Turkish Airlines. BUY Share price: TL17.37 Target price: TL Europeans are back GENEL-PUBLIC. Company update GENEL-PUBLIC

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1 Turkish Airlines March 8, 2018 Equity Research Aviation Europeans are back Strong demand continue to support industry. Turkish Airlines recorded 15.5% YoY O&D pax growth, resulting in overall 8.4% YoY international pax growth in In the same year, although foreign arrivals to Turkey recovered much by 27.8% YoY almost in all regions, European arrivals stayed flattish in Our conversations with Association of Turkish Travel Agencies claimed that summer bookings from Western Europe has jumped much by 60% YoY for Furthermore, summer bookings from domestic tourist figures jumped to 6 million versus 5 million in previous year. We now estimate Turkish Airlines will carry 42.2 mn international passenger and 33.1 mn domestic passenger, overall resulting to 9.7% YoY passenger growth and improvement of 2.9 ppt in load factor to 82.1% in 2018E vs 79.1% in Although we revised up our revenue estimate of 2018E much by 6.7%, we cut down EBITDA margin estimate by 1ppt on the back of upward revision in our oil estimates and ex-fuel CASK by 5.9% after 4Q17 results performing worse than our estimates. Accordingly, we project THY to generate 13.2% revenue and 9.9% EBITDA CAGR over our forecast period ( E). There is still room for improvement on our assumptions. The shares have gained 10.7% so far this year outperforming the benchmark BIST 100 index by 9.4 percentage points. THYAO is trading at 6.5x on one-year forward EV/EBITDA, at 8% below its 5- year historical average multiple, or at 5% to its emerging market peers median. Valuation. Our price target is based on a combination of DCF and target EV/EBITDA multiple with respect to 80:20 weights. Our DCF model points to a 12-month target share price of TL18.90 implying a 9% upside potential. On the multiple part, we use 2018E target EV/EBITDA of 7.0x historical five-year median, values THYAO at TL22.30, implying a 28% upside potential, assuming 12-month target currency of USD/TRL at Key risks. An unexpected increase in geopolitical tension, lower than our expected load factors, passenger growth, ticket prices, unexpected hikes in fuel prices, value-destructive M&A and negative surprise in the value of US dollar are the main downside risks to our model. Forecasts and Ratios 2015A 2016A 2017A 2018E 2019E Revenues (USDmn) 10,522 9,792 10,958 12,541 14,043 EPS (basic,usd) EPS (fully-diluted,usd) BVPS (USD) PER (x) 5.9x -82.0x 28.3x 8.2x 7.2x PBR (x) 1.3x 1.2x 1.2x 1.0x 0.9x EV/Sales (x) 1.3x 1.4x 1.2x 1.1x 0.9x EV/EBITDA (x) 8.2x 16.6x 7.1x 6.5x 5.9x Company update BUY Share price: TL17.37 Target price: TL21.60 Expected Events March April, 9th Key Data Ticker THY February-18 traffic Market traffic results (March) Price performance Price BIST100 (Rebased) Analyst: Abdullah Demirer ADemirer@halkyatirim.com.tr Istanbul: THYAO Share price (TL) W high (TL) W low (TL) 5.38 Market Cap (TLm) 23,971 Market Cap (USDm) 6,310 Free float (%) Consensus TP (TL) Consensus rating 73% B / 27% H / 0% S 3M ADV (USDm) HY EPS (2018E) 2.16 Consensus EPS (2018E)

