic with 9% growth in domestic passenger traffic during the same period. The State

Airports Authority (DHMI) anticipates a CAGR of 9% between 2015-2018, parallel to our forecast in

overall terms.

Source: DHMI

Source: DHMI

4.5

3.15

Source: DHMI

International vs Domestic Passenger Growth in Istanbul Ataturk Airport

International vs Domestic Passenger('000) in Ataturk Airport

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan-1

2

Apr-

12

Jul-12

Oct-12

Jan-1

3

Apr-

13

Jul-13

Oct-13

Jan-1

4

Apr-

14

Jul-14

Oct-14

Jan-1

5

Apr-

15

Jul-15

Oct-15

Jan-1

6

Apr-

16

Domestic ('000) International ('000)

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan-1

2

Apr-

12

Jul-12

Oct-12

Jan-1

3

Apr-

13

Jul-13

Oct-13

Jan-1

4

Apr-

14

Jul-14

Oct-14

Jan-1

5

Apr-

15

Jul-15

Oct-15

Jan-1

6

Apr-

16

Domestic International

Domestic average International average

29

RESEARCH


June 22, 2016

Source: DHMI

Source: DHMI

International vs Domestic Passenger Growth in Istanbul Sabiha Gokcen Airport

International vs Domestic Passenger('000) in Istanbul Sabiha Gokcen Airport

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan-1

2

Apr-

12

Jul-12

Oct-12

Jan-1

3

Apr-

13

Jul-13

Oct-13

Jan-1

4

Apr-

14

Jul-14

Oct-14

Jan-1

5

Apr-

15

Jul-15

Oct-15

Jan-1

6

Apr-

16

Domestic International

Domestic average International average

0

500

1,000

1,500

2,000

2,500Ja

n-1

2

Apr-

12

Jul-12

Oct-12

Jan-1

3

Apr-

13

Jul-13

Oct-13

Jan-1

4

Apr-

14

Jul-14

Oct-14

Jan-1

5

Apr-

15

Jul-15

Oct-15

Jan-1

6

Apr-

16

Domestic ('000) International ('000)

Pax numbers evolution since 2003

Source: DHMI, Garanti Securities

0

50

100

150

200

250

mn

Domestic International Total

Domestic 22% CAGR 2003-2015International 11% CAGR 2003-2015

Total 15% CAGR 2003-2015

30

RESEARCH


June 22, 2016

Latest on third airport

In line with the government’s target of making Istanbul an international hub for air travel, a tender for

the third airport in Istanbul was held in May 2013, where the Cengiz-Kolin-Limak-Mapa-Kalyon

consortium submitted the winning bid, offering a total of EUR22,152mn in rent (EUR26,139mn

including an 18% VAT) over a period of 25 years (EUR1,046mn per annum). The new airport will be

completed in four phases. Once complete, the airport will have a pax capacity of 150mn. The first

phase, which will have a pax capacity of 90mn, is expected to be completed in 2018. The plot for

Istanbul’s new airport project was officially handed over to the winning consortium as of May 2015.

Istanbul New Airport's initial financing agreement was signed on October 2015. The amount of

financing will be around EUR4.5bn, of which 70% will be provided by state banks. State banks (Ziraat

Bank; EUR1.48bn, Vakifbank (VAKBN TI); EUR0.96bn and Halkbank (HALKB TI); EUR0.96bn) will

provide a EUR3.4bn loan to Istanbul’s new airport Project, while the remaining (EUR1.1bn) will be

provided by three private banks (Denizbank (DENIZ TI); EUR0.5bn, Garantibank (GARAN TI);

EUR0.3bn, Finansbank (FINBN TI); EUR0.3bn) and the loan has a four-year grace period with a 16-

year maturity. The loan will bear 4.25% interest for the first 10 years. The Limak-Mapa-Kalyon-

Cengiz-Kolin Consortium will provide EUR 1.5bn of their own equity towards the construction of the

airport. Turkish law will have jurisdiction over the financing package and Istanbul will be the center for

arbitration should there be any disagreements regarding the loan.The State Airports Authority (DHMI)

will guarantee the loan should there be any unforeseen developments regarding repayment.

Istanbul's new airport

Estimated Total Cost € 6.0 bn € 10.2 bn

Total Site Area - 76.5 mn m²

Terminal Floor Area 1.3 mn m² 1.3 mn m²

Number of Runw ays 2 + 1 6

Total Aircraft Capacity 184 396

Number of Pax Bridges 114 143

Aircraft Parking Capacity 70 253

Maximum ATM 96/144 224

Maximum PAX Capacity 90 mn ppa 150 mn ppa (up to 200 mn)

Baggage Handing System capacity w ill be decided 50k baggage/hour

Source: Turkish Airlines

Airports in Istanbul

Source: Pegasus Presentation, Garanti Securities

3rd Bridge Project

31

RESEARCH


June 22, 2016

Sensitivity to FX & Oil price

THY (functional currency is USD): Due to the currency mismatch in THY’s operations (FX

denominated costs account for 69% of THY’s total costs, while FX denominated revenues account

for 83% of revenues), the TL weakness effectively serves to support THY’s profitability. However, the

company has a short FX position in EUR and JPY on its balance sheet.

Pegasus Airlines (functional currency is EUR): Some 59% of Pegasus’s total revenues are

denominated in hard currencies (27% in USD, 29% in EUR), while 69% of total costs are in hard

currency (55% in USD, 23% in EUR). Therefore, Pegasus benefits from a strong EUR against the TL

and USD from an operational perspective. It carries a long FX position in USD and TL on its balance

sheet.

Turkish Airlines Revenue by currency Turkish Airlines Expenses by currency

Source: The Company data

EURO, 26%

USD, 55%

TL, 17%

Other, 2%

2015

EURO, 12%

USD, 51%

TL, 31%

Other, 6%

2015

FX position impact on Profit Before Tax as of 1Q16 (TLmn)

Currency 10% appreciation vs. USD

TL -62 62

EUR -997 997

JPY -726 726

CHF -64 64

Other 87 -87

Source: 1Q16 Footnotes

10% depreciation vs. USD

Pegasus Airlines Revenue exposure Pegasus Airlines Expenses exposure


EURO, 29%

USD, 27%

TL, 41%

Other, 3%

2015

EURO, 23%

USD, 55%

TL, 21%

Other, 1%

2015

32

RESEARCH


June 22, 2016

TAV Airports (functional currency is EUR): Since 73% of total revenues are in hard currencies,

the company is highly exposed to FX volatility through its businesses, while 60% of its costs are in

TL. Hence, TL weakness bodes well for TAVHL operationally. According to its 1Q16 footnotes, a

10% weakening of the USD and TL against the EUR would reflect as TL15mn and TL4mn in FX

losses, respectively on the income statement.

Celebi (functional currency is TL): The majority of revenues are in FX (79%), while that of costs is

59%. The Company’s hard currency revenues allow Celebi to display defensive characteristics in a

volatile market. It has some FX positions in EUR and INR on the balance sheet.

TAV Airports Revenue by currency TAV Airports Expenses by currency

Source: The Company

EURO, 54%USD,

18%

TL, 26%

Other, 2%

2015

EURO, 10%

USD, 20%

TL, 60%

Other, 10%

2015

Celebi Revenue by currency Celebi Expenses by currency


EURO, 45%

USD, 14%

TL, 21%

Other, 2%INR, 18%

2015

EURO, 31%

USD, 2%

TL, 41%

Other, 6%

INR, 20%

2015


Currency 10% appreciation vs. EUR

USD 49 -49

TL 21 -21


10% depreciation vs. EUR



USD 15 -15

TL 4 -4

Other 1 -1



33

RESEARCH


June 22, 2016

DO&CO (functional currency is EUR): DO & CO is a naturally hedged company as it generates

about 40-45% of its revenues in EUR terms, 35-40% in TL and around 10% in GBP and USD terms

(a similar structure also applies for the cost side).

The Company is seeking to match the currency structure of its costs to revenues by establishing

production sites and sourcing products as locally as possible and by funding capex in local currency.

However, a simple local revenue translation to EUR could have a serious impact in case of a

weakening in the local currency against the reporting currency (the EUR). Turkish DO & CO’s

revenues, which comprise some 35% of DO & CO’s total revenues, are TL denominated. Therefore,

any depreciation of the TL could diminish revenues.



USD 15 -15

TL 4 -4

Other 1 -1



34

RESEARCH


June 22, 2016

Fuel expenses represent the largest cost item for airlines. Fuel expenses account for around

35% of total costs for both THY and Pegasus. Low hedge ratios of Turkish carriers should mean a

greater benefit from the lower oil prices.

Hedging. The airlines have an active hedging strategy for their fuel costs through swaps and

options. The fuel surcharge is also a part of their policy. THY has currently hedged 43% of its fuel

expenses for 2016 compared to 60% for Pegasus. THY’s blended oil price is USD48/bbl under the

assumption of an average Brent price of USD40/bbl. According to our calculations, the blended price

for Pegasus is USD52/bbl. Airlines have an active hedging strategy for their fuel costs through swaps

and options.

Impact on financials. Our base case scenario assumes an average Brent price of USD40/bbl in

2016. All else being equal, each USD5/bbl change in our assumption for oil prices results in an 8%

change in the 2016E EBITDAR for THYAO, or a 6% change in that of PGSUS. That translates into a

1.3 pps EBITDAR margin difference for THYAO vs. the 1.1 pps difference for PGSUS. Meanwhile,

each 1% change in the EUR/USD exchange rate would have a 2% impact on the projected 2016E

EBITDAR for THY and a 1% impact on the same multiple for Pegasus. Our sensitivity analysis

regarding the change in the 2016E average Brent price and EUR/USD rate is tabulated below.

Pegasus' fuel cost


41.1%

36.6% 36.2%38.0%

32.1%

44.4% 43.9% 44.6% 44.7%

36.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2011 2012 2013 2014 2015

as % of sales as% of cogs

THY's fuel cost


33.9% 34.9% 35.0% 34.4%

28.4%

40.8%

44.0% 42.9% 42.1%

35.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2011 2012 2013 2014 2015

as % of sales as % of cogs

Fuel Hedge Ratios 2016 2017

THY 43% 21%

Pegasus 60% n.a

Ryanair 95% 44%

Finnair 61% 32%

Air Berlin 63% n.a

Easyjet 87% 76%

Air France KLM 73% n.a

Lufthansa 79% 44%

IAG 70% 40%

SAS 86% n.a

Source: Bloomberg, Company Presentations

35

RESEARCH


June 22, 2016

THY

2016 EBITDAR 5,761 30 35 40 45 50 55

1.02 6,594 6,112 5,630 5,147 4,665 4,183

1.03 6,685 6,207 5,730 5,252 4,775 4,297

1.04 6,774 6,302 5,829 5,356 4,883 4,411

1.05 6,863 6,395 5,927 5,459 4,991 4,523

1.06 6,951 6,488 6,024 5,561 5,097 4,634

1.07 7,038 6,579 6,120 5,662 5,203 4,744

1.09 7,124 6,670 6,215 5,761 5,307 4,853

1.10 7,208 6,758 6,309 5,859 5,409 4,960

1.11 7,292 6,846 6,401 5,956 5,511 5,066

1.12 7,374 6,933 6,493 6,052 5,611 5,170

1.13 7,456 7,020 6,583 6,147 5,710 5,274

THY

%ch 2016 EBITDAR 30 35 40 45 50 55

1.02 14% 6% -2% -11% -19% -27%

1.03 16% 8% -1% -9% -17% -25%

1.04 18% 9% 1% -7% -15% -23%

1.05 19% 11% 3% -5% -13% -21%

1.06 21% 13% 5% -3% -12% -20%

1.07 22% 14% 6% -2% -10% -18%

1.09 24% 16% 8% 0% -8% -16%

1.10 25% 17% 10% 2% -6% -14%

1.11 27% 19% 11% 3% -4% -12%

1.12 28% 20% 13% 5% -3% -10%

1.13 29% 22% 14% 7% -1% -8%

EU

R/U

SD

Assu

mp

tio

ns

EU

R/U

SD

Assu

mp

tio

ns

Brent Price Assumptions (USD)


Pegasus

2016 EBITDAR 722 30 35 40 45 50 55

1.02 823 777 731 685 639 593

1.03 828 782 737 691 646 600

1.04 833 788 743 698 653 608

1.05 838 793 748 704 659 615

1.06 843 798 754 710 666 622

1.07 847 804 760 716 673 629

1.09 852 809 766 722 679 636

1.10 857 814 771 728 686 643

1.11 862 819 777 734 692 650

1.12 866 824 782 740 698 656

1.13 871 829 788 746 705 663

Pegasus

%ch 2016 EBITDAR 30 35 40 45 50 55

1.02 14% 7% 1% -5% -12% -18%

1.03 15% 8% 2% -4% -11% -17%

1.04 15% 9% 3% -3% -10% -16%

1.05 16% 10% 4% -3% -9% -15%

1.06 17% 11% 4% -2% -8% -14%

1.07 17% 11% 5% -1% -7% -13%

1.09 18% 12% 6% 0% -6% -12%

1.10 19% 13% 7% 1% -5% -11%

1.11 19% 13% 8% 2% -4% -10%

1.12 20% 14% 8% 2% -3% -9%

1.13 21% 15% 9% 3% -2% -8%EU

R/U

SD

Assu

mp

tio

ns


EU

R/U

SD

Assu

mp

tio

ns


36

Share Price

TL5.92

TL8,170mn

Bloomberg/Reuters:

Rel. Performance: 1 mth 3 mth 12mth

-3% -20% -30%

12M Range (TL):

474.9

YTD TL Return: -20%

Beta (2year, w eekly) 1.09

Weight in BIST-100 3.32%

1,380.0

Current 12M ago

32% 74%

Privatization Administration 49.1%

Free Float 51.9%

Financials/Ratios 2015 2016E 2017E 2018E

Net Sales (TLmn) 28,752 33,848 37,661 40,807

YoY 19% 18% 11% 8%

EBITDAR (TLmn) 5,809 5,761 6,949 7,485

YoY 39% -1% 21% 8%

Net Income (TLmn) 2,993 684 1,326 988

YoY 65% -77% 94% -25%

EBITDAR margin 20.2% 17.0% 18.5% 18.3%

Net margin 10.4% 2.0% 3.5% 2.4%

P/E (x) 2.7 11.9 6.2 8.3

EV/EBITDAR (x) 6.4 7.4 6.2 6.1

EPS (TL) 2.17 0.50 0.96 0.72

DPS (TL) 0.00 0.00 0.00 0.00

Div. Yield 0.0% 0.0% 0.0% 0.0%

ROE 21% 5% 8% 6%

Analyst: Baris Ince Sales Contact:

+90 (212) 384 1141 +90 (212) 384 1155-58

[email protected] [email protected]

THYAO.TI / THYAO.IS

Shareholders Structure

The Company in Brief

5.72 / 9.38

Shares Outstanding (mn):

Foreign Ow n. in Free Float :

Average Daily Vol (TLmn) 3 mth:

Turkish Airlines is Turkey’s f lag carrier w ith a f leet of 299

aircrafts as of 2015 and carried 61mn passengers. Follow ing the

SPO in 2006, the Government’s stake w as reduced to 49.12%,

thus Turkish Airlines is considered as a private company. The

Company became a full member of Star Alliance in 2008

Stock Market Data (June 22, 2016)

EV

Potential Return12M Target Price

TL7.25 22%

Mcap

USD2,821mn TL29,666mn

Turkish Airlines Market Perform (Prev. Outperform)

Overshadowed by short-term headwinds

We are downgrading THY to Market Perform from Outperform

and are cutting our 12-month forward target price by 34% to

TL7.25, indicating a 22% upside potential. Our downward

revisions are based on our expectation of a greater contraction

in revenue yields given its capacity expansion plans and

ongoing stiff competition in the sector.

We reduced our EBITDA and net income estimates by 16%

and 50% on average for the 2016-2017 period as we now

expect a very low spread between unit revenues and costs and

higher financial expenses.

The stock is trading at a 43% and 9% discount to its five-year

historic average 1- year forward looking P/E and EV/EBITDA

multiples, respectively. That said, we would like to see a

recovery in demand before becoming positive on the stock

despite our conservative assumptions.

A number of factors pulled down the shares ytd: The weakness in

traffic figures in the recent quarters due to security/geopolitical

risks, the anticipation of a greater contraction in revenue yields

and the estimated huge loss in profitability driven by the short JPY

and EUR positions so far this year kept investors away from the

stock in our view.

3Q16 will be the key to build a positive stance for the stock: Given

the anticipated weakness in demand for June due to Ramadan, all

hopes are linked to 3Q16 to see a better yield outlook. On the

other hand, non-fuel costs seem to be under control with a flattish

figure despite the temporary headwinds from personnel, sales and

marketing and maintenance costs in 1Q16. Excluding the

aforementioned temporary impacts, we roughly calculated a 2.3

pps decline in THY’s EBITDAR margin 1Q16 vs. the actual 8.1 pps

decline. We expect the new terminal at its hub to alleviate the cost

pressures due to congestion starting from this August.

Conservatism in place: The Company foresees 18% pax growth

with a 78% load factor vs. our 10% and 75% expectations,

respectively. THY targets a 2.5-4.5 pps decline in its EBITDAR

margin, while we predict a 4.5 pps decline. Our RASK-CASK

spread stands at USDcent 0.12 —– trough at 0.26 and peak at

0.63 over the past five years.

Valuation: We value Turkish Airlines via a 6.8x target EV/

EBITDAR multiple, which is the average of the last five years. Our

valuation suggests a 12-month target price of TL7.25/share,

indicating a 22% upside potential. Based on our forecasts, the

stock trades at a premium vs. its peers’ 2016-17E multiples.

Risks: A greater than expected contraction in the yields, a

deterioration in its cost base, elevated/prolonged security

concerns and stiffer competition are the main risks. The airline’s

share buy-back program could limit the downside for the shares.

June 22, 2016

Please see the last page of this report for important disclosures.

