Company report
Transport
Airports
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Equity Turkey
Global Research
TAV Airports
Terminal delight
Overweight (V)
Turkey’s largest airport terminal operator with four existing
airports and 11% forecast CAGR passenger growth 2007-10
Target price (TRY)
Share price (TRY)
Potential total return (%)
15.8
11.6
36.3
2005a
2006e
2007e
31.4
20.2
-47.0
-13.5
8.5
74.6
Performance
1M
3M
12M
Absolute (%)
Relative^ (%)
10.8
5.3
-
-
HSBC EPS
HSBC PE
High visibility on passenger fees, developed non-aviation
revenues and strengthened long-term growth potential with
tender win for two additional airports in Tunisia
DCF-based 12-month price target, including Tunisia, of
TRY15.8 per share, offering 36% potential return. Initiating
coverage with an Overweight (V) rating
Note: (V) = volatile (please see disclosure appendix)
TAV Havalimanlari Holding A.S. (TAV Airports) operates three airports in Turkey:
Istanbul Atatürk, Ankara Esenboğa and Izmir Adnan Menderes. It also operates Tbilisi
International Airport in Georgia and recently won a tender to operate two additional
airports in Tunisia: Monastir and Enfidha. In addition to its airport portfolio, TAV has
duty free, food and beverage, ground handling and airport services operations.
In our view, TAV offers five main attractions: 1) above-average traffic growth – 13% in
2007e vs c5% for European airports; 2) high visibility on aviation revenues with
passenger charges fixed for the concession terms; 3) strong and growing non-aviation
revenue streams, representing c75% of total revenues; 4) a controlled cost base; 5) further
potential upside from new concession contract wins.
5 April 2007
Cenk Orcan *
Analyst
HSBC Portfoy Yonetimi A.S.
+ 90 212 366 1605
[email protected]
*Employed by a non-US affiliate of
HSBC Securities (USA) Inc, and is not
registered/qualified pursuant to NYSE
and/or NASD regulations.
Issuing office: Istanbul
Disclaimer &
Disclosures.
This report must be read
with the disclosures and
the analyst certifications in
the Disclosure appendix,
and with the Disclaimer,
that form part of it.
The recent tender win in Tunisia underpins TAV’s strong commitment to pursue regional
growth. With 40 years of operating rights, Tunisia has strengthened the growth outlook in
the longer term. We forecast the project’s contribution to EBITDA will reach 10% by
2010 and estimate its IRR at c13%. TAV is still presented with ample growth
opportunities both domestically and regionally, with further airport tenders in the pipeline.
Having incorporated Tunisia into our forecasts, we project 17% CAGR in consolidated
revenue for FY 2007-10, 25% CAGR in EBITDAR and 81% CAGR in net profit between
2008 and 2010. Such growth is unmatched by any of the European airport operators.
Using DCF, we set our 12-month target share price at TRY15.8 per share, of which
Tunisia accounts for TRY2.6 or 17%. In line with the 36% total potential return offered
by our price target, we initiate coverage of TAV with an Overweight (V) rating.
Index^
Index level
RIC
Bloomberg
Source: HSBC
ISTANBUL COMP.
44660.68
TAVHL.IS
TAVHL TI
Enterprise value (EURM)
Free float (%)
Market cap (USDm)
Market cap (EURm)
Source: HSBC
2073
18.2
2040
1534
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TAV Airports
Airports
5 April 2007
Financials & valuation
Key forecast drivers
Financial statements
Year to
12/2005a
12/2006e
12/2007e
12/2008e
Profit & loss summary (EURm)
Revenue
EBITDA
Depreciation & amortisation
Operating profit/EBIT
Net interest
PBT
HSBC PBT
Taxation
Profit before minorities
HSBC net profit
305
79
-51
28
-6
29
0
10
41
27
391
40
-13
27
-57
-30
0
-40
-70
-56
484
121
-52
68
-40
29
0
-6
23
21
577
187
-58
129
-46
82
0
-16
66
59
Cash flow summary (EURm)
Cash flow from operations
Capex
Cash flow from investment
Dividends
Change in net debt
FCF equity
66
-132
-132
-4
-59
-7
-289
-289
0
-203
-297
66
-110
-110
0
86
-44
117
-210
-210
0
154
-93
89
863
197
147
1,150
90
885
738
121
912
102
817
398
342
1,361
105
877
535
358
871
101
876
324
263
1,450
109
884
621
432
928
99
1,029
262
196
1,602
112
972
775
491
1,081
Balance sheet summary (EURm)
Intangible fixed assets
Tangible fixed assets
Current assets
Cash & others
Total assets
Operating liabilities
Gross debt
Net debt
Shareholders funds
Invested capital
Year to
12/2005a
12/2006e
12/2007e
12/2008e
23.7%
16.9%
9.0%
36.0%
11.9%
10.2%
18.7%
-13.5%
0.0%
2.3%
13.7%
14.3%
10.0%
8.0%
6.0%
11.7%
12.4%
8.0%
8.0%
6.0%
Istanbul airport total pax traffic gr.