2 Figure 1 : Foreign Arrivals Breakdown Figure 2 : European Arrivals YoY 40% 27.8% 30% 20% 10% 5.5% -1.6% 0% 3.5% -1.8% -0.1% -10% -20% -30.1% -30% -40% -31.1% % 30% 20% 10% 0% -10% -20% -30% -40% -50% -6% -9%-14% -2% -19% -19% -20% -24% -25% -29% -30% -33%-37% -38%-37% -33%-33% 7%8% 13% 1% 3% 12% 21% 34% Europe Total Source: Ministry of Culture and Tourism, Halk Invest Although foreign arrivals recovered much by 27.8% YoY in 2017 almost in all regions, European arrivals stayed flattish in Our conversations with Association of Turkish Travel Agencies claimed that summer bookings from Western Europe has jumped much by around 60% YoY for 2018, where German arrivals lead the figures. Moreover, last minute reservations also increased to 60-70% from 20-30% in the last couple years. Furthermore, Afrin operation did not affect the reservations. Last but not least, early reservation figures show that domestic tourist numbers increased to 6 million from 5 million in previous year. Thus we now estimate the domestic passenger number will record 9.7% YoY in 2018E after 10.3% YoY growth in European passenger figures jumped 35% YoY according to Turkish Airlines Jan., 2018 traffic data and led total O&D passenger to grow 45% YoY. Taking into account the jump in summer bookings, European arrivals would increase c.33% YoY growth in 2018 and will lead international passengers of Turkish Airlines to increase c.10% YoY in Therefore we updated our 2018E international passenger estimates by 0.6% to 42.2 mn which stands out at 41.0 mn in company management guidance. Note that, direct passenger constitute 45% of the Europe routes and have 20-30% higher yield than the transfer passengers. Therefore, we upgraded our passenger revenue yields by 5.0% to 7.26 Usc from 6.92 Usc. We now estimate company will generate USD12,541 mn in 2018E implying 14% YoY growth on the back of mainly upward revision of our total passenger numbers. On the other hand, we update our expense estimates derived mainly worse than our estimates in 4Q17 and upward revision in our average Brent price estimates. According to our estimates, CASK growth would record 8.2% YoY to 6.35 Usc in 2018E from 5.87 Usc in As a result, our 2018E estimate slightly increased to USD2,040 mn in 2018 by 0.7%. We upgrade our 2018E assumption of average Brent price to 62.0 USD/bbl from 56.0 USD/bbl to incorporate recent improvement in oil prices, which leads our average fuel price estimate for the company, including hedge, to increase to 653 USD/ton. Having that 60% of fuel cost is hedged by decreasing layered hedging strategy for the following 24 months, over ICE Brent derivatives, we calculate company already hedged 45% of its 2018E fuel consumption at 53.3 USD/bbl, which will provide shield for the company s operating profitability. 2

3 Figure 3 : Changes in our estimates 2018E 2019E USD m n Old New Change Old New Change Sales 11,750 12, % 13,477 14, % EBITDA 2,026 2, % 2,023 2, % Margin 17.2% 16.3% -1 pp 15.0% 16.0% 1 pp Net Income % % Margin 6.8% 6.1% -0.7 pp 5.7% 6.3% 0.6 pp Source: Halk Invest We now estimate the company to generate 6.7% more sales revenue in 18E on the back of upward revisions in our total pax estimates. We also upgraded our top-line estimates of 19E, mostly derived from cargo volume upward revision and domestic passenger upward revision assuming domestic passenger market share gain of the company in 2018E will remain. On the other hand, we cut down our total international passenger estimates by 4.1% on the back of downward revision of authority estimates by 10.9% in 2019E. Figure 4 : Our estimates versus the consensus THYAO Halk Invest Bloomberg Difference (TL mn) 2018E 2019E 2018E 2019E 2018E 2019E Sales 48,784 56,451 45,560 51,556 7% 9% EBITDA 7,937 9,035 7,616 8,619 4% 5% Net Income 2,982 3, ,142 6% 13% EBITDA Margin 16.3% 16.0% 16.7% 16.7% -0.4 p -0.7 p Net Income Margin 6.1% 6.3% 6.2% 6.1% -0.1 p 0.2 p Source: Bloomberg, Halk Invest Figure 5 : Our estimates versus FY2018 THY guidance 2018E Company Target Halk Invest Difference Sales (Solo - USD bn) % EBITDAR Margin (Solo) 21%-22% 23.7% - EBITDAR Margin (Consolidated) 23%-24% 24.5% - CASK (YoY Change) %3-%5 5.6% - ASK (bn) % Total Pax (Million) % Domestic % International % Load Factor 79-80% 82.1% Cargo (000 Tonnes) 1,300 1, % Average Jet Fuel (including fuel hedge) 633 USD 656 USD 3.7% 3

