Company Update Aviation Industry May 21, 2021 TAV Airports Holding Almaty International Airport becomes TAV Airport’s first owned airport R. Fulin Önder Equity Research Analyst [email protected] MARKET PERFORM The consortium formed by TAV Airports and VPE Capital has finalized TP: TRY 26.30 the share transfer of Almaty Airport as of end-April 2021. Almaty Airport is now owned by the consortium, of which TAV Airports is an 85% Previous TP: 23.00 shareholder. The Kazakhstan Infrastructure Fund under the Upside potential: 11% management of VPE Capital holds the remaining 15% stake. The purchase price has been revised down to US$365mn at the closing of the deal, from US$415mn previously, with an earn-out schedule for the remaining US$50mn - TAV Airports and VPE Capital had previously agreed to acquire 100% shares of Almaty Airport and its associated jet fuel and catering businesses for an EV of US$415mn on May 7, 2020. The previously agreed purchase price was revised down to TRY US$ US$365mn at the closing of the deal, taking into account the traffic Close 23.60 2.82 decrease at the airport due to the COVID-19 pandemic. The parties have rather inked an “earn-out” schedule (Fig. 1) for the payment of the BIST 100 1,450 173 remaining US$50mn of the previously agreed on price. The payments to US$/TRY(CB Bid Rate): 8.3689 be made according to this “earn-out” schedule will be subject to traffic recovery at Almaty Airport reaching certain thresholds. The ultimate 52 Week High: 26.74 3.66 threshold number is set as 28,883 flights, determined according to the 52 Week Low : 13.79 1.66 average of total of international and cargo ATMs during 2018 & 2019. Bloomberg/Reuters Ticker: TAVHL.TI / TAVHL.IS According to this earn-out schedule, if, for example, the total number of international and cargo ATM at the airport reaches 23,107 flights in 2021E (i.e., 80% of the 28,883 flights threshold), a US$40mn payment Number of Shares (Mn): 363 will be made to the seller by the consortium. And if this figure were to Current Mcap (Mn): 8,573 1,024 increase further to 25,995 in 2022 (i.e. to 90% of the 28,883 threshold), Free Float Mcap (Mn): 4,115 492 an additional US$5mn payment would be made. The earn-out payment matrix differs for each year by the rate of traffic recovery, and will be paid in full in 2030, regardless of traffic. 1 M YoY YtD TAV Airports will be consolidating this asset fully starting from 2Q21E TRY Return (%): 26.7 27.7 10.8 - Almaty Airport will be TAV Airport’s first owned airport; TAV Airports US$ Return (%): 22.7 3.5 -1.8 will be fully consolidating this asset in its financials starting from 2Q21E. BIST 100 Relative (%): 19.4 -10.0 12.9 Unlike the Group’s other terminal operations that have concession periods and/or are BOT projects, Almaty Airport has perpetuity with no Avg. Daily Vol. (TRY Mn): 191.1 rent payments and no concession renewal risk. The airport had served Avg. Daily Vol. (US$ Mn): 25.4 c.3.6mn PAX in 2020 (2019:6.4mn); yet its strength actually lies in its fuel and cargo businesses, whereby it had generated US$119mn revenues with an EBITDA margin of c.17% in 2020 (2019: US$206mn & Beta 0.90 33%, resp.). These correspond to c.13% of TAV Airports’ total PAX, c.34% Volatility (Stock) 0.42 of its revenues and 77% of its EBITDA in the respective year, 2020 (2019: Volatility (BIST 100) 0.23 7%, 25% & 22%, resp.). The consolidation of Almaty Airport in TAV Airports’ financial statements from 2Q21E onwards thus increases our 2021E revenue and EBITDA estimates by c.27% to €478mn and by c.20% Shareholder Structure % to €143mn, from €377mn and €119mn previously, respectively. Groupe ADP 46.1 The acquisition impacts our valuation positively; we revise our 12M Tepe Insaat 5.1 TP to TRY 26.30/sh and maintain our “Market Perform” rating –While Sera Yapı 1.2 we evaluate the purchase price as fair considering the US$200mn Free Float 47.6 investments to build a new international terminal to increase capacity Total 100.0 up to 14mn PAX p.a. from 7mn PAX p.a. currently, we also note that at 18.3x 2020A EV/EBITDA and at c.11.0x 2021E EV/EBITDA on our estimates, it compares favorably with TAV Airports’ peer median of 30.0 170 33.8x and 17.6x, respectively. We value Almaty Airport at €240mn; our 27.5 155 valuation, which is a blend of the Group’s SoTP and relative valuation 25.0 140 to its peers, thus yields a 12M TP of 26.30/sh for TAV Airports Holding. We maintain our “Market Perform” rating on the Group shares amid the 22.5 125 current volatile and relatively unpredictable environment for air travel 20.0 110 demand due to the COVID-19 pandemic, while noting the upside risks 17.5 95 mainly as possible compensation for loss of traffic from other (non- 15.0 80 Turkish) airports that it operates. 