Ankara total pax traffic gr.
Izmir total pax traffic gr.
Tbilisi total pax traffic gr.
Tunisia total pax traffic gr.
DCF analysis
HSBC assumptions
DCF, comprising
Risk free rate
Beta
Equity risk premium
WACC
6.0%
1.0
5.5%
9.1%
Value of enterprise
Value of non-core
assets
Value of equity
Year to
12/2005a
Year to
12/2005a
12/2006e
12/2007e
12/2008e
7.5
28.7
2.5
20.2
4.3
-3.9
0.8
5.3
51.5
2.4
-13.5
4.1
-20.8
0.0
4.5
17.8
2.3
74.6
3.6
-2.9
0.0
4.0
12.3
2.1
25.8
3.1
-6.2
1.3
EV/sales
EV/EBITDA
EV/IC
PE*
P/NAV
FCF yield (%)
Dividend yield (%)
Note: * = Based on HSBC EPS (fully diluted)
Price relative
12/2007e
12/2008e
Y-o-y % change
Revenue
EBITDA
Operating profit
PBT
HSBC EPS
12
11.5
11.5
11
11
10.5
37.1
-37.3
-12.9
127.0
123.3
28.4
-49.2
nm
nm
nm
23.7
200.5
nm
nm
nm
19.2
55.0
88.4
188.4
188.4
0.7
8.2
42.7
11.6
26.0
9.1
14.4
427.1
9.3
8.9
0.4
7.1
-14.1
8.1
10.3
6.9
0.9
142.3
13.3
nm
0.5
6.1
5.2
5.1
25.0
14.1
3.0
136.9
5.1
10.6
0.6
10.3
12.9
7.7
32.5
22.3
4.0
150.4
4.1
15.1
31.39
31.39
4.99
147.14
-47.01
-47.01
0.00
154.00
8.49
8.49
0.00
178.29
24.50
24.50
0.00
202.78
Ratios (%)
Revenue/IC (x)
ROIC
ROE
ROA
EBITDA margin
Operating profit margin
EBITDA/net interest (x)
Net debt/equity
Net debt/EBITDA (x)
CF from operations/net debt
12.5
12
12/2006e
1759
Valuation data
12.5
Ratio, growth and per share analysis
2401
0
10.5
10
10
9.5
9.5
9
9
2005
TAV
2006
2007
2008
Rel to ISTANBUL COMP
Source: HSBC
Note: price at close of 30 Mar 2007
Per share data (USc)
EPS reported (fully diluted)
HSBC EPS (fully diluted)
DPS
NAV
Disclaimer & Disclosures. This report must be read with the disclosures and the analyst certifications in the
Disclosure appendix, and with the Disclaimer, that form part of it.
2
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TAV Airports
Airports
5 April 2007
Investment summary
Turkey’s largest airport terminal operator with four existing airports
and c11% forecast CAGR passenger growth 2007-10
High visibility on passenger fees, growing non-aviation revenues
and strengthened long-term growth potential with Tunisia
Our 12-month DCF-based target price of TRY15.8 offers 36%
absolute return and we initiate coverage with Overweight (V)
Growth turns regional
TAV Airports has concessions to operate
terminals at three airports in Turkey: Istanbul
Atatürk (until January 2021), Ankara Esenboğa
(until mid-2023) and Izmir Adnan Menderes
(until January 2015). Outside Turkey, TAV has
the concession to operate Tbilisi International
Airport in Georgia until January 2027 and most
recently won a tender to operate two airports in
Tunisia (the existing Monastir Airport and a new
airport to be built in Enfidha) for 40 years. The
portfolio has grown remarkably fast over a short
period of time, with airports in Ankara, Izmir and
Tbilisi having become operational in the last six
months and TAV now getting prepared to start
Tunisian operations from the beginning of 2008.