37

RESEARCH

THY

June 22, 2016

SUMMARY FINANCIALS (TL mn)

Income Statement 2015 2016E 2017E 2018E

Net Sales 28,752 33,848 37,661 40,807

Consolidated EBITDAR 5,809 5,761 6,949 7,485

Net Other Income/ Expense 562 662 783 870

Profit (Loss) from Subsidiaries 509 168 327 226

Net financial Income/ Expense 916 -609 -687 -714

Profit (Loss) before Tax 3,911 856 1,657 1,235

Tax -918 -171 -331 -247

Minority Interests 0 0 0 0

Net Income 2,993 684 1,326 988

Ratios

EBITDAR Margin 20.2% 17.0% 18.5% 18.3%

Net Income Margin 10.4% 2.0% 3.5% 2.4%

Sales Growth 19% 18% 11% 8%

EBITDAR Growth 39% -1% 21% 8%

Net Income Growth 65% -77% 94% -25%

Balance Sheet 2015 2016E 2017E 2018E

Current Assets 9,148 8,456 10,538 14,349

Cash and Cash Equivalents 2,617 2,283 3,904 6,536

Short-Term Trade Receivables 1,052 1,238 1,378 1,493

Inventories 628 927 772 1,094

Other Current Assets 4,851 4,007 4,485 5,226

Long Term Assets 38,490 45,536 44,902 47,376

Total Assets 47,638 53,992 55,440 61,725

Short Term Liabilities 11,248 13,642 14,390 16,623

Short-Term Financial Loans 2,945 3,256 3,443 3,628

Short-Term Trade Payables 1,949 2,878 2,395 3,395

Other Short-Term Liabilities 6,354 7,508 8,551 9,600

Long Term Liabilities 22,300 25,576 24,949 28,014

Long-Term Financial Loans 19,294 22,324 21,308 24,079

Other Long-Term Liabilities 3,006 3,253 3,641 3,935

Shareholders Equity 14,090 14,774 16,100 17,088

T. Liabilities & S.holders Equity 47,638 53,992 55,440 61,725

Cash Flow Summary 2015 2016E 2017E 2018E

EBITDAR 5809 5761 6949 7485

WC Change -269 -712 -245 -808

Operating Cash flow 4042 1355 1381 3319

Capex 14482 9635 2391 6213

Investing cash flow -1456 -969 -240 -625

Dividends paid 0 0 0 0

Change in net debt 7362 3674 -2448 324

CF from financing activities -1443 -720 480 -62

Key metrics 2015 2016E 2017E 2018E

Adj. Net Debt/EBITDAR (x) 4.6 5.6 4.6 4.6

Adj. Net Debt/Equity (x) 1.9 2.2 2.0 2.0

Capex/Sales (%) -50.4% -28.5% -6.3% -15.2%

WC Change/Sales (%) -0.9% -2.1% -0.7% -2.0%

ROCE (%) 8.2% 1.7% 3.2% 2.2%

ROIC (%) 3.5% 1.4% 3.0% 1.9%

FCF yield (%) n.a n.a n.a n.a


38

RESEARCH

THY

June 22, 2016

MODEL ASSUMPTIONS

2011 2012 2013 2014 2015 2016E 2017E 2018E

# of total passengers (mn) 32.7 39.0 48.3 54.8 61.2 67.1 73.8 80.6

YoY 12.2% 19.6% 23.6% 13.5% 11.8% 9.6% 9.9% 9.2%

Load factor 72.6% 77.7% 79.0% 79.3% 77.9% 74.9% 75.9% 76.8%

YoY (pps) -1.1 pps 5.1 pps 1.3 pps 0.3 pps -1.4 pps -3.0 pps 0.9 pps 0.9 pps

ASK (mn) 81,167 96,131 116,399 134,809 153,209 183,301 198,269 209,278

YoY 24.7% 18.4% 21.1% 15.8% 13.6% 19.6% 8.2% 5.6%

RPK (mn) 58,918 74,705 91,962 106,885 119,380 137,350 150,422 160,733

YoY 22.8% 26.8% 23.1% 16.2% 11.7% 15.1% 9.5% 6.9%

RASK (US cents) 8.7 8.6 8.5 8.2 6.9 6.1 6.0 5.8

YoY 1.0% -1.6% -1.1% -3.4% -15.8% -11.0% -2.7% -2.6%

Revenue (TLmn) 11,813 14,762 18,777 24,158 28,752 33,848 37,661 40,807

YoY 40.2% 25.0% 27.2% 28.7% 19.0% 17.7% 11.3% 8.4%

CASK (US cents) 8.4 7.9 8.0 7.7 6.4 6.0 5.8 5.7

YoY 3.6% -6.0% 0.6% -3.3% -16.7% -6.4% -4.1% -1.4%

CASK-ex fuel (US cents) 5.5 4.9 5.0 4.9 4.5 4.2 4.2 4.2

YoY -7.4% -10.0% 1.5% -2.2% -8.8% -5.5% -1.2% 0.2%

EBITDAR (TLmn) 1,592 2,549 3,192 4,180 5,809 5,761 6,949 7,485

YoY 19.6% 60.2% 25.2% 30.9% 39.0% -0.8% 20.6% 7.7%

EBITDAR margin 13.5% 17.3% 17.0% 17.3% 20.2% 17.0% 18.5% 18.3%

YoY (pps) -2.3 pps 3.8 pps -0.3 pps 0.3 pps 2.9 pps -3.2 pps 1.4 pps -0.1 pps

Net Income (TLmn) 19 1,156 683 1,819 2,993 684 1,326 988

YoY -93.5% 6141.5% -40.9% 166.4% 64.5% -77.1% 93.7% -25.5%

Net margin 0.2% 7.8% 3.6% 7.5% 10.4% 2.0% 3.5% 2.4%


ROAE 0.4% 23.3% 11.0% 22.6% 25.8% 4.7% 8.6% 6.0%


Average Brent price (USD) 111 112 108 99 52 45 52 55

YoY 38% 1% -3% -9% -47% -13% 16% 6%

Capex (TLmn) 5,475 2,635 5,775 5,849 14,482 9,635 2,391 6,213

YoY -52% 119% 1% 148% -33% -75% 160%

Average fleet size 164 188 216 247 280 319 335 340

Average Stage Length (km) 1,692 1,794 1,866 1,914 1,909 1,933 1,933 1,873

2011 2012 2013 2014 2015 2016E 2017E 2018E

USD/TRY-eop 1.89 1.78 2.13 2.33 2.92 3.10 3.27 3.44

USD/TRY-avg 1.67 1.79 1.90 2.19 2.72 3.01 3.18 3.35

EUR/TRY-eop 2.44 2.35 2.93 2.83 3.18 3.47 3.76 3.96

EUR/TRY-avg 2.32 2.30 2.53 2.91 3.02 3.27 3.61 3.86

EUR/USD-eop 1.29 1.32 1.38 1.22 1.09 1.12 1.15 1.15

EUR/USD-avg 1.39 1.29 1.33 1.33 1.11 1.09 1.14 1.15

Basket (EUR+USD)-eop 2.17 2.06 2.53 2.58 3.05 3.29 3.51 3.70

GDP growth 8.8% 2.2% 4.0% 3.0% 4.0% 3.5% 3.5% 3.5%

CPI 10.5% 6.2% 7.4% 9.0% 8.8% 7.8% 7.5% 7.5%

Source: The Company, Garanti Securities

*Figures are based on our own calculations may differ from company's figures

Macro assumptions

Model Assumptions at a glance*


39

RESEARCH

THY

June 22, 2016

2016 Guidance vs. Garanti Securities

THY’s management is targeting to generate USD12.2bn in revenues (GS

estimate:USD11.2bn) by carrying 72.4mn passengers (GS estimate:

67.1mn) and increasing ASK to 186bn (GS estimate:183bn) with a 78%

load factor (GS estimate:74.9%). Management is expecting 18% (GS

estimate:18%) and 19% (GS estimate:19%) increases in fuel consumption

and total staff, respectively. THY plans to open six new routes in 2016 and

reach 290 destinations with 339 aircraft (240 NB + 87 WB + 12 Cargo) in

its fleet by the end of 2016 (vs. 299 in 2015). On the unit revenues side,

THY anticipates a 3% decline in unit revenues (in USD terms). As for

costs, the airline expects a 1.5% decline in non-fuel CASK in USD

terms.We assume 11% and 6% decreases in unit revenues and non-fuel

CASK in USD terms in 2016. Our estimates are conservative compared to

the airline’s. All in all, our projections suggest a 19.5% EBITDAR margin

for 2016 according to THY’s calculation vs. the 20-22% guidance.

2015

Actual

2016E

Guidance YoY

2016E

Garanti Diff.

Total Pax (mn) 61.2 72.4 18% 67.1 -7%

-Domestic 26.3 30.6 16% 29.4 -4%

-International 34.9 40.8 17% 37.7 -8%

- Hajj and charter f lights pax 1.0

Revenue Target ( ~US$bn) 11 12.2 ~15% 11.2 -8%

Total ASK (bn) 153.2 186 21% 183 -1%

-Turkey 14% 11% -3%

-South America 14%

-Africa 13% 27% 14%

-Far East 15% 23% 8%

-North America 24%

-Europe 12% 17% 6%

-Middle East 13% 17% 4%

-America 23% 31% 8%

Load Factor 77.9% 78.0% 0% 74.9% -3.1%

Unit Revenue (USD)* -15.8% -3.0% -11.0% -8.0%

non-fuel CASK (USD)* -16.7% -1.5% -5.5% -4.0%

Fuel consumption growth* 12% 18% 18% 0.4%

Fuel cost per tonnes (inc.hedge) (USD)* 702 647 -8% 649 0%

# of personel growth* 10% 19% 19% -0.3%

EBITDAR MARGIN* 24.5% 20-22% 19.5%

# of destinations 284 290

Fleet 299 339

- Narrow Body 216 240

- Wide Body 73 87

- Cargo 10 12

EUR/USD - avg 1.11 1.10 1.09

USD/TL - avg 2.72 3.14 3.01

EUR/TL-avg 3.02 3.45 3.27



40

RESEARCH

THY

June 22, 2016

Revisions to Forecasts

We have revised our 2016-17E sales and EBITDA estimates down by 7%

and 16% on average, respectively, due to lower than expected revenue

yields, while adjusting our bottom line forecast to take into account our

new macro and non-operational expense assumptions. For 2016-17, we

reduced our earning estimates by c50% on average.

Bloomberg vs. Garanti Forecasts

Our forecasts for both 2016 and 2017 are in line at the top line level, but

c18% lower at the EBITDA level compared to the market consensus.

However, our net income forecast is c45% lower than the market’s most

probably owing to different FX assumptions and the net profit

contributions from THY’s associates. Our target share price stands at

TL7.25 vs. the Bloomberg consensus of TL8.74.

Revision in Estimates

THYAO

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 37,053 39,689 33,848 37,661 -9% -5%

EBITDA 5,289 5,490 4,109 4,923 -22% -10%

Net Profit 1991 2058 684 1326 -66% -36%

EBITDA Margin 14.3% 13.8% 12.1% 13.1% -2.1% -0.8%

Net Income Margin 5.4% 5.2% 2.0% 3.5% -3.4% -1.7%

Target Price


OLD NEW % Change

11.04 7.25 -34%

Consensus vs. Our estimates

THYAO

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 33,572 38,158 33,848 37,661 1% -1%

EBITDA 5,089 5,871 4,109 4,923 -19% -16%

Net Profit 1,457 2,074 684 1,326 -53% -36%

EBITDA Margin 15.2% 15.4% 12.1% 13.1% -3.0 pps -2.3 pps

Net Income Margin 4.3% 5.4% 2.0% 3.5% -2.3 pps -1.9 pps

Target Price


Bloomberg Garanti Securities Difference

8.74 7.25 -17%


41

RESEARCH

THY

June 22, 2016

Turkish Airlines 1Q16 Results Review

Weaker profitability: THY reported a net loss of TL1,238mn in 1Q16,

below the consensus estimate of TL942mn and our estimate of a

TL790mn net loss. Revenues were in line with the expectations. However,

its 1Q16 EBITDA was in the red at TL31mn vs. the expectations of a

positive TL269mn. There were a couple of one-off payments during the

quarter: i) a one time net payment made to unionized employees

amounting to USD39mn, ii) USD18mn in maintenance costs relating

to previous terms and iii) one time marketing efforts. Marketing expenses/

sales were realized at 14.5% in 1Q16 vs. 12.1% in 1Q15. The bottom line

was eroded by higher financial expenses driven by cTL700mn in FX

losses given THY's short position in both the EUR and JPY despite the

TL337mn tax income.

Ex-fuel costs were not supportive: In 1Q16, based on the IR

presentation, revenue yields decreased by 12.7% yoy (7.8% excluding the

currency impact), while unit costs (CASK) declined by 8.1% yoy (2.1%

excluding the currency impact) thanks to lower oil prices. The CASK (ex-

fuel) remained flat yoy due to the increase in personnel, sales and

marketing and maintenance. 1Q16 operating profits were dragged down

by the USD243mn in unit revenues (ex-currency) weakness vs. the

positive impact of the favorable fuel prices at USD212mn. All its markets

yielded a negative contribution to revenues. Europe, the CIS and America

were the worst performers with a decline of c20% in their RASKs followed

by c18% in Asia/Far East and the Middle East and 17% in Turkey.

Outlook for 2Q16: THY's capacity growth target is 16% in 2Q16 yoy and

20% in 2H16. Forward booking trends indicate that: i) there will be a weak

demand environment in 2Q16 (especially in European and Asian traffic,

while Africa, the U.S. and Eastern Europe will be relatively stronger and ii)

yield pressures will decline in 2H16. Recall that on April 21, the company

maintained its guidance of a 2.5-4.5pps contraction in its EBITDAR

margin for 2016 based on its calculation.

Turkish Airlines Summary Financials

(mn TL) 1Q15 2Q15 3Q15 4Q15 1Q16 1Q16/1Q15 1Q16/4Q15

Net Sales 5,456 6,846 9,291 7,159 6,431 18% -10%

Gross Profit 752 1,287 2,916 936 347 -54% -63%

Operating Profit -86 317 1,945 -155 -823 n.m. n.m.

EBITDA 415 818 2,603 622 -31 n.m. n.m.

EBITDAR 685 1,151 3,004 969 333 -51% -66%

Net Other Income/Expense 128 256 61 117 193 51% n.m.

Financial Inc./ Exp. (net) 551 170 -494 592 -936 n.m. n.m.

PROFIT BEFORE TAX 592 864 1,764 691 -1,575 n.m. n.m.

Tax -219 -202 -422 -74 337 n.m. n.m.

Net Income 373 662 1,341 617 -1,238 n.m. n.m.

Net Cash -13,978 -15,233 -19,422 -19,486 -21,496

Working Capital -578 -363 -109 269 -151

Shareholders Equity 10,924 11,993 14,643 14,090 12,704

Ratios

Gross Margin 13.8% 18.8% 31.4% 13.1% 5.4% -8.4 pp -7.7 pp

Operating Margin n.m. 4.6% 20.9% n.m. n.m. n.m. n.m.

EBITDA Margin 7.6% 12.0% 28.0% 8.7% n.m. n.m. n.m.

EBITDAR Margin 12.5% 16.8% 32.3% 13.5% 5.2% -7.4 pp -8.4 pp

Net Profit Margin 6.8% 9.7% 14.4% 8.6% n.m. n.m. n.m.

Change


42

RESEARCH

THY

June 22, 2016

Revenue Development (1Q16 vs 1Q15) (USDmn)


2,219 2,188

372

-195

-21-79

-108

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2,700

1Q15 Volume Decrease in Cargoand Other Rev.

LF Unit Revenue (R/Y) Currency 1Q16

Net Operating Profit Bridge (USDmn)


17

+212

+37

14

-10

--68

-173

-243 -214

-250

-150

-50

50

150

250

350

450

550

1Q15 Fuel Currency Other Utilization LF Ex-fuel unitcost

RASK 1Q16

CASK Breakdown (USc) 1Q15 1Q16 Change

Fuel 2.08 1.54 -26.0%

Personnel 1.25 1.26 0.5%

Aircraft Ow nership 0.95 1.00 5.7%

Airports & Air Navigation 0.62 0.57 -7.3%

Sales & Marketing 0.61 0.61 1.2%

Ground Handling 0.44 0.39 -10.2%

Passenger Services & Catering 0.42 0.36 -13.0%

Maintenance 0.29 0.36 26.4%

General Administration 0.07 0.07 -9.0%

Other Cost of Sales 0.12 0.12 -3.7%

TOTAL 6.84 6.29 -8.1%



43

RESEARCH

THY

June 22, 2016

Regional Yield Development in USD (1Q’16 vs 1Q’15)


Scheduled Services Unit Revenue Development


6.39

5.33

5.64

1Q15 1Q16 1Q16-ex currency

RASK (USc)

-11.7% 7.49

6.54

6.91

1Q15 1Q16 1Q16-ex currency

R/Y (USc)

-12.7%

-7.8%-16.6%


44

RESEARCH

THY

June 22, 2016


Quarterly Figures

7.7

8.7

9.3

8.48.1

8.69.0

8.07.7

8.5

9.2

7.3

6.7 6.8

7.7

6.15.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

US

ce

nt

RASK

8.38.0

7.2

8.4 8.27.8 7.6

8.28.0 7.9

7.77.4

6.8 6.66.1 6.3 6.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

US

ce

nt

CASK

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

US

ce

nts

EBITDAR margin RASK-CASK (rhs)

5.3

4.8

4.4

5.4

5.2

4.9

4.7

5.2

5.15.0

4.84.8

4.7

4.5

4.2

4.5

4.7

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

US

cen

t

non-fuel CASK

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

mn

ASK Load factor (rhs)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

RASK/CASK EUR/USD - avg (rhs)

Turkish Airlines Traffic Figures

TOTAL

May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY

Number of Landing 39,381 41,054 4.2% 38,525 6.6% 173,837 187,482 7.8%

Available Seat Km ('000) 13,178,765 14,614,317 10.9% 13,771,104 6.1% 58,400,607 67,789,834 16.1%

Revenue Passenger Km ('000) 10,349,210 10,877,154 5.1% 10,100,444 7.7% 45,199,940 50,027,156 10.7%

Passenger Load Factor (%) 78.5% 74.4% -4.1p 73.3% 1.08p 77.4% 73.8% -3.5p

Passengers Carried 5,400,396 5,671,003 5.0% 5,179,882 9.5% 23,208,524 25,019,012 7.8%

Cargo and Mail (Tons) 65,273 68,891 5.5% 66,184 4.1% 284,128 313,772 10.4%

Km Flow n ('000) 73,828 79,155 7.2% 74,909 5.7% 336,127 370,987 10.4%

Int-to-Int Transfer Pax Carried 1,452,694 1,710,798 17.8% 1,670,518 2.4% 6,777,029 8,159,580 20.4%


45

RESEARCH

THY

June 22, 2016

REGIONAL

Domestic May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY



Passenger Load Factor (%) 82.9% 84.9% 1.95p 84.3% 0.59p 82.9% 83.9% 1.00p

Passengers Carried 2,304,782 2,526,295 9.6% 2,266,201 11.5% 9,785,652 10,778,748 10.1%

Cargo and Mail (Tons) 4,695 4,852 3.4% 4,376 10.9% 22,064 21,607 -2.1%

Europe May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY

Revenue Passenger Km ('000) 3,117,069 3,072,216 -1.4% 2,791,706 10.0% 13,051,192 13,534,442 3.7%



Passengers Carried 1,800,374 1,787,302 -0.7% 1,608,231 11.1% 7,503,584 7,791,632 3.8%


Middle East May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY

Revenue Passenger Km ('000) 841,352 924,429 9.9% 878,198 5.3% 3,918,602 4,210,524 7.4%



Passengers Carried 434,662 475,307 9.4% 447,608 6.2% 1,994,749 2,148,470 7.7%


Far East May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY



Passenger Load Factor (%) 77.1% 73.4% -3.6p 76.0% -2.6p 79.3% 76.0% -3.2p

Passengers Carried 368,128 367,257 -0.2% 357,434 2.7% 1,740,473 1,793,945 3.1%


Africa May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY

Revenue Passenger Km ('000) 710,939 818,179 15.1% 791,393 3.4% 3,411,130 4,204,689 23.3%


Passenger Load Factor (%) 69.6% 64.5% -5.0p 64.9% -0.4p 69.7% 67.3% -2.3p

Passengers Carried 214,648 229,451 6.9% 215,199 6.6% 999,136 1,119,347 12.0%


North America May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY




Passengers Carried 166,200 190,475 14.6% 166,642 14.3% 674,880 853,991 26.5%

Cargo and Mail (Tons) 6,111 5,741 -6.1% 5,409 6.1% 25,332 27,752 9.6%

South America May.15 May.16 YoY Apr.16 MoM 5M15 5M16 YoY

Revenue Passenger Km ('000) 199,375 253,893 27.3% 204,055 24.4% 968,793 1,085,466 12.0%

Available Seat Km ('000) 255,437 300,735 17.7% 256,345 17.3% 1,234,879 1,317,035 6.7%

Passenger Load Factor (%) 78.1% 84.4% 6.37p 79.6% 4.82p 78.5% 82.4% 3.96p

Passengers Carried 19,779 23,747 20.1% 20,580 15.4% 110,528 118,716 7.4%

Cargo and Mail (Tons) 897 957 6.6% 794 20.5% 3,960 4,377 10.5%

*This data includes only scheduled flights, excluding hajj and charter flights.