12.5 65 2019 2020 3M 2020 3M 2021 2021E 2022E 10.0 50 P/E 4.39 NM 3.15 NM NM NM May-18 Jan-19 Sep-19 May-20 Jan-21 P/BV 1.22 0.92 0.71 0.74 0.89 0.93 EV/EBITDA* 6.69 131.99 5.04 NM 8.96 10.00 Share Price (TRY) BIST 100 Rel. EV/Sales 2.94 5.64 2.08 5.49 2.69 2.31 Net Sales (€ mn)* 749 301 118 61 478 527 Net Profit (€ mn) 373 (285) (56) 62 7 (42) EPS (€) 1.03 (0.78) (0.15) 0.17 0.02 (0.11) Şeker Invest Research May 21, 2021 Almaty Airport’s inclusion in our valuation – Almaty Airport currently has a capacity of 7mn PAX p.a., and with the completion of the US$200mn worth investments for a new terminal building over the next 30 months, its capacity is expected to reach 14mn PAX p.a. ultimately. The airport had served c.3.6mn PAX amid the COVID-19 pandemic in 2020 (2019:6.4mn). We expect it to be able to reach its 2019 PAX levels in 2023E. Almaty Airport’s passenger fees and other passenger traffic-related commercial income are relatively lower when compared to TAV Airport’s other terminal businesses, yet its strength actually lies in its fuel, cargo and ground handling businesses, which comprise nearly 75-80% of the airport’s total annual revenues. Almaty Airport thereby generated US$119mn revenues with an EBITDA margin of c.17% in 2020 (2019: US$206mn & 33%, resp.). We see potential of improvement in passenger fees and commercial income, and expect the airport’s revenues recovering by c.37% in 2021E and by c.22% in 2022E, and exceeding 2019 levels by 2023E. We also presume the airport’s EBITDA margin recovering gradually to reach c.30% by the end of our projection span, from 16.8% in 2020 (2019: 33.5%). Almaty Airport has perpetuity with no rent payments and no concession renewal risk; hence with a terminal growth rate assumption of 1% and a WACC of 9.8%, we value the airport’s operations at US$290mn (€240mn), including debt to be incurred at the SPV, which contributes c.€204mn to our SoTP valuation for the Group. The consortium (SPV) formed by TAV Airports and VPE Capital has financed US$200mn of the payment for the acquisition of Almaty Airport with equity, and TAV Airports provided bridge financing to the SPV for the remainder of the acquisition, which will be paid back to TAV Airports upon the closure of loan funding. The SPV has received approval from the IFC and the EBRD to finance c.50% of the acquisition with a 15-year maturity loan having a 3-year grace period; the expected closing for the loan funding is Q3 2021. Figure 1: Earn-out schedule 2021 2022 2023 2024 2025 2026+ Traffic recovery threshold 70% 35 35 35 21 14 0 compared to the average 80% 40 40 40 24 16 0 of 2018 & 2019 90% 45 45 45 27 18 0 international & cargo ATM 100% 50 50 50 30 20 0 (28,833 flights) required 125% 50 50 50 50 50 50 to make additional earn- out payment Source: TAV Airports Holding Figure 2: Almaty Airport, Summary figures 2017 2018 2019 2020 2021E 2022E International PAX (mn) 2.7 2.8 3.0 0.8 1.8 2.8 Domestic PAX (mn) 3 2.8 3.4 2.8 3.1 3.2 Revenues (US$ mn) 171 189 206 119 163 200 EBITDA (US$ mn) 47 51 69 20 36 49 EBITDA margin 27% 27% 33% 17% 22% 24% Net income (US$ mn) 26 27 45 5 12 19 Net income margin 15% 14% 21% 4% 8% 9% Source: TAV Airports Holding; combined results, 2020 results not audited, local GAAP; Seker Invest Research estimates Aviation Industry | TAV Airports Holding P a g e | 1 May 21, 2021 Figure 3: Valuation summary (TRY m) Value Weight Weigted value SoTP 9,496 60% 5,698 Peer Comparison (2021E EV/Sales, EV/EBITDA & PE) 9,654 40% 3,861 Target Value 9,559 # of shares 363 Target Price (TRY/sh.) 26.30 Mcap 8,573 Upside Potential 11% Source: Seker Invest Research Risks - TAV Airports had applied to the State Airports Authority (DHMI) of Turkey regarding the force majeure conditions created by the pandemic-related restrictions as per its operating contracts, and accordingly, in February 2021, the DHMI has extended the operating periods of Antalya, Ankara, Gazipasa-Alanya, Izmir and Milas-Bodrum for two more years, and deferred the concession rent payments for these airports, that would normally be made in 2022E, to be 2024E.