In addition, TAV has duty free, food and
beverage, ground handling and airport services
operations, mainly at its existing airports.
Five main attractions
We believe that TAV has five main attractions: 1)
above-average traffic growth; 2) fixed passenger
charges for the concession terms; 3) growing nonaviation revenue streams; 4) a controlled cost
base; and 5) further potential upside from new
concession contract wins. Having incorporated
Tunisia into our forecasts, we project 17% CAGR
in consolidated revenue FY 2007-10, 25% growth
in EBITDAR and 81% growth in net profit
between 2008 and 2010.
Above-average traffic growth
Turkey is the second-largest country in Europe
with a population of c70.7m as of October 2006.
Istanbul is the largest city in Europe and eighthlargest city in the world with a population of
c12m, giving TAV a strong base market.
The International Air Transport Association
(IATA) forecasts average passenger growth of
8.9% between 2005 and 2009 in Turkey. We
expect passenger growth to outpace GDP growth,
mainly driven by Turkish Airline’s fleet
expansion and Star Alliance membership.
Exposure is partially muted by DHMI’s departing
passenger growth guarantee at Izmir and Ankara,
although it is still exposed on the non-aviation
side. We forecast 13.5% in FY 2007, well above
the c5% of the major European airport operators.
Certainty of passenger charges
The regulatory regime under which TAV operates
is highly transparent. Passenger fees and
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TAV Airports
Airports
5 April 2007
concession costs are fixed for the terms of the
concession at all four airports, departing
passenger growth is guaranteed by DHMI at
Ankara and Izmir and concession costs are fixed.
Growing non-aviation revenue
Above-average passenger traffic growth provides
the means for TAV to continue to grow nonaviation revenues through its 50%-owned duty
free joint venture, ATU, and its 67%-owned food
and beverage subsidiary, BTA. Furthermore, all
the terminals which TAV operates are new and
therefore retail space is fit for purpose.
There are only two independent ground handling
operators in Turkey which have the requisite ‘A’
group operating licence: Havaş (TAV’s
60%-owned ground handling subsidiary) and
Çelebi. According to 2005 data from the
companies, Havaş generates 27% more revenue
per flight, although it currently has only 38%
market share in terms of number of flights
handled. Therefore there is potential for Havaş to
increase revenues through capturing market share.
Controlled cost base and capex
Concession fees at Istanbul are the major
operating expense for TAV, representing 36% of
the total in FY 2006e. These payments are fixed at
USD165m per annum for the life of the Istanbul
contract (until 2021) providing visibility.
Unusually for an airport operator, employee
benefit costs are relatively small at 18% of
FY 2006e costs, most likely as TAV does not
operate all the airside activities.
Future concession contract upside
The concession tender win in Tunisia in March
2007 has shown TAV’s strong pursuit of its
strategic plan to increase the number of airports in
its portfolio over the next few years. In our view,
there are still a number of visible opportunities for
TAV (Antalya in Turkey being the most eminent
one with a tender to be held on 12 April),
4
although estimating the valuation impact is a
significant challenge at this stage.
Valuation
We believe that discounted cash-flow analysis
(DCF) is the most appropriate method of valuing
TAV. This is because TAV’s business model is
project based, with good visibility of cash flows to
be generated, and also because DCF captures
longer-term growth from new additions to the
portfolio (Tunisia in particular) better than
multiple-based valuation.
Tunisia contribution TRY2.6 per share
Our DCF model yields a 12-month DCF fair value
of TRY15.8 per share, using a WACC of 9.1%.