Source: Turkish Airlines, Garanti Securities


46

RESEARCH

THY

June 22, 2016


Yearly Figures

8.6 8.7 8.6 8.58.2

6.9

6.1 6.0 5.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

US

ce

nt

RASK

8.18.4

7.9 8.07.7

6.46.0

5.8 5.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

US

ce

nt

CASK

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

US

ce

nts


8.18.4

7.9 8.0 7.7

6.46.0 5.8 5.75.9

5.54.9 5.0 4.9

4.5 4.2 4.2 4.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

US

cen

tCASK non-fuel CASK

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

-

50,000

100,000

150,000

200,000

250,000

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

mn


0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1.08

1.09

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E


THY Indebtedness


4.1

4.34.6

5.6

4.6 4.6

1.91.9 1.9 2.2

2.0 2.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2013 2014 2015 2016E 2017E 2018E

Adj. Net Debt (TLmn) EBITDAR (TLmn)

Adj. Net Debt /EBITDAR (rhs) Adj. Net Debt /Equity (rhs)


47

RESEARCH

THY

June 22, 2016

EBITDAR Margin Comparison vs. Peers (2015 vs. 1Q16)

*Turkish Airlines 1Q16's EBITDAR margin is 14.8% if adjusted for temporary impacts according to our calculations

Source: The Company

24.5% 24.3%

21.5% 20.4%18.7%

13.3%

10.3%

9.8%

22.6% 21.2%15.9% 13.7%

9.5% 9.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

TurkishAirlines*

Delta American United IAG AF-KLM Lufthansa

2015 1Q16

Pax per personnel (2015)

Source: The Company

2,212 2,163 1,970

1,710 1,698 1,451

1,174

869 820 663

-

500

1,000

1,500

2,000

2,500

CASK (US cents)-2015

Source: The Company

4.6 4.4 3.9 4.2 3.8 4.1 3.9 3.8 3.4

3.1 1.9 2.0 2.2 2.4 2.2

1.1 1.2 1.1

2.7

2.2 2.5 1.9 1.9 1.7 2.6 2.5

2.0

-

2.0

4.0

6.0

8.0

10.0

12.0

Others/ASK Fuel/ASK Personnel/ASK

48

Pegasus Airlines Market Perform (Maintained)

Share Price

TL13.73

TL1,404mn

Bloomberg/Reuters:


-9% -15% -43%

12M Range (TL):

28.2

YTD TL Return: -22%



102.3

Current 12M ago

11% 42%

Esas Holding 62.9%

2.6%

Free Float 34.5%


Net Sales (TLmn) 3,488 3,894 5,266 6,597

YoY 13% 12% 35% 25%

EBITDAR (TLmn) 678 722 1,087 1,343

YoY -21% 7% 50% 24%

Net Income (TLmn) 113 67 130 151

YoY -21% -41% 94% 16%

EBITDAR margin 19.4% 18.6% 20.6% 20.4%

Net margin 3.2% 1.7% 2.5% 2.3%

P/E (x) 12.4 20.9 10.8 9.3

EV/EBITDAR (x) 6.1 9.0 8.1 7.8

EPS (TL) 1.11 0.66 1.27 1.48

DPS (TL) 0.00 0.00 0.00 0.00

Div. Yield 0.0% 0.0% 0.0% 0.0%

ROE 8% 4% 8% 8%


+90 (212) 384 1141 +90 (212) 384 1155-58


PGSUS.TI / PGSUS.IS

Pegasus Airlines is a low cost carrier w ith a f leet of 69 aircrafts.

The Company uses Istanbul Sabiha Gokcen Airport as main hub

and f lies to 103 destinations in 41 countries. The Company

carried 22mn passengers in 2015.


Sabancı Family Members


13.17 / 25.9





EV


TL16.00 17%

Mcap

USD485mn TL2,111mn

Challenging period ahead

We are maintaining our Market Perform recommendation for

Pegasus Airlines with a new 12-month forward target price of

TL16.00/share (vs. TL20.92/share before), implying a 17%

upside potential.

Although we continue to like the airline’s growth prospects and

significant cost efficiencies compared to its competitors, we

believe that the cost advantages will not be enough to

compensate for the decline in revenue yields in the near term.

We attribute this to the challenging demand environment,

ongoing competition from THY in its own hub SAW, cost

pressures from starting its own ramp handling services and shift

in fleet mix.

We lowered our revenues and EBITDA forecasts by 4% and

17% on average in 2016-17. The stock trades at a premium vs.

its global peers and its historical multiples.

Growth Constraints: Pegasus Airlines faces strong competition

from THY as THY plans to form a second hub at SAW given the

capacity constraints in its hub at IAA. It seems that the second

runway construction, which will double the capacity, will not be

ready before 2019. Therefore, we expect the continuation of cost

pressures from the congestion at the airport. Furthermore, THY has

the upper hand in acquiring a bilateral agreement, which might limit

international expansion for Pegasus.

Yields are not likely to improve in the near term: Although we

broadly maintained our traffic forecasts for 2016, we cut our

EBITDA margin estimates by 1.3 pps considering the weakness in

revenue yields. On the other hand, ancillary revenues have been

solid with EUR10.1 per pax (vs. EUR9.8 in 2015) and are expected

to reach EUR10-12 vs. our estimate of EUR10 in 2016. We assume

a 13% decline in RASK and a 7% decrease in CASK for 2016. The

Company guides for flat yields and load factor on the domestic side

vs. a downside trend in the load factor and yields due to capacity

increases, competition and geopolitics along with a 2-3% drop in

the CASK.

Valuation: We value Pegasus Airlines with a 6.8x target EV/

EBITDAR multiple similar to THY. Our valuation suggests a 12-

month target price of TL16.00/share, indicating a 17% upside

potential. Based on our forecasts, the multiples look expensive

compared to its peers and historical averages on multiples.

Risks: A greater than expected contraction in yields, a deterioration

in the cost base, elevated/prolonged security concerns, stiffer

competition and a delay in the construction of the second runway

are the main risks.

June 22, 2016


49

RESEARCH

Pegasus

June 22, 2016



Net Sales 3,488 3,894 5,266 6,597

Consolidated EBITDAR 678 722 1,087 1,343



Net financial Income/ Expense -81 19 26 33

Profit (Loss) before Tax 182 84 163 189

Tax -71 -17 -33 -38

Minority Interests -1 0 0 0

Net Income 113 67 130 151

Ratios

EBITDAR Margin 19.4% 18.6% 20.6% 20.4%


Sales Growth 13% 12% 35% 25%

EBITDAR Growth -21% 7% 50% 24%

Net Income Growth -21% -41% 94% 16%


Current Assets 1,834 1,605 2,179 2,755

Cash and Cash Equivalents 955 805 987 1,401

Short-Term Trade Receivables 295 295 502 496

Inventories 13 12 22 20

Other Current Assets 571 494 668 837

Long Term Assets 2,264 3,389 4,059 4,447

Total Assets 4,098 4,995 6,238 7,202

Short Term Liabilities 992 1,131 1,554 1,806

Short-Term Financial Loans 209 226 250 267

Short-Term Trade Payables 246 256 417 430

Other Short-Term Liabilities 537 649 887 1,109



Other Long-Term Liabilities 447 447 447 447

Shareholders Equity 1,453 1,520 1,650 1,801



EBITDA 678 722 1087 1343

WC Change 62 50 107 86

Operating Cash flow 511 -3627 -1892 42

Capex 361 1337 956 724


Dividends paid 0 0 0 0

Change in net debt -37 858 532 164

CF from financing activities -186 4318 2676 828

Key metrics 2015 2016E 2017E 2018E

Adj. Net Debt/EBITDAR (x) 4.0 7.1 6.8 6.8

Adj. Net Debt/Equity (x) 1.9 3.4 4.5 5.1

Capex/Sales (%) -10.3% -34.3% -18.1% -11.0%

WC Change/Sales (%) 1.8% 1.3% 2.0% 1.3%

ROCE (%) 3.6% 1.7% 2.8% 2.8%

ROIC (%) 5.3% -1.7% -0.8% -1.2%



50

RESEARCH

Pegasus

June 22, 2016

MODEL ASSUMPTIONS

2011 2012 2013 2014 2015 2016E 2017E 2018E

# of total passengers (mn) 10.7 13.6 16.8 19.7 22.3 25.0 28.9 32.9

YoY 33.7% 26.8% 23.9% 17.4% 13.1% 11.9% 15.5% 13.9%

Load factor 74.9% 78.2% 80.2% 80.0% 79.0% 77.1% 77.3% 77.8%

YoY (pps) -0.8 pps 3.3 pps 2.0 pps -0.3 pps -0.9 pps -1.9 pps 0.3 pps 0.5 pps

ASK (mn) 13.5 16.4 20.2 24.4 28.0 33.0 38.6 45.1

YoY 26.6% 22.0% 22.7% 20.9% 14.7% 18.1% 17.0% 16.8%

RPK (mn) 10.1 12.8 16.2 19.5 22.1 25.5 29.9 35.1

YoY 25.3% 27.3% 25.9% 20.5% 13.4% 15.2% 17.4% 17.5%

RASK (EUR cents) 4.7 5.1 4.7 4.4 4.1 3.6 3.8 3.8

YoY 2.6% 7.0% -7.4% -7.4% -5.1% -12.6% 4.5% 0.5%

Ancillenary revenue/pax (EUR) 5.9 7.4 8.0 9.3 9.8 10.1 10.5 10.9

YoY -0.6% 25.4% 8.8% 16.0% 6.0% 2.2% 4.2% 3.6%

Revenue (TLmn) 1,484 1,919 2,394 3,082 3,488 3,894 5,266 6,597

YoY 51.8% 29.3% 24.7% 28.7% 13.2% 11.6% 35.2% 25.3%

CASK (EUR cents) 4.8 4.6 4.2 4.0 3.9 3.6 3.8 3.8

YoY 6.9% -3.9% -9.1% -3.7% -2.0% -7.1% 3.5% 0.7%

CASK-ex fuel (EUR cents) 2.8 2.7 2.5 2.3 2.6 2.6 2.7 2.7

YoY -1.6% -3.2% -10% -4% 10.6% -1.5% 4.7% -0.8%

EBITDAR (TLmn) 182 377 528 600 678 722 1,087 1,343

YoY 18.2% 107.1% 40.0% 13.5% 13.0% 6.6% 50.4% 23.5%

EBITDAR margin 12.3% 19.7% 22.1% 19.5% 19.4% 18.6% 20.6% 20.4%

YoY (pps) -3.5 pps 7.4 pps 2.4 pps -2.6 pps 0.0 pps -0.9 pps 2.1 pps -0.3 pps

Net Income (TLmn) -15 119 92 143 113 67 130 151

YoY n.m n.m -22.9% 56.3% -21.1% -40.7% 93.9% 16.1%

Net margin -1.0% 6.2% 3.8% 4.7% 3.2% 1.7% 2.5% 2.3%

YoY (pps) -3.6 pps 7.2 pps -2.4 pps 0.8 pps -1.4 pps -1.5 pps 0.7 pps -0.2 pps

ROAE -8.6% 46.1% 12.4% 12.4% 8.7% 4.5% 8.2% 8.8%

YoY (pps) n.m 54.6 pps -33.6 pps 0.0 pps -3.8 pps -4.1 pps 3.7 pps 0.5 pps

Average Brent price (USD) 111 112 108 99 52 45 52 55

YoY 37.9% 0.7% -2.8% -8.7% -47.5% -13.5% 15.6% 5.8%

Capex (TLmn) 637 421 533 -24 357 1,337 956 724

YoY -33.8% 26.5% -104.6% -1569.1% 274.2% -28.5% -24.3%

Average fleet size 35 37 42 52 61 74 84 92

Average Stage Length (km) 942 947 962 987 990 1,006 921 980

2011 2012 2013 2014 2015 2016E 2017E 2018E

USD/TRY-eop 1.89 1.78 2.13 2.33 2.92 3.10 3.27 3.44

USD/TRY-avg 1.67 1.79 1.90 2.19 2.72 3.01 3.18 3.35

EUR/TRY-eop 2.44 2.35 2.93 2.83 3.18 3.47 3.76 3.96

EUR/TRY-avg 2.32 2.30 2.53 2.91 3.02 3.27 3.61 3.86

EUR/USD-eop 1.29 1.32 1.38 1.22 1.09 1.12 1.15 1.15

EUR/USD-avg 1.39 1.29 1.33 1.33 1.11 1.09 1.14 1.15

Basket (EUR+USD)-eop 2.17 2.06 2.53 2.58 3.05 3.29 3.51 3.70

GDP growth 8.8% 2.2% 4.0% 3.0% 4.0% 3.5% 3.5% 3.5%

CPI 10.5% 6.2% 7.4% 9.0% 8.8% 7.8% 7.5% 7.5%


*Figures are based on our own calculations may differ from company's figures

Macro assumptions

Model assumptions at a glance*


51

RESEARCH

Pegasus

June 22, 2016

2016 Guidance vs. Garanti Securities


While we have revised our 2016-17E sales estimates slightly downwards

due to the anticipated weaker yields, we cut our EBITDA margin by 0.8%

pps during the same period to factor in pressures on profitability stemming

from the competition.


Our forecasts for both 2016 and 2017 are more or less in line with the

market consensus in terms of sales, yet are c40% lower in terms of

EBITDA. We believe that most of the market participants have not revised

their forecasts after the worse than expected 1Q16 results. Meanwhile,

our target price of TL16.00 is 8% lower than the Bloomberg consensus of

TL17.36.

Guidance Garanti

Traff ic Grow th c. 13-15% 11.9%

ASK Grow th 17-19% 18%

Load Factor (LF) &

Yields (RY)

Domestic : Flat

Load Factor / Flat

yields (TL)

International:

Slight decrease in

Load Factor / Flat

International Yields

(EUR)

Domestic LF; RY (TL)

(0.0 pp ; +2.2%)

International LF; RY

(EUR) (-5.0pp; -7.4%)

Ancillary Revenues/Pax EUR10 EUR10.1

CASK c.2-3 % increase 7% decline

EBITDAR margin 19-21% 18.6%

Source: The Company

2016


PGSUS

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 4,260 5,226 3,894 5,266 -9% 1%

EBITDA 249 309 179 291 -28% -6%

Net Profit 96 119 67 130 -30% 9%

EBITDA Margin 5.8% 5.9% 4.6% 5.5% -1.3% -0.4%

Net Income Margin 2.3% 2.3% 1.7% 2.5% -0.5% 0.2%

Target Price


OLD NEW % Change

20.92 16.00 -23%


PGSUS

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 4,158 5,000 3,894 5,266 -6% 5%

EBITDA 352 440 179 291 -49% -34%

Net Profit 122 151 67 130 -45% -14%



Target Share Price


Bloomberg Garanti Securities Difference

17.36 16.00 -8%


52

RESEARCH

Pegasus

June 22, 2016

Pegasus Airlines 1Q16 Results Review

Weaker operating figures: Pegasus Airlines reported a net loss of

TL190mn in 1Q16, below the consensus estimate of a TL152mn net loss,

but in line with our estimate of a TL200mn net loss. The airline generated

TL691mn in revenues in the quarter, which is in line with the expectations.

However, its 1Q16 EBITDA was lower at -TL118mn vs. our and the

consensus’ forecasts of TL90mn and TL106mn, respectively. Despite

favorable oil prices during the quarter, the greater than expected increase

in personnel, ground handling and landing expenses led to the weaker

than expected operational profitability in the quarter.

Non-fuel cost headwinds: According to our calculations, domestic RASK

(in TL) decreased by 8% YoY in 1Q16 (vs. the 2% increase in 3Q15 and

9% decrease in 4Q15), while international RASK was down by 20% in

EUR terms (vs. the 1% decrease in 3Q15 and the 12% decline in 4Q15).