4 Figure 6 : EV/EBITDA 18E Figure 7 : EV/Sales 18E THY EM Median Global Median THY EM Median Global Median Eva China Korean Asiana IAG Air France Lufthansa Eva China Korean Asiana IAG Air France Lufthansa Source: Bloomberg, Halk Invest THYAO : 1yr forward P/E Following our EBITDA revisions, Turkish Airlines is currently trading at 6.5x and 2018E EV/EBITDA discount at c.5% to its emerging market peers median. Additionally, the share is trading discount at 8% to its 5-year historical average multiple of 7.0x. Valuation. We base our valuation for Turkish Airlines with a combination of DCF and target EV/EBITDA multiple with respect to 20:80 weights. Our DCF model points to the 12-month target share price of TL18.90 implying a 9% upside potential. On our DCF model, we use a USD-based model with the assumptions of a 2% terminal growth rate, a Beta of 1.10, a market risk premium 5.5%, a risk free rate 6.0%, longterm EBITDA margin assumption of 14.6% (from 13.8%). On the multiple part, we use 2018E target EV/EBITDA of 7.0x historical five-year median. Our multiple model values THYAO at TL22.30, implying a 28% upside potential. As a result, our weighted valuation model indicates the 12-month target share price of TL21.60, assuming a 12-month target currency of USD/TRL at Risks. An unexpected increase in geopolitical tension, lower than our expected load factors, passenger growth, ticket prices, unexpected hikes in fuel prices, valuedestructive M&A and negative surprise in the value of US dollar are the main downside risks to our model. THYAO : 1yr forward EV/EBITDA Source: Bloomberg, Halk Invest 4

5 Operational and financial estimates 2017A 2018E 2019E 2020E # of total passengers Old Change 2.9% 0.1% 0.2% # of int'l passengers Old Change 0.6% -4.1% -5.4% # of domestic passengers Old Change 5.9% 6.5% 9.1% Passenger growth YoY 9.3% 9.7% 8.7% 6.1% Old 6.7% 11.7% 6.0% Change 3.1 ppt -3 ppt 0.1 ppt Load factor 79.1% 82.1% 83.1% 79.5% Old 81.1% 77.7% 77.8% Change 1 ppt 5.5 ppt 1.8 ppt Passenger R/Y (USc) Old Change 5.0% 7.9% 1.1% ASK (bn) Old Change -0.9% -11.0% -8.7% CASK (USc) Old Change 8.8% 16.1% 5.7% Ex-fuel CASK (USc) Old Change 5.9% 13.7% 12.1% RASK (USc) Old Change 6.3% 15.9% 4.2% Revenue (USD mn) 10,958 12,541 14,043 14,730 Old 11,750 13,477 15,302 Change 6.7% 4.2% -3.7% EBITDA 1,860 2,040 2,248 2,152 Old 2,026 2,023 2,141 Change 0.7% 11.1% 0.5% Net Income Old Change -4.0% 15.2% -15.6% 5

6 Financials & forecasts THYAO (Consolidated) Financials and Forecasts (USD mn) 2014A 2015A 2016A 2017A 2018E 2019E Sales 11,070 10,522 9,792 10,958 12,541 14,043 COGS -9,030-8,420-8,656-8,762-10,043-11,303 Gross income 2,040 2,102 1,136 2,196 2,498 2,740 Opex -1,399-1,420-1,486-1,402-1,590-1,739 EBITDA 1,384 1, ,860 2,040 2,248 Depreciation ,148-1,066-1,133-1,247 EBIT ,001 Net financial income , Net other income EBT 1,046 1, ,129 Tax Net income 845 1, Minorities Net income after minorities 845 1, Dividends paid out Retained earnings 845 1, Total assets 13,746 16,383 18,491 18,197 18,880 20,727 Cash and securities ,862 2,137 1,818 2,426 Fixed assets 9,201 11,415 13,476 13,002 13,371 14,300 Inventories Total debt 5,950 7,664 10,247 9,070 8,533 9,036 Book equity 3,950 4,842 5,087 5,346 6,113 6,994 Market equity 5,687 3,496 2,756 3,087 6,316 6,316 MV of net debt 5,227 6,701 8,385 6,933 6,715 6,610 Minorities Enterprise value 10,914 10,197 11,141 10,020 13,032 12,926 6

7 Financials & forecasts Margins 2014A 2015A 2016A 2017A 2018E 2019E Gross EBITDA EBIT EBT Net Depreciation Inventories Opex Financing Cost of funding (net) Profitability 2014A 2015A 2016A 2017A 2018E 2019E Asset turnover ROA ROE Leverage ratios 2014A 2015A 2016A 2017A 2018E 2019E Debt/Assets Debt/Equity Net debt/equity 1.3x 1.4x 1.6x 1.3x 1.1x 0.9x Net debt/ebitda 3.8x 4.2x 10.5x 3.7x 3.3x 2.9x Dividend pay-out Per share data and multiples 2014A 2015A 2016A 2017A 2018E 2019E EPS (USD) BVPS (USD) DPS (USD) CFPS (USD) Dividend yield (%) Earnings yield (%) FCF yield (%) EV/Sales 1.2x 1.3x 1.4x 1.2x 1.1x 0.9x EV/EBITDA 9.6x 8.2x 16.6x 7.1x 6.5x 5.9x P/FCF -46.4x 15.9x -13.2x 9.9x -43.7x 14.3x PER 7.5x 5.9x -82.0x 28.3x 8.2x 7.2x PBR 1.6x 1.3x 1.2x 1.2x 1.0x 0.9x 7