We forecast free cash flows until 2048 when the
longest of TAV’s airport contracts (Tunisia 40yr) expires. We consider no terminal value
thereafter. Tunisia accounts for TRY2.6 per share
of our price target, adding c20% to our ex-Tunisia
DCF price target of TRY13.3. We estimate the
Tunisia project’s IRR at 13%
TAV currently trades at 25.9x 2008e earnings and
10.6x EV/EBITDAR, which are around European
airport averages. On 2009 forecasts, there is a
discount of 39% on PE and 13% on EV/EBITDAR.
Risks
We see the key downside risks to our target price
and Overweight rating as; i) downturn in
international and domestic air traffic and tourism
activity as a result of terrorism, pandemics and
political events; ii) financial and management
stretch risk associated with fast growth and further
new potential additions to the portfolio.
On the other hand, new potential concession wins
could create further upside to our current target
price, as well as the winning of an ongoing court
case where TAV reclaims the 18% VAT portion
paid as part of annual concession rent on Istanbul
Ataturk airport.
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TAV Airports
Airports
5 April 2007
Valuation & key risks
DCF-based NPV of EUR1,759m, equivalent to 12-month target
price of TRY15.8 per share
Tunisia adds EUR295m, or 20%, to our fair value estimate of
EUR1,464m for existing airports
12-month potential return 36%; initiate coverage with Overweight
Summary
Valuation based on DCF
In our view, a discounted cash flow (DCF)
approach is the most appropriate method for
valuing TAV’s business, which is subject to
strong growth, especially in the coming four to
five years, with the start of operations at Ankara
and Izmir airports in Q4 2006, the new terminal
opening at Tbilisi in January 2007 (operations
started at the old terminal in Q4 2005) and the
new operations in Tunisia whose contribution will
start from the beginning of 2008. In particular, the
newly won Tunisia project underpins the
importance of DCF methodology in valuing TAV
in order to capture long-term growth. Following
the takeover of operations at the existing Monastir
airport from 1 January 2008, TAV will get
Enfidha operational as a brand new airport in mid2009. Therefore, the full-year impact of Tunisia
operations as a whole will be seen from 2010.
TAV: WACC calculation
Risk free rate
Estimated beta
Risk premium [HSBC]
ke
cost of debt
6.0%
1.0
5.5%
11.5%
7.0%
Proportion of equity (Mcap)
Proportion of debt
60%
40%
WACC
9.1%
Source: HSBC
Our forecasts drive a DCF fair value of TRY15.8
per share, using a WACC of 9.1%. We use 6.0%
risk free rate due to our model being based in
Euro estimates and Republic of Turkey’s longest
Eurobond issuance (denominated in euros)
currently yields 5.85%.
Turkish Treasury Eurobond yields
Denomination
Maturity
Coupon
Price
Yield
EUR
EUR
EUR
Feb 2014
Mar 2016
Feb 2017
6.50
5.00
5.50
105.38
94.56
97.45
5.53
5.80
5.85
Source: Reuters *Quotes as of 30 April 2007
Our DCF model forecasts free cash flows until
2048 when the longest of TAV’s airport contracts
(Tunisia - 40yr) expires. We consider no terminal
value thereafter. Ground handling operations,
Havas, are independent of TAV’s airport
concessions and may be considered as an infinite
5
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TAV Airports
Airports
5 April 2007
business in the forecast model but our calculations
suggest the present value of the business beyond
2048 falls to negligible levels.
potential return as we do not anticipate any
dividend payments for calendar 2007, hence
TAV: DCF Operating free cash flows 2007-10e
Setting 12M target price
EURm
NPV equity DCF value (EURm)
2006e 2007e 2008e 2009e 2010e
Revenues
391
Opex
-364
Operating profit
27
Dep'n/amort'n
13
EBITDA
40
Net capex
-289
Tax rate
20.0%
Tax charge on oper. profit
-5
Operating free cash flow
-254
484
-416
68
52
121
-110
20%
-14
-3
577
-448
129
58
187
-210
20%
-26
-48
668
-487
181
62
243
-110
20%
-36
97
736
-513
223
63
286
-10
20%
-45
231
assume zero dividend yield.