On the cost front, the CASK decreased by 12% in EUR terms in 1Q16

after the 9% decrease in 3Q15 and 4% decrease in 4Q15. The non-fuel

CASK rose by 1.6% in 1Q16 (vs. the 4% increase in 3Q15 and 14%

increase in 4Q15) as delayed flight costs, the change in the fleet structure

and the impact of self ramp handling start-up costs were the main items to

trigger the increase in the non-fuel CASK. On the other hand, ancillary

revenues per pax decreased by 1% to EUR10.1 and ancillary revenues

accounted for 25% of total revenues in 1Q16 vs. 22% in 1Q15. The

Company recorded TL39mn in net other expenses, which were driven by

FX losses from its operations in the quarter vs. the TL22mn net financial

income (driven by TL11mn from interest income and 18mn from FX

Pegasus Airlines Summary Financials

(mn TL) 1Q15 2Q15 3Q15 4Q15 1Q16 1Q16/1Q15 1Q16/4Q15

Net Sales 583 834 1,320 751 691 19% -8%

Gross Profit -35 63 438 -35 -86 n.m. n.m.

Operating Profit -93 -10 376 -97 -167 n.m. n.m.

EBITDA -53 34 423 -51 -118 n.m. n.m.

EBITDAR 11 112 513 41 -15 n.m. n.m.

Net Other Income/Expense 82 -27 -48 60 -39 n.m. n.m.

Financial Inc./ Exp. (net) -45 51 -40 -48 22 n.m. n.m.

PROFIT BEFORE TAX -46 19 298 -88 -192 n.m. n.m.

Tax -34 19 -58 2 1 n.m. -37%

Net Income -74 35 234 -82 -190 n.m. n.m.

Net Cash -408 -322 -228 -460 -707

Working Capital -82 -132 -18 -62 -76

Shareholders Equity 1,111 1,214 1,670 1,453 1,279

Ratios

Gross Margin n.m. 7.5% 33.2% n.m. n.m. n.m. n.m.

Operating Margin n.m. n.m. 28.5% n.m. n.m. n.m. n.m.

EBITDA Margin n.m. 4.1% 32.1% n.m. n.m. n.m. n.m.

EBITDAR Margin 2.0% 13.5% 38.9% 5.4% n.m. n.m. n.m.

Net Profit Margin n.m. 4.2% 17.7% n.m. n.m. n.m. n.m.

Change


53

RESEARCH

Pegasus

June 22, 2016

gains).

CASK non-fuel Analysis (EUR cents)

Source: Pegasus Airlines

2.85

2.92

0.02

-0.06

0.03

0.06 0.03

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

2.80

2.90

3.00

2015 Q1CASK non

fuel

€/$ impact €/TRY and Inflation on TL

costs

Ramphandling start

up costs

Fleet structure Airportdisruption

costs

2016 Q1CASK non

fuel

1Q EBITDAR Evolution (TLmn)

94.3

7.9

-64.3

-21.7

-12.8

-7.1

-18.4-4.6 -15.2

11.3

-60

-40

-20

0

20

40

60

80

100

120

140

2015 Q

1 E

BIT

DA

R

Fue

l co

st p

er

ton

Anci

llary

Per

Pax

Sch

edule

d F

light

s R

AS

K

Esc

ala

tion o

n T

L cost

s

Str

uct

ura

l im

pact

s

Airport d

isru

ptio

n c

ost

s

Fx

Oth

er

2016 Q

1 E

BIT

DA

R

Source: Pegasus AirlinesSource: Pegasus Airlines


54

RESEARCH

Pegasus

June 22, 2016


Quarterly Figures

4.0

5.2

5.9

4.8

4.4

4.85.2

4.1

3.5

4.3

5.4

3.93.7

4.0

5.1

3.43.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

EU

R c

en

t

RASK

5.24.9

4.14.4 4.4

4.13.8

4.3 4.3

3.9 4.0 4.04.3

4.03.6

3.8 3.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

EU

R c

en

t

CASK

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

EU

R c

en

ts


3.3

3.0

2.3

2.6 2.62.4

2.2

2.7 2.6

2.3 2.3 2.3

2.92.6

2.3

2.62.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

EUR

ce

nt

non-fuel CASK

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

mn


0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16


Pegasus Airlines Traffic Figures

May May 2016 vs Jan-May Jan-May 2016 vs

2016 2015 2015 2016 2015 2015

Pax (million) 2.08 1.95 6.8% 9.28 8.18 13.5%

Cycle 14.199 13345 6.4% 65.708 56.782 15.7%

Seat (million) 2.62 2.47 5.8% 12.1 10.54 14.8%

Load Factor 79.4% 78.60% 0.76 pp 76.70% 77.60% -0.92 pp

ASK (m km) 2.559 2.446 4.6% 11.891 10.303 15.4%

pax/cycle 146 146 0.4% 141 144 -1.9%

Utilization 12.5 12.9 -3.0% 12.2 12 1.0%

Pax (million) 1.33 1.18 12.0% 6.02 5.11 18.0%

Cycle 8.518 7.766 9.7% 39.369 33.633 17.1%

Seat 1.59 1.45 9.2% 7.36 6.31 16.7%

LF 83.60% 81.50% 2.09 pp 81.80% 80.90% 0.88 pp

ASK (m km) 946 848 11.6% 4.446 3.701 20.1%

pax/cycle 156 152 2.2% 153 152 0.8%

Pax (million) 0.75 0.76 -1.3% 3.26 3.07 6.0%

Cycle 5.681 5.579 1.8% 26.339 23.149 13.8%

Seat (million) 1.03 1.02 0.9% 4.74 4.23 12.1%

LF 73% 74.60% 1.62 pp 68.7 72.60% -3.92 pp

ASK (m km) 1613 1598 1.0% 7.444 6.601 12.8%

pax/cycle 132 136 -3.1% 124 133 -6.8%

Source: The Company

To

tal

Do

mesti

cIn

tern

ati

on

al*


55

RESEARCH

Pegasus

June 22, 2016


Yearly Figures

5.1

4.74.4

4.1

3.63.8 3.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2012 2013 2014 2015 2016E 2017E 2018E

EU

R c

en

t

RASK

4.6

4.24.0 3.9

3.63.8 3.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2012 2013 2014 2015 2016E 2017E 2018E

EU

R c

en

t

CASK

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2012 2013 2014 2015 2016E 2017E 2018E

EU

R c

en

ts


2.7

2.5

2.3

2.62.6

2.7 2.7

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2012 2013 2014 2015 2016E 2017E 2018EEU

R c

en

t

non-fuel CASK

72.0%

73.0%

74.0%

75.0%

76.0%

77.0%

78.0%

79.0%

80.0%

81.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2012 2013 2014 2015 2016E 2017E 2018E

mn


0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0.90

0.95

1.00

1.05

1.10

1.15

2012 2013 2014 2015 2016E 2017E 2018E


Pegasus Indebtedness


2.63.0

4.0

7.16.8 6.8

1.21.6

1.9

3.4

4.5

5.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2013 2014 2015 2016E 2017E 2018E

Adj. Net Debt (TLmn) EBITDAR (TLmn)

Adj. Net Debt /EBITDAR Adj. Net Debt /Equity

56

TAV Airports Outperform (prev. Market Perform)

Share Price

TL13.80

TL5,013mn

Bloomberg/Reuters:


-12% -12% -29%

12M Range (TL):

32.1

YTD TL Return: -20%



363.3

Current 12M ago

73% 80%

Aeroports De Paris 38.0%

Tepe Insaat 8.1%

Akfen Holding 8.1%

Sera Yapi 2%

Other 3.5%

Free Float 40.3%


Net Sales (TLmn) 3,259 3,612 4,211 4,811

YoY 23% 11% 17% 14%

EBITDAR (TLmn) 1,849 2,055 2,454 2,775

YoY 12% 11% 19% 13%

Net Income (TLmn) 638 755 971 1,188

YoY 1% 18% 29% 22%

EBITDAR margin 56.7% 56.9% 58.3% 57.7%

Net margin 19.6% 20.9% 23.1% 24.7%

P/E (x) 7.9 6.6 5.2 4.2

EV/EBITDAR (x) 5.2 4.7 3.9 3.4

EPS (TL) 1.76 2.08 2.67 3.27

DPS (TL) 0.87 1.04 1.34 1.63

Div. Yield 6.3% 7.5% 9.7% 11.8%

ROE 25% 26% 28% 29%


+90 (212) 384 1141 +90 (212) 384 1155-58



EV


TL19.00 38%

Mcap

USD485mn TL8,393mn

TAVHL.TI / TAVHL.IS


TAV Airports, the leading airport operator in Turkey, operates 13

airports. TAV Airports provides service in all areas of airport

operation such as duty-free, food and beverage, ground

handling, IT, security, and operations services. The company

provided service 102mn passengers in 2015.


13.26 / 22.83




Defensiveness should take center stage

We have changed our recommendation from Market Perform to

Outperform for TAVHL on valuation grounds.

After incorporating our new macroeconomic assumptions and

the 1Q16 results along with lower pax assumptions, we have

revised down our 12-month forward target price to TL19.00/

share (vs. the previous TL20.39), indicating a 38% upside

potential. In the worst case scenario, we find an 22% upside for

the shares.

The stock is trading at 44% and 39% discounts to its five-year

historic average 1- year forward looking P/E and EV/EBITDA


Still a safe choice in the Turkish aviation universe: Since November

24, 2015, TAVHL shares have underperformed the BIST100 by

34% and Turkish carriers (THY and Pegasus) by 10%, respectively.

We think that TAVHL is being heavily punished due to the possible

early termination of Ataturk Airport's operations (expected in 2018),

elevated security concerns/geopolitical risks and the lack of

visibility for TAV Airports to add sizable new projects to its portfolio.

Even if we assume no compensation from the government

regarding the early termination of Ataturk Airport (no FCFs from

2019 and 2020), we find a 22% upside for the shares. We believe

that TAV Airports is likely to outperform as a defensive pick with

solid qualities given: i.) its anticipated margin improvement in 1H16

vs. the contraction for airlines, ii) its position as the main beneficiary

of the anticipated recovery in demand with the high season and

regional diversification, iii) a less unfavorable currency mismatch

and iv) likely more attractive dividend payments.

We are conservative compared to the guidance: TAV targets 7-9%

growth in total pax (4% ytd) and in pax numbers using Istanbul

Ataturk Airport (2% ytd). The Company expects to generate 7-9%

revenue growth (2% in 1Q16) and 7-9% EBITDAR growth (7% in

1Q16), while stressing its expectation of a 10-12% improvement in

net profits (down 50% in 1Q16). Considering the ytd trend, it

appears that the Company might not meet its targets. Our forecasts

suggest c3% growth across the board.

Valuation: We value TAV Airports using a sum-of the parts (SOTP)

analysis based on target Net Asset Value (NAV). Our valuation

suggests a 12-month target price of TL19.00/share, indicating a

38% upside potential. Based on our forecast, the stock trades at

48% and 64% EV/EBITDA and P/E multiples vs. its peers.

Risks: A slowdown in passenger traffic growth, increasing political

tensions in its regions of operation, failure to replace IAA or

overpaying for acquisitions.

June 22, 2016


57

RESEARCH

TAVHL

June 22, 2016



Net Sales 3,259 3,612 4,211 4,811

Consolidated EBITDAR 1,849 2,055 2,454 2,775



Net financial Income/ Expense -373 -389 -369 -346

Profit (Loss) before Tax 781 924 1,190 1,455

Tax -156 -185 -238 -291

Minority Interests -13 -16 -20 -23

Net Income 638 755 971 1,188

Ratios

EBITDAR Margin 56.7% 56.9% 58.3% 57.7%


Sales Growth 23% 11% 17% 14%

EBITDAR Growth 12% 11% 19% 13%

Net Income Growth 1% 18% 29% 22%


Current Assets 2,921 3,150 3,576 4,156

Cash and Cash Equivalents 673 767 1,051 1,478



Other Current Assets 1,783 1,872 1,965 2,064

Long Term Assets 7,585 7,644 7,706 7,771

Total Assets 10,506 10,794 11,282 11,926

Short Term Liabilities 2,859 2,711 2,584 2,477

Short-Term Financial Loans 1,943 1,749 1,574 1,417


Other Short-Term Liabilities 184 193 203 213



Other Long-Term Liabilities 2,341 2,455 2,575 2,701

Sh. Equity & Minorities 2,585 2,941 3,474 4,139



EBITDAR 1849 2055 2454 2775

WC Change 262 294 331 371


Capex 394 292 326 355


Dividends paid -317 -377 -486 -594

Change in net debt -764 229 212 197

CF from financing activities -133 -55 -51 -47

Key metrics 2015 2016E 2017E 2018E

Net Debt/EBITDA (x) 1.8 1.5 1.0 0.7

Net Debt/Equity (x) 1.3 1.1 0.7 0.5

Capex/Sales (%) 12.1% 8.1% 7.7% 7.4%

WC Change/Sales (%) 8.0% 8.0% 8.0% 8.0%

ROCE (%) 8.3% 9.3% 11.2% 12.6%

ROIC (%) 1.8% 1.9% 2.1% 2.3%



58

RESEARCH

TAVHL

June 22, 2016

VALUATION UPDATE

Sum-of-the-Parts (SOTP) Valuation

We set a new 12-month target price of TL19.00/share (vs. TL20.39/share

previously). We value TAV using a sum-of the parts (SOTP) analysis

based on the target Net Asset Value (NAV). We assumed a 5.0% risk-free

rate, a 5.5% equity risk premium and a 5.5% cost of debt in our WACC

calculation. We employed DCF analysis to value each of the Company’s

operations separately. Our valuation is solely based on DCF as we

believe DCF analysis is the most appropriate means of reflecting TAV’s

long-term growth potential as well as its well designed structure. We only

valued TAV’s existing airport operations, not taking into account any

terminal value and assuming that it would neither win any new tenders,

nor be awarded another term upon the expiry of its current concession

agreements. On the other hand, as the operations of the service

companies will continue after the expiry of the operating rights at the

airports, we have included a terminal value in calculating the value of the

services companies.

Valuation Target Equity TAV's Contribution % of Total

Business Method Value Share (EURmn) NAV

Airports

TAV Istanbul DCF 1,000 100% 1,000 50%

TAV Ankara DCF 122 100% 122 6%

TAV Izmir DCF 165 100% 165 8%

TAV Gazipasa DCF 56 100% 56 3%

TAV Georgia DCF 316 80% 253 13%

TAV Tunisia DCF -235 67% -158 -8%

TAV Macedonia DCF 98 100% 98 5%

TAV Medina DCF 361 33% 119 6%

TAV Zagreb Investment Value 15% 15 1%

TAV Bodrum DCF 181 100% 181 9%

Airports Total 1,852 93%

Services

ATU DCF 212 50% 106 5%

BTA DCF 119 67% 80 4%

Havas DCF 171 100% 171 9%

Services Total 357 18%

Other Net Cash/(Debt) -221 -11%

Total NAV (EURmn) 1,988

Current Mcap (EURmn) 1,527

12M-Target Price (TL/Share) 19.00

Current Share Price (TL) 13.80

Upside Potential 38%


TAV Airports - Sum of the Parts Valuation (EUR mn)


59

RESEARCH

TAVHL

June 22, 2016

Sensitivity analysis for early termination of IAA

Since the newsflow regarding the new airport project in Istanbul led to a

huge underperformance for the shares, we conducted a scenario analysis

to see the potential impact of the early termination of IAA. IAA accounts

for 50% of our TAVHL valuation. 49% and 60% of TAVHL’s revenues and

EBITDA were from IAA in 2015. TAVHL has the right to operate IAA until

the end of 2020. However, once the new airport in Istanbul becomes

operational, IAA will be closed and TAVHL will be compensated for the

potential loss of the remaining period. The new airport in Istanbul is

estimated to become operational in 2018.

Worst case: IAA will be closed in 2018 and there will be no

compensation for 2019 and 2020.

Base case: IAA will be closed in 2018 and there will be partial

compensation for 2019 and 2020 based on our FCF estimates.

Bull Case: TAVHL will operate IAA until the end of 2020.


We have revised down our 2016-17E estimates on average across the

board to take into account our new macro and non-operational expense

assumptions.

TAVHL

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 3,991 4,744 3,612 4,211 -9% -11%

EBITDA 1,738 2,055 1,666 1,954 -4% -5%

Net Profit 822 1065 755 971 -8% -9%

EBITDA Margin 43.5% 43.3% 46.1% 46.4% 2.6% 3.1%

Net Income Margin 20.6% 22.4% 20.9% 23.1% 0.3% 0.6%

Target Price


OLD NEW % Change

20.39 19.00 -7%

Sensitivity analysis for early termination of Istanbul Ataturk Airport

Scenario Target Price Upside

Bear Case 16.81 22%

Base Case 19.00 38%

Bull Case 21.19 54%


No FCFs from Ataturk Airport for 2019 and 2020

Definition

50% of FCFs from Ataturk Airport for 2019 and 2020

Full FCFs from Ataturk Airport for 2019 and 2020


60

RESEARCH

TAVHL

June 22, 2016

Garanti Securities vs. 2016 Guidance

After achieving its 2015 targets except for the bottom line due to currency

movements, TAV has provided guidance for 2016E as shown below. Gar-

anti Securities’ forecasts are provided alongside the Company’s own pro-

jections for the sake of comparison. We are conservative compared to the

Company’s guidance. TAV targets 7-9% growth in total pax (4% ytd) and

in pax numbers using Istanbul Ataturk Airport (2% ytd). The Company

expects to generate 7-9% revenue growth (2% in 1Q16) and 7-9%

EBITDAR growth (7% in 1Q16), while stating its expectation of a 10-12%

improvement in net profit (down 50% in 1Q16).


Our forecasts for 2016 are in line with the market’s, while our forecasts

are slightly higher for 2017. Meanwhile, our target price of TL19.00 is 11%

lower than the Bloomberg consensus of TL21.35.

Guidance Garanti

Istanbul Ataturk Airport Int'l pax grow th 7-9% 2.0%

Total pax grow th 7-9% 1.9%

Revenue 7-9% 2.5%

EBITDAR 7-9% 2.8%

Net Profit 10-12% 2.8%



TAVHL

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 3,725 4,074 3,612 4,211 -3% 3%

EBITDA 1,657 1,844 1,666 1,954 1% 6%

Net Profit 747 898 755 971 1% 8%

EBITDA Margin 44.5% 45.3% 46.1% 46.4% 1.6% 1.1%

Net Income Margin 20.1% 22.0% 20.9% 23.1% 0.8% 1.0%

Target Price


Difference

21.35 19.00 -11%


61

RESEARCH

TAVHL

June 22, 2016

TAV’s traffic figures for the YTD

TAV’s passenger traffic increased by 4% yoy in 5M16 with a 3% yoy in-

crease in international passengers and 6% annual growth in domestic

passengers. We project 2% annual growth in 2016 after the 8% growth

rate in 2015.