8 Previous Publications TATGD Turnaround performance likely to continue - Upgrade to BUY February 27, 2018 XBANK BRSA Nov 17 figures support 4Q17 expectations January 2, 2018 ARCLK A challenging year ahead December 28, 2017 AKCNS Get ready for 2018 December 11, 2017 THYAO Still enough air for higher altitude December 8, 2017 XBANK BRSA Oct 17 figures are promising for 4Q17 December 1, 2017 THYAO Promising outlook, better to be up there October 26, 2017 VESTL Attractive entry point October 25, 2017 XHOLD Discounts are still wide, awaiting 3Q results October BIMAS Positives Already Priced in October 19, 2017 XBANK Banks: August earnings up 12%, 8M17 added 25% October 4, 2017 XBANK June earnings up 34% on a recurrent basis August 2, 2017 KRDMD Kardemir: The RAIL-maker July 25, 2017 KCHOL Koc s EPS / discount mismatch offers an opportunity July 24, 2017 ALKIM Alkim Kimya: Budding to be Turkey s Chemicals Powerhouse July 17, 2017 XBANK Banks: May Earnings up 19%, 5M Added 50% July 12, 2017 XHOLD Conglomerates: Discounts have Widened After insider Sales June 13, 2017 ALKA Alkim Kagit : Attractive Valuation with 10% yield June 7, 2017 MGROS Migros: Stronger with Kipa May 30, 2017 XBANK Banks: Valuations Remain Attractive Stay invested May 24, 2017 XHOLD Conglomerates: Strong EPS Momentum Point to Further Price Gains May 15, 2017 TOASO Tofas: it s All About Earnings April 10, 2017 VESTL Vestel Elektronik: Good Story but Too Crowded a Trade March 29, 2017 EREGL Erdemir: High Yield, Attractive Valuation March 28, 2017 XBANK Banks: Reiterating our Positive Stance for Post Fed-Hike March 16, 2017 TATGD Tat Gida: Priced to Perfection March 8, 2017 XBANK Banks: The Rally Has Legs, Upside Risk to 1Q17 Earnings March 8,

9 Halk Invest Rating Definitions We rate a stock BUY if we see 15% or more upside in shares. Any upside between 1% and 15% merits a HOLD rating. We rate a stock SELL if our target value is below the current market value. Equity Research Banu Kivci Tokali Head of Research Chief Economist BTokali@halkyatirim.com.tr Ilknur Turhan Generalist, Building Materials ITurhan@halkyatirim.com.tr Abdullah Demirer Industrials, Mid-caps ADemirer@halkyatirim.com.tr Serhan Yenigün Energy & Utilities Strategy SYenigun@halkyatirim.com.tr Ugur Bozkurt Macro Research UBozkurt@halkyatirim.com.tr Equity Sales & Trading Alpogan Sabri Erdogan Head of Financial Markets +90 (212) AErdogan@halkyatirim.com.tr Nazan Ozdemir Sales +90 (212) NOzdemir@halkyatirim.com.tr Disclaimer This report has been prepared by Halk Yatırım Menkul Değerler A.Ş. ( Halk Invest ), solely to provide information to the recipient as of the date of issue and are subject to changes without prior notice. The comments, estimates and recommendations included herein do not constitute an offer or an invitation to buy or sell any security. The advice given in this document is not a part of investment advisory activity. Investment advisory services are given according to the investment advisory contract, signed between the authorised institution and the client. The information presented in this report has been obtained from published information and other sources which Halk Invest considers to be reliable. Halk Invest does not accept any liability or responsibility for the accuracy or completeness of any such information. The opinions discussed in this report may not be appropriate for all investors. Transactions in securities, instruments or investments to which it refers to can involve high risks, therefore it is highly recommended that investors make their own investment decisions based on their specific investment objectives, financial positions and risk profiles. Halk Invest and its affiliated organisations and persons may, from time to time, take position on any of the securities covered herein and may buy or sell those securities or their derivative securities either on their own account and / or on behalf of their clients. All information in this document remains as the property of Halk Invest and must not be reproduced under any circumstances, not to be copied or made available to any person other than the recipient. 9