12-month equity value (EURm) (@9.1%)
12-month equity value (TRYm) (EUR/TRY 2.00)
No of shares
12-month price per share (TRY)
Current share price (TRY)
Price upside
CY 2007e dividend yield
Total potential return
1759
1919
3830
242,187,500
15.8
11.6
37.0%
0.0%
36.3%
Source: HSBC estimates
Source: HSBC estimates
Tunisia improves DCF value by 20%
Our DCF model, without incorporating estimates
for Tunisia, indicates a fair value of TRY13.1 per
share, TRY15.8 per share with Tunisia.
Accordingly, we calculate the value contribution
from Tunisia as EUR295m or TRY2.6 per share,
which improves our fair value estimate for
existing airports by around 20%.
DCF summary: Contribution of Tunisia
EURm
NPV
Terminal value
less net debt (2007e)
Less minority stake
Equity value
Tunisia contribution
Excluding Tunisia
1973
70
-558
-22
1464
Including Tunisia
2401
0
-621
-22
1759
295
Source: HSBC estimates
Price target and rating
We roll our DCF fair value of EUR1759m
(end-2006) forward by 12 months (using WACC
of 9.1%) in setting our 12-month target price of
TRY15.8 per share.
The HSBC rating system requires a minimum
32% one-year return, including dividends, to
arrive at an Overweight rating for a volatile
Turkish stock. This is calculated by adding ±10
percentage point confidence band to 22% required
return on Turkish stock, yielding a Neutral band
of 12-32%. Our 12-month price target represents
36% absolute upside which is also a one-year total
6
Trading multiples
We believe that the use of average trading
multiples from other listed airport companies is
not an appropriate valuation methodology for
TAV. This is because average spot multiples
derived from other listed airports do not reflect
differences in:
Growth potential
Business mix (TAV primarily operates
terminals only)
Asset ownership structure (TAV has timelimited concessions)
In our view, TAV deserves to trade at a premium
to European airports on the first point above. We
project 11.6% traffic growth at TAV’s four
existing airports between 2007e-2010, while
average annual traffic growth at European airports
is around 5%. On the second and third points,
TAV deserves a discount, though, since European
airports generate additional aviation revenues
from landside (ie runway) operations, which TAV
currently has only at Tbilisi, and European peers
are mostly owners of the assets whereas TAV is
not, which prevents it from developing real estate
business at the premises. However, we think the
Tunisia project should improve TAV’s profile to
some extent on these points, given it is a quite
long-term (40-year) concession agreement and
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TAV Airports
Airports
5 April 2007
Peer Group
_______ PE ________ __ EV/EBITDAR ___
Country
ADP
Fraport
Vienna Airport
Zurich Airport
Airports avg.
TAV
prem./(/disc.) to peers
TAV (VAT refund)
prem./(/disc.) to peers
Ticker Share price
France ADP FP
Germany FRA GR
Austria
FLU AV
Switzerland UZAN SE
Turkey TAVHL TI
Turkey TAVHL TI
__EV/Revenues ___
___ Div. Yield_____
Rating 2007e 2008e 2009e 2007e 2008e 2009e 2007e 2008e 2009e 2007e 2008e 2009e
EUR73.24 Underweight
EUR55.18
Neutral
EUR77.25
Neutral
CHF475.0 Underweight
33.2
26.1
22.3
62.2
30.6
TRY11.6 Overweight 74.6
144%
TRY11.6 Overweight 23.1
-25%
30.5
28.3
21.7
41.8
29.4
25.9
-12%
21.4
-27%
27.6
28.4
20.1
24.4
27.4
16.8
-39%
14.7
-46%
13.2
8.3
10.8
12.7
11.1
12.8
15%
11.5
4%
12.3
9.0
10.8
11.7
11.0
10.6
-4%
9.6
-13%
11.4
9.1
10.2
11.0
10.5
9.1
-13%
8.3
-20%
4.1
2.1
3.7
5.7
3.4
4.5
33%
4.1
21%
4.0
2.2
3.8
5.3
3.3
4.0
20%
3.7
11%
3.8
2.3
3.6
5.0
3.2
3.5
9%
3.3
1%
1.3%
2.1%
2.6%
0.5%
1.6%
0.0%
1.6%
2.1%
2.7%
0.8%
1.8%
1.3%
1.8%
1.8%
2.9%
1.2%
1.8%
2.0%
0.0%
1.3%
2.0%
Source: HSBC estimates * Prices as at close of 4 April 2007
also includes runway operations. All in all, our
judgment, considering also the potential for
further new concession wins by TAV in upcoming
years, is that the company deserves some
premium over European peers. We stress our view
that trading multiples are of less fundamental
value than discounted cash flow methodologies
and we look at them for illustrative purposes only.