TAV Traffic Figures - May 2016

Passengers (1) 2015 2016 Chg % 2015 2016 Chg %Jun14-May15Jun15-May16 Chg %

Ataturk Airport 5,508,952 5,225,131 -5% 23,575,226 24,085,483 2% 57,672,273 62,116,807 8%

International 3,716,054 3,487,989 -6% 16,014,869 16,337,052 2% 39,022,678 42,497,575 9%

Domestic 1,792,898 1,737,142 -3% 7,560,357 7,748,431 2% 18,649,595 19,619,232 5%

Esenboga Airport 1,053,417 1,157,806 10% 4,815,380 5,185,821 8% 11,148,089 12,592,921 13%

International 122,077 117,298 -4% 565,379 551,417 -2% 1,456,409 1,549,988 6%

Domestic 931,340 1,040,508 12% 4,250,001 4,634,404 9% 9,691,680 11,042,933 14%

Izmir Airport 1,070,105 1,053,493 -2% 4,478,091 4,670,119 4% 11,257,524 12,348,428 10%

International 243,632 184,365 -24% 690,422 607,845 -12% 2,562,343 2,596,381 1%

Domestic 826,473 869,128 5% 3,787,669 4,062,274 7% 8,695,181 9,752,047 12%

Gazipaşa Airport 103,597 84,466 -18% 234,832 217,615 -7% 764,182 916,960 20%

International 64,662 40,529 -37% 108,449 69,401 -36% 420,917 493,493 17%

Domestic 38,935 43,937 13% 126,383 148,214 17% 343,265 423,467 23%

Milas-Bodrum (4) 375,079 316,084 -16% 743,361 724,125 -3% 3,839,705 3,917,362 2%

International 188,435 117,166 -38% 227,853 144,385 -37% 1,807,958 1,536,509 -15%

Domestic 186,644 198,918 7% 515,508 579,740 12% 2,031,747 2,380,853 17%

Medinah 414,243 552,830 33% 2,534,705 2,789,142 10% 5,635,724 5,947,013 6%

Tunisia (Monastir&Enfidha) 232,914 166,773 -28% 628,904 416,164 -34% 3,295,687 1,260,694 -62%

Georgia (Tbilisi&Batumi) 163,021 201,727 24% 625,532 757,113 21% 1,824,893 2,159,143 18%

Macedonia (Skopje&Ohrid) 126,631 161,777 28% 506,271 648,745 28% 1,342,983 1,667,709 24%

Zagreb Airport 235,133 246,961 5% 911,052 958,630 5% 2,484,943 2,623,548 6%

TAV TOTAL (3) 9,094,657 9,167,048 1% 38,825,501 40,452,957 4% 96,716,823 104,043,561 8%

International 5,107,711 5,048,947 -1% 21,570,205 22,217,996 3% 55,519,356 58,278,718 5%

Domestic 3,986,946 4,118,101 3% 17,255,296 18,234,961 6% 41,197,467 45,764,843 11%

Air Traffic Movements (2) 2015 2016 Chg % 2015 2016 Chg %Jun14-May15Jun15-May16 Chg %

Ataturk Airport 39,087 39,483 1% 175,650 183,520 4% 426,383 454,633 7%

International 26,837 27,592 3% 122,837 131,449 7% 293,579 321,587 10%

Domestic 12,250 11,891 -3% 52,813 52,071 -1% 132,804 133,046 0%

Esenboga Airport 7,644 8,074 6% 35,206 38,192 8% 82,195 90,504 10%

International 994 993 0% 4,589 4,825 5% 11,666 12,268 5%

Domestic 6,650 7,081 6% 30,617 33,367 9% 70,529 78,236 11%

Izmir Airport 6,962 6,891 -1% 29,523 30,880 5% 74,334 81,308 9%

International 1,812 1,396 -23% 5,061 4,882 -4% 17,430 19,428 11%

Domestic 5,150 5,495 7% 24,462 25,998 6% 56,904 61,880 9%

Gazipaşa Airport 709 693 -2% 1,787 1,783 0% 5,653 6,522 15%

International 421 309 -27% 762 581 -24% 2,919 3,389 16%

Domestic 288 384 33% 1,025 1,202 17% 2,734 3,133 15%

Milas-Bodrum (4) 2,557 2,307 -10% 5,365 5,216 -3% 26,450 26,495 0%

International 1,220 840 -31% 1,512 1,075 -29% 11,043 9,657 -13%

Domestic 1,337 1,467 10% 3,853 4,141 7% 15,407 16,838 9%

Medinah 3,585 4,407 23% 19,961 22,148 11% 47,914 50,396 5%

Tunisia (Monastir&Enfidha) 1,683 1,333 -21% 4,971 4,281 -14% 21,894 11,889 -46%

Georgia (Tbilisi&Batumi) 1,996 2,278 14% 8,510 8,968 5% 23,626 25,324 7%

Macedonia (Skopje&Ohrid) 1,256 1,465 17% 5,402 6,250 16% 14,384 16,149 12%

Zagreb Airport 3,724 3,624 -3% 16,124 15,814 -2% 39,428 39,644 1%

TAV TOTAL (3) 67,983 70,555 4% 300,987 317,052 5% 745,725 793,466 6%

International 39,671 41,472 5% 175,399 187,470 7% 440,681 469,762 7%

Domestic 28,312 29,083 3% 125,588 129,582 3% 305,044 323,704 6%

Source: Turkish State Airports Authority (DHMI), Georgian Authority, TAV Tunisie, TAV Macedonia, TIBAH and MZLZ

Note: DHMI figures for 2016 are tentative.

(1) Both departing and arriving passengers, including transfer pax

(2) Commercial flights only

(3) 2015 TAV totals do not include Milas-Bodrum international until November 2015

(4) TAV commenced its operation at Milas-Bodrum domestic terminal on July 15 2015. International terminal of Milas-Bodrum was taken over on October 22, 2015

May January-May Last Twelv e Months

May January-May Last Twelv e Months


62

RESEARCH

TAVHL

June 22, 2016

Lack of visibility for the addition of new airport projects

CEO Sani Sener was quoted as saying that TAV Airports plans to bid for

new tenders within 12-24 months in Vietnam, Indonesia, Malaysia and

India. He added that 50 new airports are expected to be privatized in India

and that TAV Airports is interested in airports that handle more than 1mn

passengers in Africa.

Recall that the consortium, including TAV Airports, received the pre-

qualification to bid for “The Regional Airports' Tender” in the Philippines in

September 2015. This tender consists of the operations and maintenance

of the Bacolod-Silay, Iloilo, Davao, Laguindingan and New Bohol-Panglao

(Tagbilaran) airports which had served around 9mn passengers in 2014.

According to local daily Hurriyet, Malaysia Airports plans a stake sale at

SAW. Malaysia Airports owns a 100% stake in SAW. Recall that in 2014,

TAVHL offered EUR285mn for 40% of SAW which had been held by

Indian GMR. However, Malaysia Airports exercised its first right of refusal

at that time. If the news is true, we believe that TAVHL would be one of

the ambitious bidders.

The company has always been in search of new opporunities. Therefore,

until the company finalizes an acquisition, we view such news as

valuation neutral.

IAA, Extension Project to be completed by July 2016.

TAVHL signed a contract with the State Airports Authority (DHMI) for the

expansion of IAA International Terminal in November 2014. In line with

the contract, 32 additional check-in desks will be built in addition to the

existing 224 desks and the capacity of the baggage handling system will

be improved and the mezzanine floor on the land side will be moved to

the air side, increasing the passenger area on the air side. In addition to

the expansion of the international terminal, the existing cargo terminal will

be demolished and replaced with a 27,000 sqm passenger terminal and

four additional passenger bridges will be added to the 26 existing

passenger bridges. These bridges will have the optional of providing

apron space for eight single-aisle aircraft or four twin-aisle aircraft.

Henceforth, the total number of bridges at the International Terminal will

increase from 26 to 34. Furthermore, 17,000 sqm of additional open car

parking space will be built.

The estimated sum of the new investment is around EUR92mn and the

estimated completion date is July 2016. TAVHL is using its own funds for

the project.

This extension project aims to increase terminal capacity, maximize

service comfort for passengers using IAA, improve the flow of increased

traffic and maximize resource efficiency. The project is likely to increase

the current capacity by a further 10mn to 80mn passengers vs. 61mn in

2015.


63

RESEARCH

TAVHL

June 22, 2016

TAV Airports 1Q16 Results Review A EUR7mn one-off hurt the bottom line: TAV Airports announced

EUR15mn in net income in 1Q16 vs. the consensus' EUR19mn and our

EUR24mn estimates. Revenues and EBITDA were in line with expectati-

ons, yet the bottom line was lower due to the EUR7mn one-off expense in

relation to the TAV Macedonia refinancing.

Operating leverage in place: TAV Airports posted a EUR82mn EBITDA

in the quarter, implying a 35.3% EBITDA margin (up 0.7 pps) yoy, which

was 80bps higher than the expectations. We observed operational levera-

ge in this quarter with 2% annual growth at the top line and a 4% EBITDA.

Likewise, TAV Airports' 1Q16 EBITDAR increased by 7% yoy, implying a

50.8% margin (up 230bps yoy). Revenue growth was mainly driven by the

growth in transfer passengers.The TRY depreciation against the EUR had

an average 17% impact on the company's TRY-linked revenue items. In

1Q16, the total number of passengers served at all airports increased by

6% yoy, the same level as in Istanbul Ataturk Airport alone. The 7% ATM

growth could not be reflected to passengers due to lower load factors and

the weakness in Origin to Destination (O&D) compensated by transfer

passengers (Istanbul int'l-to-int'l transfer share in international passengers

was 48% vs. 41% in 1Q15).


64

RESEARCH

TAVHL

June 22, 2016

TAV Airports Passenger Evolution (mn)


2330

41 4248

53

72

84

95102

106112

119

0

20

40

60

80

100

120

140

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

18% CAGR 2006-2015

Revenue & EBITDA Development (EURmn)


785

881847

904983

1,0791,106

1,165

1,247

212257

328381

434488 510 541

579

27.0%

29.2%

38.7%

42.1%44.2% 45.3%

46.1% 46.4%46.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0

200

400

600

800

1,000

1,200

1,400

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Revenue EBITDA EBITDA margin (rhs)

65

Celebi Outperform (Maintained)

Share Price

TL22.90

TL556mn

Bloomberg/Reuters:


-13% -21% -18%

12M Range (TL):

3.3

YTD TL Return: -30%



24.3

Current 12M ago

54% 68%

Celebioglu Family (indirectly) 39.2%

Zeus Aviation (Actera PE) (indirectly) 39.2%

Free Float 21.6%


Net Sales (TLmn) 732 691 778 868

YoY 18% -6% 13% 12%

EBITDA (TLmn) 153 143 157 175

YoY 28% -7% 10% 11%

Net Income (TLmn) 83 61 70 80

YoY 52% -27% 16% 14%

EBITDA margin 20.9% 20.6% 20.2% 20.2%

Net margin 11.3% 8.8% 9.0% 9.3%

P/E (x) 6.7 9.1 7.9 6.9

EV/EBITDA (x) 4.9 5.6 5.0 4.5

EV/Sales (x) 1.0 1.1 1.0 0.9

EPS (TL) 3.42 2.50 2.90 3.30

DPS (TL) 3.00 2.25 2.61 2.97

Div. Yield 13.1% 9.8% 11.4% 13.0%

ROE 58% 55% 52% 50%


+90 (212) 384 1141 +90 (212) 384 1155-58



EV

Founded in 1958, Celebi is the first ground handling company in

Turkey. Celebi mainly provides ground handling and

w arehouse/cargo services. The Company has presence in

Turkey, India, Hungary and Germany. Zeus Aviation Services

Inv B.V. w hich is under the control of Actera Group acquired a

39.18% stake of Celebi in 2013. Actera Group is the largest

private equity fund dedicated to investments in Turkey w ith a

total equity capitalization in excess of $1.6bn.



TL34.20 49%


Mcap

22.42 / 36.48




USD192mn TL738mn

CLEBI.TI / CLEBI.IS

Still more ground to cover

Strong cash generation and already low/diminishing leverage

should offer further opportunities along with the PE ownership.

3Q16 will be the first period to see the impact of the post-

Pegasus era at SAW, the potential loss (c5% of revenues) is

likely to be offset by strong figures in India (total number of

handled aircraft up by 80% in 1Q16 after 58% in 2015). India’s

contribution to EBITDA was 26% in 1Q16 vs. 19% in 1Q15.

Defensive business structure and attractive dividend yields.

Strong cash generation: Given its diminishing leverage ratios and

high ROE generation capabilities, we believe that Celebi will continue

to remain on investors’ radar screens in 2016. We expect the

Company to post an average c50% ROE over the next three years

and its net debt/EBITDA ratio to decline from 2.9x in end-2013 to 1.2x

in end-2018. Assuming a 90% pay-out ratio, we anticipate an 11%

dividend yield from 2016E earnings.

Defensive business structure: The bulk of Celebi’s revenues are in

FX (79%), while 59% of its costs are also in FX. Its hard currency

revenues allow Celebi to display defensive characteristics in a volatile

market. The company’s largest cost item is its personnel,

corresponding to 37% of total costs. Therefore, operating in low

personnel cost markets (Turkey and India) is another plus for the

company. By the nature of the business, Celebi stands out as a safe

choice in the sector without the risk of volatility in oil prices. It is also a

beneficiary of competition among airlines given the increased traffic

movements (ATM).

Concerns regarding the minimum wage increase have proved

pointless: Since it is a labor intensive business, there were some

concerns regarding the 30% increase in the minimum wage in the

beginning of the year. However in 1Q16, we observed that costs per

personnel remained flat yoy.

The loss of Pegasus Airlines at Sabiha Gokcen Airport (SAW) in June

2016 might be exaggerated: We admit that idle time management is

the key in the ground handling industry, but since Pegasus Airlines is

a low cost carrier, the real impact on Celebi’s operations would be

more limited than initially thought.

Catalysts: Stronger than expected 2Q16 results, a value accretive

acquisition, higher than anticipated ATM and a potential regulation

change prohibiting self-handling in India.

Valuation & Risks: Based on a DCF analysis, our 12-month target

share price of TL34.20 (vs. the previous TL38.00) indicates a 49%

upside potential. We are maintaining our Outperform

recommendation. The stock is trading at 26% and 17% discounts to

its five-year historic average 12-month forward looking P/E and EV/

EBITDA multiples, respectively. It is now c35% below to the amount

paid by Actera in 2013 for the acquisition of a 39.12% stake. Risks

include the loss of another major airline contract, a crisis in the airline

sector, higher than expected margin pressure from the loss of

Pegasus, changes in laws regarding operation in the sector, an overly

expensive acquisition and an imminent share overhang from private

equity ownership.

June 22, 2016


66

RESEARCH

Celebi

June 22, 2016



Net Sales 732 691 778 868

Operating Expenses -614 -588 -661 -736

Operating Profit 118 104 117 132

Consolidated EBITDA 153 143 157 175

Net Other Income/ Expense 3 6 -2 -2




Tax -20 -15 -18 -20

Minority Interests -2 0 0 0

Net Income 83 61 70 80

Ratios

EBIT Margin 16.2% 15.0% 15.0% 15.2%

EBITDA Margin 20.9% 20.6% 20.2% 20.2%


Sales Growth 18% -6% 13% 12%

EBITDA Growth 28% -7% 10% 11%

Net Income Growth 52% -27% 16% 14%


Current Assets 260 238 291 346

Cash and Cash Equivalents 138 124 163 204




Long Term Assets 420 429 444 462

Total Assets 679 667 735 808

Short Term Liabilities 265 267 287 308




Long Term Liabilities 270 290 313 338

Long-Term Financial Loans 158 178 200 225


Shareholders Equity 144 110 135 162

T. Liabilities & S.holders Equity 679 667 735 808


EBITDA 153 143 157 175

WC Change 7 -1 3 3


Capex -40 -49 -55 -61


Dividends paid -73 -55 -63 -72

Change in net debt -41 43 -9 -6

CF from financing activities -52 -43 9 7

Key metrics 2015 2016E 2017E 2018E

Net Debt/EBITDA (x) 1.2 1.6 1.4 1.2

Net Debt/Equity (x) 1.3 2.1 1.6 1.3

Capex/Sales (%) 5.4% 7.0% 7.0% 7.0%

WC Change/Sales (%) 2.9% 2.9% 2.9% 2.9%

ROCE (%) 20.0% 15.2% 15.7% 16.1%

ROIC (%) 71.5% 64.4% 68.1% 71.3%

FCF yield (%) 12.3% 9.6% 10.2% 11.2%


67

RESEARCH

Celebi

June 22, 2016

VALUATION UPDATE

DCF

We set a new 12-month target price of TL34.20/share for Celebi vs. the

previous TL38.00. We are employing DCF as our preferred valuation

methodology for Celebi to better reflect its growth prospects. We have

adjusted our forecasts following its 1Q16 financials.

PV of FCF 350

Terminal Grow th 5.00%


Minorities 11

Adj. Net Debt 254

EV 719

12M Target Mcap 831


Valuation Summary (TLmn)

CLEBI DCF

(TLmn) 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Revenue 691 778 868 971 1,091 1,213 1,368

Adj. EBIT 104 117 132 150 172 193 220

Taxes on EBIT -21 -23 -27 -30 -35 -39 -44

NOPLAT 83 93 106 120 138 154 176

Depreciation 39 41 43 46 50 55 61

Gross Cash Flow 122 134 149 166 187 209 236

Increase in Working Capital 20 22 25 28 31 35 39

Capital Expenditures 49 55 61 68 77 85 96

Gross Investment 69 77 86 96 108 120 136

Free Cash Flow 53 57 62 70 79 89 100

Assumptions (%)

Revenue grow th (%) -6 13 12 12 12 11 13

EBITDA grow th (%) -7 10 11 12 13 12 13

EBITDA margin (%) 20.6 20.2 20.2 20.2 20.4 20.4 20.5

Incr. in Working Capital/Sales (%) 2.9 2.9 2.9 2.9 2.9 2.9 2.9

Capital Expenditures/Sales (%) 7.0 7.0 7.0 7.0 7.0 7.0 7.0


WACC Assumptions

(%) 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Risk-free Rate (RFR) 10.0 10.0 10.0 10.0 10.0 10.0 10.0

Cost of Equity 15.5 15.5 15.5 15.5 15.5 15.5 15.5

Cost of Debt 14.0 14.0 14.0 14.0 14.0 14.0 14.0

Tax Rate 20.1 20.1 20.1 20.1 20.1 20.1 20.1

Cost of Debt after Tax 11.2 11.2 11.2 11.2 11.2 11.2 11.2

Weight - Equity 23.9 26.2 28.0 30.0 35.0 40.0 45.0

Weight - Debt 76.1 73.8 72.0 70.0 65.0 60.0 55.0

WACC 12.2 12.3 12.4 12.5 12.7 12.9 13.1


Celebi 12mth Target Price (TL/Share)


WACC + 1% 25.17 29.08 27.64

WACC 29.13 34.20 32.31

WACC - 1% 34.03 40.77 38.23



68

RESEARCH

Celebi

June 22, 2016

Revisions to estimates

After incorporating the lower air traffic figures from Turkey and its 1Q16

results into our model, we reduced our forecasts for 2016 and 2017.