Capitalised value of assets under concession – Method 1
PV=A/r
A (EURm)
duration
r (%)
NPV (EURm)
Source: HSBC estimates
Capitalised value of assets under concession – Method 2
PV=A/r
We show above comparative trading PE,
EV/EBITDAR and EV/Sales multiples as well as
dividend yields for the listed European airport
stocks under HSBC’s coverage. In our
EV/EBITDAR multiple calculations, we adjust
EV for airport concession payments (the
comparable companies do not generally face these
‘lease-like’ payments). In doing so, we chose to
treat annual rent payments (Istanbul airport) as
finite cash outflows until the last payment in
January 2021. We calculate a net present value of
around EUR1.0bn using 9.1% WACC and add
this to our year-end net estimates as an
adjustment. The other alternative would be to treat
annual rent payments as a perpetuity, in which
case the net present value would be higher at
around EUR1.4bn. We believe that, given the
assumption that there will be no renewal for the
Istanbul contract upon its expiry in 2021, the
adjustment would be overstated in the case of the
second alternative, which is why we prefer to
adjust by considering rent payments that match
the life of the contract.
_ (annual rent payments treated as finite
cash outflows over life of concession) _
126.9
(annual rent)
15 years
9.1%
(WACC)
1,017 (addition to net debt)
A (EURm)
r (%)
PV (EURm)
____(annual rent payments treated
as perpetuity) ____________
126.9
(annual rent)
9.1%
(WACC)
1,395 (addition to net debt)
Source: HSBC estimates
Using 2008e multiples, this analysis suggests that
TAV trades at a slight discount to peer group
average on EV/EBITDAR, while it’s at a 12%
discount on PE. On 2009e multiples, the PE
discount widens to 39%, while EV/EBITDAR
also points to a discount of 13%.
Our financial forecasts suggest that the impact of
new airports (Ankara, Izmir and Tbilisi) on
growth becomes more visible from 2008 onwards,
while Tunisia’s full-year contribution (Monastir
and Enfidha altogether) will reflect on growth
figures from 2010 onwards. We therefore believe
using short-term (ie 2007e) figures would
particularly underestimate the value from such
growth potential. We project three-year CAGR
(2007e-2010e) of 17% in revenues and 25% in
EBITDAR.
7
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TAV Airports
Airports
5 April 2007
around USD80m (EUR65m).
Derived multiples at our target price
At our DCF-based target price of TRY15.8, TAV
would trade at approximately a 20% premium to
peer group average on 2008e PE and 13%
premium on EV/EBITDAR, while on 2009e
multiples, the EV/EBITDAR premium narrows to
1% while there is 16% discount on PE.
Derived multiples at our target price
PE
Peer avg.
EV/EBITDAR
Peer avg.
EV/Sales
Peer avg.
2008e
2009e
2010e
35.2
29.4
12.4
11.0
5.0
3.3
22.9
27.4
10.6
10.5
4.4
3.2
17.10
N/A
9.3
N/A
3.9
N/A
Source: HSBC estimates
VAT impact on trading multiples
Another point to mention is the impact of a
potential VAT refund for Istanbul airport rent
agreement on the trading multiples. In the
following section, we provide details on the
ongoing VAT case, along with the estimated
impact on our DCF valuation. But it’s worth
mentioning at this point that TAV’s trading
multiples would also improve and indicate a
cheaper valuation should the company win the
ongoing court case and there is no more VAT
payment (USD25m of annual USD165m rent
payments is VAT). Under such a scenario, we
would expect an improvement in EBITDAR and
net profit forecasts (particularly in 2007, with
TAV compensated for the prepaid portion of VAT
payments in cash, which the company states is
VAT impact on valuation
TAV is liable for paying 18% VAT on the
original concession cost of USD2.5bn for
operating Istanbul Airport for 15.5 years (from
June 2005). This equates to cUSD460m additional
payments as VAT, bringing the total cost to
USD3.0bn. On the grounds that privatisation deals
by the Privatisation Administration (PA) are
exempt from VAT (in this case the seller is DHMI
not the PA), TAV took the issue to court in
February 2006 in order to reclaim the VAT
portion. TAV estimates that it could potentially
receive a refund of cUSD80m in relation to VAT
paid on concession payments to date and save an
additional USD120m during the remaining life of
the concession, should the courts decide in its
favour. A resolution to the issue seems likely in
2007. Our calculations, which we detail below,
suggest that the net present value of potential
VAT refunds is EUR132m.