Compared to the market, our forecasts are 8% lower on average across

the board for 2016 and 2017. Meanwhile, our target price of TL34.20 is

10% lower than the Bloomberg consensus of TL38.16.


CLEBI

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 772 873 691 778 -10% -11%

EBITDA 154 172 143 157 -7% -9%

Net Profit 71 83 61 70 -14% -15%

EBITDA Margin 19.9% 19.7% 20.6% 20.2% 0.7% 0.5%


12M Target Price


OLD NEW

38.00 34.20 -10%


CLEBI

(TLmn) 2016E 2017E 2016E 2017E 2016E 2017E

Net Sales 774 825 691 778 -11% -6%

EBITDA 159 167 143 157 -10% -6%

Net Profit 70 72 61 70 -13% -2%

EBITDA Margin 20.6% 20.2% 20.6% 20.2% 0.1 pps 0.0 pps

Net Income Margin 9.0% 8.7% 8.8% 9.0% -0.2 pps 0.3 pps

12M Target Price


Bloomberg Garanti Securities

38.16 34.20 -10%


69

RESEARCH

Celebi

June 22, 2016

Celebi 1Q16 Results Review

Revenues were up by 20% yoy in 1Q16 driven by the 22% increase in

ground handling revenues vs. the 14% increase in cargo revenues.

According to our calculations, the number of flights handled in Turkey inc-

reased by 13% vs. 80% in India and 6% in Hungary.

On the other hand, cargo tonage increased by 3% during the quarter.

Celebi Summary Financials

(mn TL) 1Q15 2Q15 3Q15 4Q15 1Q16 1Q16/1Q15 1Q16/4Q15

Net Sales 140 181 236 175 168 20% -4%

Gross Profit 30 53 92 41 37 25% -9%

Operating Profit 7 28 69 14 11 47% -24%

EBITDA 15 37 78 23 19 27% -15%

Net Other Income/Expense 1 2 5 -6 1 -32% n.m.

Financial Inc./ Exp. (net) -3 -12 -17 2 -6 n.m. n.m.

PROFIT BEFORE TAX FROM CONTINUING OPERATIONS 6 19 65 12 7 16% -42%

Tax -2 -3 -13 -3 -2 n.m. n.m.

Net Income 5 16 52 10 5 3% -52%

Net Cash -227 -286 -228 -184 -181

Working Capital -28 -42 -58 -30 -36

Shareholders Equity 119 85 142 144 145

Ratios

Gross Margin 21.1% 29.3% 39.0% 23.3% 22.0% 0.9 pp -1.3 pp

Operating Margin 5.2% 15.6% 29.2% 8.0% 6.3% 1.2 pp -1.6 pp

EBITDA Margin 10.9% 20.7% 32.9% 13.0% 11.5% 0.6 pp -1.5 pp

Net Profit Margin 3.3% 8.9% 22.1% 5.7% 2.9% -0.5 pp -2.8 pp

Change


70

RESEARCH

Celebi

June 22, 2016

MODEL FORECASTS

CELEBI TURKEY 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E CAGR 2015-22E 1Q15 1Q16

Aircraft handled ('000) 179.1 193.0 210.0 177.9 188.5 201.5 218.1 236.9 258.3 281.7 4.3% 39.7 44.7

YoY 3.4% 7.8% 8.8% -15.3% 6.0% 6.9% 8.2% 8.6% 9.1% 9.1% 12.8%

Domestic 72.5 80.4 89.6 66.2 69.5 75.1 81.1 87.5 94.5 102.1 1.9% 19.1 21.7

YoY 1.8% 11.0% 11.4% -26.2% 5.0% 8.0% 8.0% 8.0% 8.0% 8.0% 13.4%

International 82.2 86.4 89.7 77.3 81.2 85.2 92.1 100.3 110.4 121.4 4.4% 14.3 15.8

YoY -2.6% 5.1% 3.8% -13.8% 5.0% 5.0% 8.0% 9.0% 10.0% 10.0% 10.4%

Turkish Airlines 24.3 26.2 30.7 34.4 37.8 41.2 44.9 49.0 53.4 58.2 9.6% 6.2 7.2

YoY 38.1% 7.6% 17.2% 12.0% 10.0% 9.0% 9.0% 9.0% 9.0% 9.0% 16.3%

Revenues (TLmn) 324.4 374.8 467.1 393.8 441.3 497.0 566.6 648.4 744.9 855.9 9.0% 81.3 96.2

YoY 1.7% 15.5% 24.6% -15.7% 12.1% 12.6% 14.0% 14.4% 14.9% 14.9% 18.4%

Avg handling fee (USD) 952 887 817 735 735 735 735 735 735 735 -1.5% 832 731

YoY -7.4% -6.8% -7.9% -10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -12.2%

EBITDA (TLmn) 76.3 90.4 133.3 118.6 132.3 148.3 168.2 192.5 220.0 251.6 9.5% 11.9 15.7

YoY 24.7% 18.6% 47.4% -11.0% 11.5% 12.1% 13.4% 14.4% 14.3% 14.3% 31.8%

EBITDA margin 23.5% 24.1% 28.5% 30.1% 30.0% 29.8% 29.7% 29.7% 29.5% 29.4% 14.7% 16.3%

YoY 4.3% 0.6% 4.4% 1.6% -0.1% -0.1% -0.1% 0.0% -0.1% -0.1% 1.7%


CELEBI HUNGARY 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E CAGR 2015-22E 1Q15 1Q16


YoY -25.7% -2.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 6.1%

Revenues (TLmn) 72.7 77.2 76.3 82.6 91.3 97.5 102.7 108.2 114.0 120.1 6.7% 16.7 21.1

YoY 4.3% 6.1% -1.1% 8.1% 10.6% 6.7% 5.4% 5.3% 5.3% 5.4% 26.2%

Avg handling fee (EUR) 1,427 1,358 1,291 1,291 1,291 1,291 1,291 1,291 1,291 1,291 0.0% 1,456 1,479

YoY 28.0% -4.9% -4.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.6%

EBITDA (TLmn) 24.4 21.8 18.0 17.5 18.4 19.6 20.7 21.8 23.0 24.2 4.3% 3.5 4.9

YoY 11.9% -10.6% -17.4% -2.7% 5.1% 6.7% 5.4% 5.3% 5.4% 5.4% 37.5%

EBITDA margin 33.5% 28.2% 23.6% 21.2% 20.2% 20.2% 20.2% 20.2% 20.2% 20.2% 21.1% 23.0%

YoY 2.3% -5.3% -4.7% -2.4% -1.1% 0.0% 0.0% 0.0% 0.0% 0.0% 1.9%


CELEBI INDIA 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E CAGR 2015-22E 1Q15 1Q16

GROUND HANDLING


YoY -25.1% 7.1% 58.1% 50.5% 10.5% 5.5% 4.5% 5.5% -24.3% 5.7% 80.2%

Revenues (TLmn)* 15.2 19.9 25.7 32.1 37.5 41.7 45.9 51.0 40.7 45.3 8.4% 5.2 8.2

YoY 15.1% 31.5% 29.0% 24.8% 16.9% 11.1% 10.1% 11.1% -20.2% 11.4% 56.8%

Avg handling fee (USD) 469 501 329 247 247 247 247 247 247 247 -4.0% 411 300

YoY 44.7% 6.8% -34.4% -25.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -27.2%

EBITDA (TLmn)* 2.2 4.3 4.7 7.4 8.6 9.6 10.6 11.8 9.4 10.4 12.1% 0.7 1.5

YoY 104.7% 99.6% 8.1% 58.1% 16.9% 11.1% 10.1% 11.1% -20.2% 11.4% 105.8%

EBITDA margin 14.3% 21.7% 18.2% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 14.2% 18.6%

YoY 6.3% 7.4% -3.5% 4.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4.4%

CARGO

Cargo volumes ('000 tons) 329.5 373.3 395.9 415.6 436.4 458.2 481.2 505.2 530.5 557.0 5.0% 95.8 98.4

YoY -8.1% 13.3% 6.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 2.7%

Delhi 329.5 373.3 395.9 415.6 436.4 458.2 481.2 505.2 530.5 557.0 5.0% 95.8 98.4

YoY -8.1% 13.3% 6.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 2.7%

Revenues (TLmn) 65.1 71.6 80.4 88.7 98.5 108.9 120.5 133.3 147.4 163.1 10.6% 17.0 20.5

YoY 20.7% 10.0% 12.3% 10.3% 11.0% 10.6% 10.6% 10.6% 10.6% 10.6% 20.4%

Avg cargo fee (USD) 103.9 87.7 74.6 70.9 70.9 70.9 70.9 70.9 70.9 70.9 -0.7% 72.2 70.8

YoY 23.7% -15.6% -14.9% -5.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -1.9%

EBITDA (TLmn) 12.7 19.3 18.2 19.0 20.1 22.2 24.5 27.1 30.0 33.2 9.0% 2.9 4.8

YoY 0.0% 52.7% -5.9% 4.5% 5.5% 10.6% 10.6% 10.6% 10.6% 10.6% 63.6%

EBITDA margin 19.4% 27.0% 22.6% 21.4% 20.4% 20.4% 20.4% 20.4% 20.4% 20.4% 17.1% 23.3%

YoY -4.0% 7.5% -4.4% -1.2% -1.1% 0.0% 0.0% 0.0% 0.0% 0.0% 6.1%

OVERALL INDIA


YoY -25.1% 7.1% 58.1% 50.5% 10.5% 5.5% 4.5% 5.5% -24.3% 5.7% 80.2%


YoY -8.1% 13.3% 6.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 2.7%

Revenues (TLmn) 80.3 91.6 106.1 120.8 136.0 150.6 166.4 184.3 188.1 208.4 10.1% 22.3 28.7

YoY 19.6% 14.1% 15.9% 13.8% 12.6% 10.8% 10.5% 10.8% 2.1% 10.8% 29.0%

EBITDA (TLmn) 14.8 23.7 22.9 26.4 28.7 31.8 35.1 38.9 39.4 43.7 9.7% 3.7 6.3

YoY 8.1% 59.5% -3.3% 15.4% 8.7% 10.8% 10.5% 10.8% 1.3% 10.8% 72.2%

EBITDA margin 18.5% 25.8% 21.6% 21.9% 21.1% 21.1% 21.1% 21.1% 20.9% 21.0% 16.4% 21.9%

YoY -2.0% 7.4% -4.3% 0.3% -0.8% 0.0% 0.0% 0.0% -0.2% 0.0% 5.5%

Source: The Company, Garanti Securities * not include Celebi-NAS

CELEBI GERMANY 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E CAGR 2015-22E 1Q15 1Q16


YoY 26.8% 161.5% 13.8% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% -1.0%

Revenues (TLmn) 30.1 78.5 82.9 94.2 109.4 122.6 135.6 150.0 165.9 183.5 12.0% 19.5 21.7

YoY 31.0% 161.1% 5.6% 13.6% 16.2% 12.1% 10.6% 10.6% 10.6% 10.6% 11.3%

Avg cargo fee (EUR) 134.4 116.8 104.3 104.3 104.3 104.3 104.3 104.3 104.3 104.3 0.0% 109.9 105.4

YoY -5.8% -13.1% -10.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -4.0%

EBITDA (TLmn) -5.5 0.8 -1.8 -2.1 -2.4 -2.7 -3.0 -3.3 -3.7 -4.0 12.0% -1.9 -3.0

YoY -24.3% -114.4% -333.3% 13.6% 16.2% 12.1% 10.6% 10.6% 10.6% 10.6% 55.8%

EBITDA margin -18.1% 1.0% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -9.7% -13.6%

YoY 13.3% 19.1% -3.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -3.9%



71

RESEARCH

Celebi

June 22, 2016

GEOGRAPHICAL VS. SEGMENT 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E CAGR 2015-22E 1Q15 1Q16

REVENUES* 507.5 622.0 732.5 691.3 778.0 867.7 971.3 1090.9 1213.0 1367.9 9.3% 139.8 167.8

GH 412.3 471.9 569.2 508.4 570.1 636.2 715.2 807.6 899.6 1021.3 8.7% 103.2 125.6

- Turkey 324.4 374.8 467.1 393.8 441.3 497.0 566.6 648.4 744.9 855.9 9.0% 81.3 96.2

- Hungary 72.7 77.2 76.3 82.6 91.3 97.5 102.7 108.2 114.0 120.1 6.7% 16.7 21.1

- India 15.2 19.9 25.7 32.1 37.5 41.7 45.9 51.0 40.7 45.3 8.4% 5.2 8.2

- Germany

Cargo 95.2 150.1 163.3 182.8 207.9 231.5 256.1 283.3 313.4 346.6 11.3% 36.6 42.2

- Turkey

- Hungary

- India 65.1 71.6 80.4 88.7 98.5 108.9 120.5 133.3 147.4 163.1 10.6% 17.0 20.5

- Germany 30.1 78.5 82.9 94.2 109.4 122.6 135.6 150.0 165.9 183.5 12.0% 19.5 21.7

EBITDA* 110.0 136.7 172.4 160.5 177.0 197.0 221.0 249.9 278.8 315.4 9.0% 17.2 23.9

GH 102.8 116.5 156.0 143.5 159.3 177.5 199.5 226.0 252.4 286.2 9.1% 16.2 22.1

- Turkey 76.3 90.4 133.3 118.6 132.3 148.3 168.2 192.5 220.0 251.6 9.5% 11.9 15.7

- Hungary 24.4 21.8 18.0 17.5 18.4 19.6 20.7 21.8 23.0 24.2 4.3% 3.5 4.9

- India 2.2 4.3 4.7 7.4 8.6 9.6 10.6 11.8 9.4 10.4 12.1% 0.7 1.5

- Germany

Cargo 7.2 20.1 16.4 16.9 17.6 19.5 21.6 23.8 26.4 29.2 8.6% 1.0 1.8

- Turkey

- Hungary

- India 12.7 19.3 18.2 19.0 20.1 22.2 24.5 27.1 30.0 33.2 9.0% 2.9 4.8

- Germany -5.5 0.8 -1.8 -2.1 -2.4 -2.7 -3.0 -3.3 -3.7 -4.0 12.0% -1.9 -3.0

BREAKDOWN

REVENUES 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

GH 81% 76% 78% 74% 73% 73% 74% 74% 74% 75% 74% 75%

- Turkey 64% 60% 64% 57% 57% 57% 58% 59% 61% 63% 58% 57%

- Hungary 14% 12% 10% 12% 12% 11% 11% 10% 9% 9% 12% 13%

- India 3% 3% 4% 5% 5% 5% 5% 5% 3% 3% 4% 5%

- Germany 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Cargo 19% 24% 22% 26% 27% 27% 26% 26% 26% 25% 26% 25%

- Turkey 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

- Hungary 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

- India 13% 12% 11% 13% 13% 13% 12% 12% 12% 12% 12% 12%

- Germany 6% 13% 11% 14% 14% 14% 14% 14% 14% 13% 14% 13%

EBITDA 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

GH 93% 85% 91% 89% 90% 90% 90% 90% 91% 91% 94% 92%

- Turkey 69% 66% 77% 74% 75% 75% 76% 77% 79% 80% 69% 66%

- Hungary 22% 16% 10% 11% 10% 10% 9% 9% 8% 8% 20% 20%

- India 2% 3% 3% 5% 5% 5% 5% 5% 3% 3% 4% 6%

- Germany 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Cargo 7% 15% 9% 11% 10% 10% 10% 10% 9% 9% 6% 8%

- Turkey 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

- Hungary 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

- India 12% 14% 11% 12% 11% 11% 11% 11% 11% 11% 17% 20%

- Germany -5% 1% -1% -1% -1% -1% -1% -1% -1% -1% -11% -12%

EBITDA margins 21.7% 22.0% 23.5% 23.2% 22.7% 22.7% 22.8% 22.9% 23.0% 23.1% 12.3% 14.3%

GH 24.9% 24.7% 27.4% 28.2% 27.9% 27.9% 27.9% 28.0% 28.1% 28.0% 15.7% 17.6%

- Turkey 23.5% 24.1% 28.5% 30.1% 30.0% 29.8% 29.7% 29.7% 29.5% 29.4% 14.7% 16.3%

- Hungary 33.5% 28.2% 23.6% 21.2% 20.2% 20.2% 20.2% 20.2% 20.2% 20.2% 21.1% 23.0%

- India 14.3% 21.7% 18.2% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 14.2% 18.6%

- Germany

Cargo 7.6% 13.4% 10.0% 9.3% 8.5% 8.4% 8.4% 8.4% 8.4% 8.4% 2.8% 4.3%

- Turkey

- Hungary

- India 19.4% 27.0% 22.6% 21.4% 20.4% 20.4% 20.4% 20.4% 20.4% 20.4% 17.1% 23.3%

- Germany -18.1% 1.0% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -9.7% -13.6%

*Unadjusted f igures

TOTAL FIGURES 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E CAGR 2015-22E 1Q15 1Q16

Total Aircraft Handled ('000) 216.2 230.8 258.3 240.7 255.9 271.5 290.3 312.0 320.0 345.8 4.3% 49.0 58.5

YoY -3.1% 6.7% 11.9% -6.8% 6.3% 6.1% 6.9% 7.5% 2.6% 8.1% 19.4%

Total Cargo Volumes ('000 tons) 418.0 604.7 659.1 692.0 726.6 762.9 801.1 841.1 883.2 927.4 5.0% 160.0 161.9

YoY -2.4% 44.7% 9.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 1.2%

Total GH revenues 412.3 471.9 569.2 508.4 570.1 636.2 715.2 807.6 899.6 1021.3 8.7% 103.2 125.6

YoY 2.6% 14.5% 20.6% -10.7% 12.1% 11.6% 12.4% 12.9% 11.4% 13.5% 21.6%

Total Cargo revenues 95.2 150.1 163.3 182.8 207.9 231.5 256.1 283.3 313.4 346.6 11.3% 36.6 42.2

YoY 23.8% 57.7% 8.8% 11.9% 13.7% 11.4% 10.6% 10.6% 10.6% 10.6% 15.5%

Avg handling fee (TL) 1,907 2,045 2,204 2,112 2,228 2,343 2,463 2,588 2,811 2,953 4.3% 2,107 2,147

YoY 5.8% 7.2% 7.8% -4.2% 5.5% 5.2% 5.1% 5.1% 8.6% 5.1% 1.9%

Avg cargo fee (TL) 228 248 248 264 286 303 320 337 355 374 6.0% 229 261

YoY 26.8% 9.0% -0.2% 6.6% 8.3% 6.1% 5.4% 5.3% 5.3% 5.4% 14.1%


72

DO&CO Market Perform (Prev. Outperform)

Share Price

TL281.60

EUR836mn

Bloomberg/Reuters:

Relative Performance: 1 mth 3 mth 12mth

-14% -12% 23%

52 Week Range (TL):

0.8

YTD TL Return: -9%

Beta (historical, w eekly) 0.6


9.7

Current 12M ago

83% 89%

Atilla Dogudan 32.31%

Free Float 67.69%

Financials & Ratios* 2015/16 2016/17E 2017/18E 2018/19E

Net Sales (EURmn) 916 990 1,044 1,124

YoY 15% 8% 5% 8%

EBITDA (EURmn) 93 97 105 114

YoY 13% 4% 8% 9%

Net Income (EURmn) 28 30 32 33

YoY -20% 6% 6% 8%

EBITDA margin 10.1% 9.7% 10.0% 10.1%

Net margin 3.1% 3.0% 3.0% 3.0%

P/E (x) 29.6 27.9 26.4 25.1

EV/EBITDA (x) 8.8 8.7 8.1 7.3

EV/Sales (x) 0.89 0.85 0.81 0.74

EPS (EUR) 2.90 3.08 3.25 3.42

DPS (EUR) 1.20 0.85 0.92 0.97

Div. Yield 0.4% 0.3% 0.3% 0.3%

ROE 11% 11% 10% 10%


+90 (212) 384 1141 +90 (212) 384 1155-58


* DO & CO’s f iscal year starts on 1 April and ends on 31 March. ie

2016/17E refers to the period betw een 1/4/2016 and 31/3/2017

Foreign Ow nership in Free Float :

DOCO.TI / DOCO.IS

241.91 / 345.5

EV

USD947mn EUR938mn

DO & CO is a high-end international caterer active in the Airline

Catering (AC), International Event Catering (IEC) and Restaurants,

Lounges and Hotel (RLH) segments. The AC segment comprises 67%

of sales compared to 20% of RHL and 13% of IEC. The company

provides services through 28 gourmet kitchens in ten countries on

three continents. The Company w ent public on the Vienna Stock

Exchange in 1998 and started trading on the BIST in December 2010.




12M Target Price

TL350.00

Potential Return

24%


Mcap

Average Daily Vol (US$mn) 3 mth:

Lack of new catalysts

Contrary to the double-digit growth in previous years, the

company guided for single-digit growth this year despite

the contribution from the catering of the UEFA 2016

Football Championship. Margins are expected to remain

stable. The guidance does not include any inorganic

growth.

Eyes are on a new hub partnership with a client or a M&A,

yet recent new flows/deals in the sector are not supportive

and indicate challenges in acquisitions. A major contract

could potentially be added in Asia according to the

management.

Until corporate actions favoring the company materialize,

its high multiples are not justified, in our view. We are

downgrading the stock to Market Perform from Outperform

with a new 12-month target share price TL350.00

(EUR100) vs. TL371.34 (EUR107), offering a 24% upside

potential.

Recent deals in the sector: China-based HNA Group made a

CHF53/share offer for Gategroup. The offer price values

Gategroup at an equity value of around CHF1.4bn. Based on

forecasts compiled by Bloomberg for Gategroup, the transaction

suggests a 19x P/E and 9x EV/EBITDA multiple vs. DOCO’s 28x

and 9x, respectively. According to the media, DO&CO was one of

three firms interested in purchasing a controlling stake in Servair,

the catering unit of Air France-KLM. However, it seems DOCO is

no longer in the running. According to recent newsflow, Air

France is in talks with HNA for the sale of 49.99% of Servair and

the transfer of operational control for EUR475m. Servair had

revenues of EUR745mn in 2015.

Revisions to forecasts: We have adjusted our forecasts

considering the guidance and our new passenger figures.

Accordingly, we reduced our net income forecasts by 10% for

2016 and 2017.

Catalysts: A new partnership with a major airline or an M&A and

a pick-up in passenger demand with the normalization in regional

risks pressuring air demand would be seen as catalysts.

Valuation & Risks: We are employing a DCF analysis as our

preferred valuation methodology for DO & CO to better reflect the

Company’s growth prospects. We are downgrading the stock to

Market Perform from Outperform. Our 12-month target price of

TL350.00/share (EUR100.0) vs. TL371.34 (EUR107.00) indicates

a 25% upside potential. DO & CO trades at a premium to its

peers based on its adjusted 2016/17E EV/EBITDA and P/E while

offering stronger growth. The loss of any of the major airline

contracts, especially Turkish Airlines (to be renewed in 2016), a

crisis in the airline sector, a delay in the opening of Istanbul Hotel,

longer than expected margin pressure from newly invested

operations, an overpaid acquisition and a potentially high capex

requirement for Istanbul’s new airport pose risks.

June 22, 2016


73

RESEARCH

DO&CO

June 22, 2016


Income Statement 2015/16 2016/17E 2017/18E 2018/19E

Net Sales 916 990 1,044 1,124

Operating Expenses -861 -936 -986 -1,061

Operating Profit 56 54 58 63

Consolidated EBITDA 93 97 105 114





Tax -6 -11 -11 -13

Minority Interests 16 12 14 17

Net Income 28 30 32 34

Ratios

EBIT Margin 6.1% 5.5% 5.5% 5.6%

EBITDA Margin 10.1% 9.7% 10.0% 10.1%


Sales Growth 15% 8% 5% 0%

EBITDA Growth 13% 4% 8% 9%

Net Income Growth -20% 6% 6% 8%

Balance Sheet 2015/16 2016/17E 2017/18E 2018/19E

Current Assets 333 322 328 360

Cash and Cash Equivalents 172 149 145 162




Long Term Assets 295 341 371 390

Total Assets 628 663 698 749

Short Term Liabilities 193 199 204 210




Long Term Liabilities 181 181 181 181

Long-Term Financial Loans 4 4 4 4


Shareholders Equity 254 283 314 358

T. Liabilities & S.holders Equity 628 663 698 749

Cash Flow Summary 2015/16 2016/17E 2017/18E 2018/19E

EBITDA 93 97 105 114

WC Change -17 7 5 7


Capex 0 -79 -73 -67


Dividends paid -11 -8 -9 -9

Change in net debt -116 23 4 -18

CF from financing activities -1 -8 -9 -8

Key metrics 2015/16 2016/17E 2017/18E 2018/19E

Net Debt/EBITDA (x) -0.2 0.0 0.1 -0.1

Net Debt/Equity (x) -0.1 0.0 0.0 0.0

Capex/Sales (%) 0.0% 8.0% 7.0% 6.0%

WC Change/Sales (%) 2.3% 0.1% 0.8% 1.2%

ROCE (%) 6.5% 6.5% 6.4% 6.2%

ROIC (%) 20.2% 15.1% 14.5% 14.7%

FCF yield (%) 11.1% 0.0% 1.6% 3.5%


74

RESEARCH

Celebi

June 22, 2016

VALUATION UPDATE

DCF

We set a new 12-month target price of TL350.00/share (EUR100) for

DO&CO vs. TL371.34 before (EUR107). We are employing DCF as our

preferred valuation methodology for DO&CO to better reflect its growth

prospects. Our revision to target price is based on adjusted forecasts fol-

lowing its 1Q16 financials.

DO & CO DCF

(EURmn) 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

Revenue 990 1,044 1,124 1,210 1,306 1,409 1,519 1,633

Adj. EBIT 54 58 63 70 77 83 90 96

Taxes on EBIT -11 -12 -13 -14 -15 -17 -18 -19

NOPLAT 43 46 50 56 62 67 72 77

Depreciation 42 47 51 54 58 62 67 72

Gross Cash Flow 86 93 101 110 119 129 139 149

Increase in Working Capital 7 5 1 1 1 1 1 1

Capital Expenditures 79 73 67 60 65 70 76 82

Gross Investment 86 78 68 62 67 72 77 83

Free Cash Flow 0 15 33 48 53 57 61 66

Assumptions

Revenue grow th (TL, %) 8.1 5.4 7.6 7.6 8.0 7.8 7.8 7.5

Airline Catering / Total Revenue 69% 70% 70% 70% 70% 70% 70% 70%

IEA / Total Revenue 15% 13% 12% 12% 12% 11% 11% 10%

RHL / Total Revenue 16% 17% 17% 18% 18% 19% 20% 20%

EBIT margin (%) 5.5 5.5 5.6 5.8 5.9 5.9 5.9 5.9

EBITDA margin (%) 9.7 10.0 10.1 10.2 10.3 10.3 10.3 10.3

Depr/Sales (%) 4.3 4.5 4.5 4.5 4.4 4.4 4.4 4.4

Chg in W. Capital/Sales (%) 0.7 0.5 0.1 0.1 0.1 0.1 0.1 0.1

Capex/Sales (%) 8.0 7.0 6.0 5.0 5.0 5.0 5.0 5.0


WACC Assumptions

(%) 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

Risk-free Rate (RFR) 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Equity Risk Premium x Beta 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8

Cost of Equity 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8

Cost of Debt 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

Tax Rate 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0

Cost of Debt after Tax 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8

Weight - Equity 60.3 62.8 65.0 65.0 65.0 65.0 65.0 65.0

Weight - Debt 39.7 37.2 35.0 35.0 35.0 35.0 35.0 35.0

WACC 6.6 6.7 6.7 6.7 6.7 6.7 6.7 6.7


DO & CO 12 month forward Target Price (TL/share)


WACC + 1% 243.38 266.42 293.88

WACC 314.81 350.00 393.53

WACC - 1% 420.41 478.87 555.49


Valuation Summary (EURmn)

PV of FCF 248

Terminal grow th 2.0%


Adj. Net Debt -19

Minorities 269

EV 904

12M Target Mcap 974



75

RESEARCH

Celebi

June 22, 2016

Revisions to estimates

We revised down our forecasts for 2016-2017 in line with our new

passenger assumptions. We reduced our bottom line estimates by 10%

for the same period.


Although our revenue forecasts for both 2016 and 2017 are more or less

in line with the market consensus in terms of sales, yet our EBITDA

forecasts are c12% lower than the consensus.


DO & CO

(EURmn) 2016/17E 2017/18E 2016/17E 2017/18E 2016/17E 2017/18E

Net Sales 1,028 1,102 990 1,044 -4% -5%

EBITDA 113 116 97 105 -15% -10%

Net Profit 36 40 30 32 -16% -21%



Target Price (TL)


Bloomberg Garanti Difference

351.02 350.00 0%


DO & CO

(EURmn) 2016/17E 2017/18E 2016/17E 2017/18E 2016/17E 2017/18E

Net Sales 1,042 1,092 990 1,044 -5% -4%

EBITDA 105 112 97 105 -8% -7%

Net Profit 34 35 30 32 -12% -10%

EBITDA Margin 10.1% 10.3% 9.7% 10.0% -0.3% -0.2%


Target Price (TL)

OLD NEW % Change

371.34 350.00 -6%


76

RESEARCH

Celebi

June 22, 2016

DO&CO 1Q16 Results Review

DO & CO posted EUR4mn in net earnings in 4Q15/16, down by 31% yoy.

According to Bloomberg’s full year consensus figures, the bottom line fo-

recast stood at cEUR3mn, higher than the actual figure in the quarter with

slightly higher revenues. As such, FY2015/16 net profits fell to EUR28mn,

down by 19% due to the EUR11mn one-off income on the fair value as-

sessment of the total return equity swap in 1H14/15. If this were to be

excluded, net income would have been up by 19% yoy.

DO & CO Financials

Consolidated (mn€) 12M 14/15 12M 15/16 YoY 4Q 14/15 3Q 15/16 4Q 15/16 QoQ YoY

Sales 799 917 15% 201 236 206 -13% 2%

EBIT 54 56 2% 14 13 10 -32% 21%

EBIT Margin 6.8% 6.1% -11% 7.2% 5.6% 5.0% -2.2% 0.2%

EBITDA 82 93 12% 23 22 22 2% -4%

EBITDA Margin 10.3% 10.1% -0.2% 11.6% 9.3% 10.9% 1.6% -0.8%

Net Income 35 28 -19% 6 5 4 -21% -34%

Net margin 4.4% 3.1% -1.3% 3.1% 2.2% 2.0% -0.2% -1.1%

AC (mn€) 12M 14/15 12M 15/16 YoY 4Q 14/15 3Q 15/16 4Q 15/16 QoQ YoY

Sales 534 631 18% 137 156 149 -4% 9%

EBIT 46 50 25% 15 10 11 -41% -22%

EBIT Margin 8.5% 7.9% 0.2% 10.7% 6.5% 7.6% -3.3% -29%

EBITDA 64 75 17% 20 16 20 26% 0%

EBITDA Margin 12.0% 11.9% -0.1% 14.9% 10.4% 13.7% 3.3% -1.2%

IEC (mn€) 12M 14/15 12M 15/16 YoY 4Q 14/15 3Q 15/16 4Q 15/16 QoQ YoY

Sales 101 118 16% 25 35 18 -50% -29%

EBIT 4 4 48% 0 2 -1 35% -1933%

EBIT Margin 3.6% 3.6% 0.6% 0.2% 5.5% -6.3% 0.5% -2693%

EBITDA 8 9 12% 1 3 0 -91% -79%

EBITDA Margin 8.2% 7.9% -0.3% 5.7% 9.5% 1.7% -7.8% -4.0%

RLH (mn€) 12M 14/15 12M 15/16 YoY 4Q 14/15 3Q 15/16 4Q 15/16 QoQ YoY

Sales 164 168 2% 40 45 39 -12% -1%

EBIT 5 1 -74% 0 1 0 165% -100%

EBIT Margin 3.1% 0.8% -3.2% -0.6% 2.2% 0.0% 1.3% -100%

EBITDA 10 8 -19% 2 2 2 -28% -1%

EBITDA Margin 6.0% 4.8% -1.2% 4.3% 5.3% 4.3% -1.0% 0.0%



77

RESEARCH

Celebi

June 22, 2016

MODEL FORECASTS

CAGR

Airline Catering (EURmn) 2013/14 2014/15 2015/16 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

2015/16-

2023/24E

Revenue 450 534 631 685 736 791 851 914 983 1057 1136 7.5%

growth 12% 19% 18% 8% 8% 8% 8% 8% 8% 7% 8%

share in total 71% 67% 69% 69% 70% 70% 70% 70% 70% 70% 70%

EBITDA 51 64 75 77 84 91 99 107 115 124 133 8.2%

growth 18% 25% 17% 2% 9% 8% 8% 8% 8% 7% 8%

share in total 77% 78% 81% 80% 80% 80% 80% 79% 79% 79% 79%

EBITDA margin 11.4% 12.0% 11.9% 11.2% 11.4% 11.5% 11.6% 11.7% 11.7% 11.7% 11.7%

Source: Company Data, Garanti Securities

CAGR

International Event Catering (EURmn) 2013/14 2014/15 2015/16 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

2015/16-

2023/24E

Revenue 61 101 118 149 134 140 146 151 158 162 169 1.8%

growth -14% 66% 16% 27% -10% 4% 4% 4% 4% 3% 4%

share in total 10% 13% 13% 15% 13% 12% 12% 12% 11% 11% 10%

EBITDA 8 8 9 9 8 9 9 10 10 10 11 3.0%

growth -12% 10% 12% -5% -7% 6% 6% 6% 4% 3% 4%

share in total 11% 10% 10% 9% 8% 8% 7% 7% 7% 7% 6%

EBITDA margin 12.4% 8.2% 7.9% 5.9% 6.1% 6.2% 6.3% 6.4% 6.4% 6.4% 6.4%


CAGR

Restaurants & Lounges & Hotel (EURmn) 2013/14 2014/15 2015/16 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

2015/16-

2023/24E

Revenue 125 164 168 157 174 193 213 241 268 299 328 11.1%

growth 19% 31% 2% -7% 11% 11% 11% 13% 12% 12% 10%

share in total 20% 21% 18% 16% 17% 17% 18% 18% 19% 20% 20%

EBITDA 7 10 8 11 12 14 16 18 20 22 24 12.3%

growth 11% 33% -19% 36% 14% 12% 12% 14% 12% 12% 10%

share in total 11% 12% 9% 11% 12% 12% 13% 13% 14% 14% 14%

EBITDA margin 5.9% 6.0% 4.8% 6.9% 7.1% 7.2% 7.3% 7.4% 7.4% 7.4% 7.4%


CAGR

Consolidated figures (EURmn) 2013/14 2014/15 2015/16 2016/17E 2017/18E 2018/19E 2019/20E 2020/21E 2021/22E 2022/23E 2023/24E

2015/16-

2023/24E

Revenue 636 799 917 990 1044 1124 1210 1306 1409 1519 1633 7.4%

growth 10% 26% 15% 8% 5% 8% 8% 8% 8% 8% 8%

EBITDA 66 82 93 97 105 114 124 135 145 157 168 8.3%

growth 13% 24% 12% 4% 8% 9% 9% 9% 8% 8% 8%

EBITDA margin 10.4% 10.3% 10.1% 9.7% 10.0% 10.1% 10.2% 10.3% 10.3% 10.3% 10.3%


78

RESEARCH


June 22, 2016

APPENDIX — BREXIT’s impact the region’s aviation

There will be a referendum on June 23 to vote UK to leave EU or not. Opinion polls are notoriously

volatile and unreliable predictors. UK accounts for less than 3-4% of THY and Pegasus Airlines’

revenues and capacity

*Below part is taken from CAPA

Brexit up in the air: implications for aviation if the UK votes to leave the European Union

The EU has a liberalised aviation market

The biggest source of benefits to UK aviation from EU membership is in the area of traffic rights and

the nationality of airlines. Any airline owned and controlled by nationals of EU member states is free

to operate anywhere within the EU without restrictions on capacity, frequency or pricing.

The creation of the liberalised internal aviation market was one of the most important catalysts

behind the rapid development of LCCs in Europe in the 1990s. Today, the extensive pan-European

networks of Ryanair, easyJet, Vueling, Norwegian and others are built upon this free access.

Of course, Norway is not part of the European Union, but Norwegian Air Shuttle has equal access to

the internal European market for air transport, thanks to the European Common Aviation Area

(ECAA).

ECAA could offer a route for UK airlines to access the single aviation market, post-Brexit

The ECAA extends the liberalised aviation market beyond the EU member states to include

Norway, Iceland, Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic

of Macedonia, Montenegro, Serbia and Kosovo. The ECAA covers 36 countries and 500 million

people. Norway and Iceland (and Liechtenstein) are also part of the European Economic Area, which

extends the EU's wider single market to these non-EU countries.

If the UK were to leave the EU, its airlines would no longer enjoy automatic access to this market,

although the UK might be expected to negotiate continued access. The most obvious way for the UK

to do this would be to participate in the ECAA Agreement in the same way as countries such as

Norway currently do.

ECAA requires acceptance of EU aviation laws and "close economic cooperation" with the EU

The Agreement provides for expansion of the ECAA to include other countries that are happy with

two broad conditions. Firstly, they must be prepared to accept EU aviation laws and, secondly, they

must establish a "framework of close economic cooperation, such as an Association Agreement" with

the EU.

It may seem reasonable to assume that the UK would be prepared to continue to accept EU aviation

laws, since it does currently. A similar logic would also suggest that the UK would establish continued

close economic cooperation with the EU.

However, neither of these assumptions can be absolutely cast iron. Would a UK that has just decided

to leave the European Union necessarily be happy to sign up immediately to a return to many of the

EU's provisions?

79

RESEARCH


June 22, 2016

The UK might not be guaranteed ECAA membership

In addition, while the ECAA Agreement seems to allow countries that are not EU member states to

become part of the single aviation market, provided that they accept the two conditions noted above,

it is not totally clear that this is automatically guaranteed.

The ECAA Agreement is a multilateral agreement between the EU, its individual member states and

the additional states that form part of the single aviation market. It may, at least in theory, be possible

for any one of the signatory nations to object to modification of the agreement that is proposed to

allow the UK's continued participation after leaving the EU.

It was one thing to extend the ECAA to a number of relatively small countries that provide additional

market opportunities for EU airlines, but whose own airlines pose little competitive threat. (Norwegian

is an exception but its growth has surprised some, and Norway had to be allowed in for the sake of

the tri-national airline SAS.)

It would be a different thing to guarantee continued pan-European access to low cost UK airlines

such as easyJet, which have caused significant competitive damage to European legacy airlines.

Although Europe's largest LCC Ryanair, as an Irish airline, would continue to have access to the

European market, the UK's ejection could cause Ryanair difficulties operating in what is its largest

country market. Little wonder that Ryanair CEO Michael O'Leary is backing the UK's continued EU

membership.

The UK's future exclusion from the ECAA may currently seem far-fetched, but there is precedent for

powerful voices in European aviation to attempt to use the bilateral air services framework to raise

protectionist barriers to competition (witness the debate over the Gulf airlines).

It certainly seems fair to say that the UK's status with respect to the single aviation market, in the

event that it were to leave the EU, is at least to some extent uncertain. The ECAA Agreement

contains no explicit clauses clarifying what would happen to a member state that ceased to be part of

the EU.

The UK would still have to comply with a wide range of EU rules

The areas of EU aviation law and regulation that the UK would likely need to submit to, as part of the

ECAA, are extensive. They include market access, safety, security, air traffic management,

the environment, social (labour) issues, consumer rights and the economic regulation of airports.

The EU's new Aviation Strategy proposes changes in many of these areas, but only EU member

states have a say on such developments. Non-EU participants in the ECAA have to take it or leave it.

See related report: New EU Aviation Strategy avoids key issues as Asia Pacific and Middle East

claim the future

In addition, broader EU rules in areas such as state aid and competition, so not just limited to

aviation, would still apply to the UK.

Of course, the UK currently operates according to EU rules in these areas, and might not be

expected to object to continuing to do so. However, with the passage of time, it is not inconceivable

that the UK might decide that developments in one or more of these areas were not in its self-

interest.

http://centreforaviation.com/profiles/airlines/sas-sk

http://centreforaviation.com/profiles/airline-groups/easyjet-plc

http://centreforaviation.com/profiles/hot-issues/low-cost-carriers-lccs

http://centreforaviation.com/profiles/hot-issues/security-safety--insurance

http://centreforaviation.com/profiles/hot-issues/air-traffic-management

http://centreforaviation.com/profiles/hot-issues/environment

http://centreforaviation.com/analysis/new-eu-aviation-strategy-avoids-key-issues-as-asia-pacific-and-middle-east-claim-the-future-257022

http://centreforaviation.com/analysis/new-eu-aviation-strategy-avoids-key-issues-as-asia-pacific-and-middle-east-claim-the-future-257022

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For example, UK airlines (and those of other EU states) have been vocal in lobbying on issues such

as passenger rights and environmental measures, such as emissions trading, but they, and the UK

government, have been able to influence the debate within an EU membership framework. If a future

non-EU UK wanted to remain part of the ECAA, it would still be bound by EU rules, but would no

longer have a voice in shaping them.

The UK, upon leaving the EU, would then have to establish close economic cooperation Then there is the question of whether or not a post-EU version of the UK would seek to establish a "framework of close economic cooperation" with the EU? This question is fundamental, not only to its continued participation in the internal European aviation market, but also to its broader participation in the single market more widely.

This question has been aired in the UK, and the default assumption is that the UK would indeed prefer to retain access to the single market, but it is also the subject of some uncertainty. The UK referendum will not ask its citizens to decide on this question; it will ask merely whether to remain in the EU or not. (The exact wording will be, ‘Should the United Kingdom remain a member of the European Union or leave the European Union?’).

If the majority vote is in favour of leaving the EU, everything else is then up for grabs. So-called "Association Agreements" with the EU, which have to be ratified by each member state, typically offer non-EU countries tariff-free access to some or all EU markets (and financial or technical assistance), and often include a free trade agreement. In exchange, they generally require commitments to political, economic, trade, or human rights reform in a country.

In the past, such agreements have either been a staging post on the way to full EU membership, or a means for a non-EU country to have some of the benefits of the EU without committing to joining up in full. There is no precedent for a former member state entering into such an agreement.

However, it seems unavoidable that the UK would still need to be bound by a range of EU rules and regulations if it wanted to continue to enjoy any access to EU markets. Its membership of the ECAA would be conditional upon this.

Again, the question arises in connection with a UK that leaves Europe: how much Europe would this

UK still want? Moreover, the mirror to this question also arises: how much of the single market would

Europe still want to offer the UK?

The Switzerland model: a bilateral agreement with the EU Another way for the UK to ensure that its airlines continue to have access to the EU's single aviation market would be to negotiate a new UK-EU agreement on a bilateral basis.

There is a precedent for this in the agreement on air transport between Switzerland and the EU as a

whole, which was signed in 1999 and came into force in 2002. Domestic rights were originally

excluded, but negotiations on this topic began in 2011. A free trade agreement between Switzerland

and the EU was signed in 1972, and came into force in 1973.

http://centreforaviation.com/profiles/countries/united-kingdom

http://centreforaviation.com/profiles/countries/switzerland

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June 22, 2016

But the Swiss bilateral ties it to other EU rules and principles, putting its aviation agreement at risk The Swiss air transport agreement with the EU provides mutual market access for airlines of both parties and effectively binds Switzerland to much of the EU's aviation legislation. It was negotiated as a package in tandem with a series of other bilateral agreements, which all stand together.

If any one of seven bilateral EU-Switzerland agreements is terminated, including the one on air transport, then they are all terminated.

The provisions in these agreements included binding Switzerland to the four freedoms that form the foundations for the EU's single market. These are the freedom of goods, services, capital and labour. Following a 2014 referendum on the restriction of immigration, Switzerland risks breaching its agreement with the EU on the freedom of movement of persons. If this agreement is breached, it will effectively also terminate the air transport agreement.

The Swiss government is in the process of redrafting its immigration policy, in negotiation with the EU. Until this is complete, there remains some uncertainty hanging over the air transport agreement.

Whatever the final outcome, the Swiss example illustrates that it is possible to negotiate access to

the single aviation market on a bilateral basis, but that the EU is also likely to demand at least some

level of conformity with its four freedoms. Indeed, whichever mechanism is used by a non-EU country

to access the single aviation market - via the ECAA or a bilateral agreement - there are likely to be

significant conditions requiring the country to adopt many of the EU's rules and legislation.

UK could attempt individual bilaterals with each country, but this would be complicated Rather than attempt a Swiss-style accord with the EU as a whole, the UK could possibly seek to negotiate, on a bilateral basis, new air services agreements with each individual member of the ECAA and Switzerland, or a chosen subset of them.

It seems very likely that it could agree unlimited open skies style access for its own airlines and those of the other countries on routesbetween the UK and each of these countries, for example between the UK and France or Italy.

However, in order to replicate fully the access to the single aviation market that its airlines currently enjoy, the UK would also need to negotiate with each country a web of fifth, sixth, seventh, eighth and ninth freedom rights. For example, these rights would be necessary to allow a UK airline to operate from the UK to Italy and then to continue from Italy to France, to operate between Italy and France without starting in the UK and to operate domestic routes in Italy.

This "multi bilateral" approach could potentially avoid the need for the UK to take on large chunks of

EU rules, but it would also be far more complicated than dealing with the EU as a whole. Moreover,

individual EU countries may not be willing to play along, given that they presumably would still hold

the EU's principles dear, and that the UK would have just rejected many of those principles.

Beyond Europe, UK would need to replace EU-US traffic rights… Beyond the internal European aviation market, a country's EU membership brings the benefits to its airlines afforded by air services agreements that are negotiated with third party countries at an EU level on behalf of all member states.

The most important of these is the so-called EU-US open skies agreement, which allows the airlines of both parties to the agreement to fly from anywhere in the EU to anywhere in the US and vice versa (although it does not allow access to domestic markets).

http://centreforaviation.com/profiles/airlines/swiss-lx

http://centreforaviation.com/profiles/hot-issues/liberalisation-and-open-skies

http://centreforaviation.com/profiles/hot-issues/route-changes

http://centreforaviation.com/profiles/countries/france

http://centreforaviation.com/profiles/countries/italy

http://centreforaviation.com/profiles/countries/united-states-of-america


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June 22, 2016

The agreement was effectively a pre-condition for the US to give antitrust immunity to the profit

sharing joint ventures between EU and US airlines that lie at the heart of the three branded global

alliances.

…by negotiating continued access to the EU-US open skies agreement The UK, if it leaves the EU, will have to negotiate a means for its airlines to retain liberalised access to the trans-Atlantic market. Non-EU members Norway and Iceland are also parties to the EU-US agreement and it may be assumed that the UK could negotiate to enjoy a similar status to theirs.

…or through a new UK-US bilateral (with the EU's involvement) Alternatively, it could seek to negotiate a new UK-US open skies-style bilateral, but this would not in itself give UK airlines the freedom to fly from, say, Paris to New York. It could also, for example, call into question Norwegian's rights to fly from the UK to destinations in the US in competition with UK airlines.

If it wanted to re-create synthetically the traffic rights environment of the EU-US agreement, after coming to a new UK-US bilateral, the UK would also need to negotiate with the EU and US to allow non-UK airlines to fly UK-US routes, and to allow UK airlines to fly EU-US routes.

Opportunities could arise for anti-competitive forces British Airways and its parent IAG are currently firm advocates of competition and market liberalisation, but future scenarios could arise where UK airlines may lobby for a more restrictive stance on UK-US competition from non-UK airlines. Under such scenarios, the UK could feasibly look to retreat from a liberal trans-Atlantic traffic rights regime that continues to mimic the existing EU-US open skies agreement.

Again, although it may now seem that the most likely scenario is that the UK will renegotiate the same US traffic rights for UK (and EU) airlines as currently apply, there is at least some degree of uncertainty over the situation. The implications for the North Atlantic immunised joint ventures are unclear.

Moreover, the fragmentation of the existing EU-US open skies regime would provide more

opportunities for anti-competitive forces to enlist the bilateral regime to raise protectionist barriers in

the future.

UK would also have to replace other EU-level bilateral… In addition to the EU-US agreement, air services agreements exist at the EU level with a number of other countries, including Canada,Morocco, the Western Balkan countries, Jordan, Georgia, Moldova, Israel and Brazil (the latter is yet to be implemented), and negotiations are ongoing with Australia and New Zealand.

In Dec-2015, the EU launched an initiative to negotiate EU-level aviation agreements with a number of other countries, including Turkey,China, Mexico, Armenia, the Gulf Cooperation Council (GCC) States and, in what would be the first such agreement between two blocs of countries, the Association of South East Asian Nations (ASEAN) States.

If it left the EU, the UK would also need to negotiate new air services agreements on a bilateral basis

to replace all these EU-level deals.

http://centreforaviation.com/profiles/hot-issues/alliances

http://centreforaviation.com/profiles/hot-issues/alliances

http://centreforaviation.com/profiles/airports/paris-charles-de-gaulle-airport-cdg

http://centreforaviation.com/profiles/airlines/british-airways-ba

http://centreforaviation.com/profiles/airline-groups/international-airlines-group-iag


http://centreforaviation.com/profiles/countries/canada

http://centreforaviation.com/profiles/countries/morocco

http://centreforaviation.com/profiles/countries/jordan

http://centreforaviation.com/profiles/countries/georgia

http://centreforaviation.com/profiles/countries/moldova

http://centreforaviation.com/profiles/countries/israel

http://centreforaviation.com/profiles/countries/brazil

http://centreforaviation.com/profiles/countries/australia

http://centreforaviation.com/profiles/countries/new-zealand

http://centreforaviation.com/profiles/countries/turkey

http://centreforaviation.com/profiles/countries/china

http://centreforaviation.com/profiles/countries/mexico

http://centreforaviation.com/profiles/countries/armenia

http://centreforaviation.com/profiles/government-bodies/association-of-southeast-asian-nations-asean

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June 22, 2016

…and decide whether to replace EU nationality clauses in UK bilaterals

In addition to these EU-level agreements, there is still a large number of bilateral agreements

between the UK and other, non-EU, countries (the same is true for all EU countries). In order to bring them into line with EU law, most of the agreements have been amended to replace references

to UK ownership of airlines with references to EU ownership.

This means that the UK's bilateral no longer discriminate against other EU airlines in terms of their

rights to operate from the UK to the non-EU country. If it decides to leave the EU, the UK will then have to decide whether or not to retain these revised nationality clauses, which allow other EU

airlines to compete with UK operators on international routes from the UK.

UK may not be able to pick and choose which parts of EU legislation to retain

In general, those who oppose the UK's continued membership of the EU, but who are in favour of

continued access to the single market, object mostly to the freedom of labour. In particular, they are

concerned about unlimited immigration into the UK from the newer EU member states, mainly in Central and Eastern Europe.

There are those who suggest that a post-EU UK would negotiate with Western European countries to

continue to allow the free movement of people. However, it may not be so easy to pick and choose

which parts of EU legislation the UK wants to retain, and in which territories, if it wants to retain access to the entire single aviation market.

Maintaining existing traffic rights may be the most likely post-Brexit outcome…

In summary, if the UK decides to leave the EU, the most likely outcome for aviation is that the UK will negotiate with the EU and other partners to maintain the status quo with regard to airline traffic

rights, as far as possible.

However, this would likely require the UK to continue to accept a large proportion of EU rules and

legislation, not only on aviation, but also on broader issues including its four fundamental freedoms.

Moreover, the UK would no longer have the same influence over these rules that its current status as an EU member state gives it. As Borge Brende, Norway’s foreign minister, has observed, “Our

arrangement . . . is that we have to implement all the EU directives. We are not around the table

when these are discussed in Brussels.”

…but there are important uncertainties and risks for airlines

If it wanted to be more selective about which rules to follow and which to reject, the consequences

are unclear, but the situation could start to unravel, and this could threaten the UK's inclusion in EU markets, including the single aviation market.

This is a potential threat not only to UK airlines, but also to airlines from other EU states for whom

the UK is an important market. Either way, the UK government will need to start planning for the

exit the minute the referendum is concluded, if the outcome is a vote to leave the EU.

http://centreforaviation.com/profiles/regions/europe--easterncentral-europe

http://centreforaviation.com/profiles/airports/brussels-airport-bru

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Recommendation History - THY

Recommendation History - Pegasus


85

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June 22, 2016

Recommendation History - TAVHL

Recommendation History - CLEBI


86

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Recommendation History - DO&CO


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June 22, 2016

Share Performances

Definition of Stock Ratings

OUTPERFORM (OP) The stock's return is expected to exceed the return of the BIST100 over the next 12 months.

MARKET PERFORM (MP) The stock's return is expected to be in line with the BIST100 by over the next 12 months.

UNDERPERFORM (UP) The stock's return is expected to fall below the return of the BIST100 by over the next 12 months.


Price Performance (TL)

15.00

20.00

25.00

30.00

35.00

40.00

45.00

01.1

5

02.1

5

03.1

5

04.1

5

05.1

5

06.1

5

07.1

5

08.1

5

09.1

5

10.1

5

11.1

5

12.1

5

01.1

6

02.1

6

03.1

6

04.1

6

05.1

6

06.1

6

CLEBI BIST-100


10.0012.0014.0016.0018.0020.0022.0024.0026.0028.0030.00

01.1

5

02.1

5

03.1

5

04.1

5

05.1

5

06.1

5

07.1

5

08.1

5

09.1

5

10.1

5

11.1

5

12.1

5

01.1

6

02.1

6

03.1

6

04.1

6

05.1

6

06.1

6

TAVHL BIST-100


10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

01.1

5

02.1

5

03.1

5

04.1

5

05.1

5

06.1

5

07.1

5

08.1

5

09.1

5

10.1

5

11.1

5

12.1

5

01.1

6

02.1

6

03.1

6

04.1

6

05.1

6

06.1

6

PGSUS BIST-100


5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

01.1

5

02.1

5

03.1

5

04.1

5

05.1

5

06.1

5

07.1

5

08.1

5

09.1

5

10.1

5

11.1

5

12.1

5

01.1

6

02.1

6

03.1

6

04.1

6

05.1

6

06.1

6

THYAO BIST-100


120.00

170.00

220.00

270.00

320.00

370.00

01.1

5

02.1

5

03.1

5

04.1

5

05.1

5

06.1

5

07.1

5

08.1

5

09.1

5

10.1

5

11.1

5

12.1

5

01.1

6

02.1

6

03.1

6

04.1

6

05.1

6

06.1

6

DOCO BIST-100


88

RESEARCH

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