Of the total annual concession payments of
USD165m, the VAT portion is USD25m
(EUR19m), of which the expensed amount by
TAV is 44%, or EUR8m pa. The remaining 56%
is netted off VAT collected or other tax liabilities
and is therefore excluded from calculations. As
far as the USD80m (EUR62m) VAT already paid
to date is concerned, this would be likely to be
paid back to TAV in cash. We calculate the NPV
of the future VAT savings as EUR70m, which
VAT refund impact on P&L figures
(EURm)
Concession rent
Concession rent (VAT refund)
EBITDAR
EBITDAR (VAT refund)
EBIT
EBIT (VAT refund)
Pretax net other income
Pretax net other income (VAT refund)
Net profit
Net profit (VAT refund)
Source: HSBC estimates
8
2007e
2008e
2009e
2010e
-127
-127
248
248
68
68
-40
22
21
65
-127
-112
314
314
129
144
-46
-44
59
72
-127
-112
370
370
181
196
-54
-54
91
105
-127
-112
413
413
223
238
-53
-51
122
135
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TAV Airports
Airports
5 April 2007
brings the total savings to EUR132m, which
corresponds to 8% of our DCF value of EUR1759m.
VAT calculation 2007e-10e
(EURm)
VAT concession payments
Portion expensed (44%)
Discount factor (WACC)
NPV future VAT savings (07e-21e)
Potential refund on pre-paid
NPV total VAT savings
Impact on DCF value
07e
08e
09e
10e
19
8
9.1%
70
62
132
7.5%
19
8
19
8
19
8
Source: HSBC estimates
DCF Sensitivity analysis
We analyse the sensitivity of our DCF valuation
scenarios to changes in key inputs to our financial
model. These are traffic growth (at each airport),
duty free per passenger spend growth and staff
costs per employee relative to inflation. We also
analyse the sensitivity of our DCF valuations to
changes in the key DCF parameters; risk-free rate,
equity risk premium and the ungeared beta.
It appears that valuation is the most sensitive to
passenger growth estimates such that a 2%
increase in estimated traffic at airports raises DCF
value by 18% to EUR2039m while the opposite
results in a cut by 15%. There is also high
sensitivity to duty free per pax spend estimates, as
this line accounts for a major portion of revenues
although margins are small. A 1% rise in duty free
spend per pax takes valuation up by 12% while a
1% cut results in a 9% drop.
Investment risks
Acquisition growth: TAV intends to add further
additional airports to the portfolio over the next
few years. TAV states that in the near term there
is potential via opportunities both inside and
outside Turkey.
The ones in Turkey are; Antalya, which is the
second-largest airport in Turkey in terms of
passenger traffic (number one in terms of
international passenger traffic based on 2006 data),
whose tender will take place on 12 April. Antalya
has two international terminals and one domestic
terminal which are being tendered altogether by the
DHMI, although the current operators’ contracts for
international terminals will expire later (that of
Fraport for Terminal 1 in September 2007 and
that of Celebi for Terminal 2 in September 2009).
The other potential in Turkey is the airport on the
Asian side of Istanbul, named Sabiha Gökçen
(which TAV states will operate independently if
possible), due to be privatised in 2007.
Further opportunities include the planned
privatisation of the airside of Istanbul Airport by
the State Airports Authority (DHMI). However,
we believe that the privatisation (of runways,
excluding air control) is unlikely to take place
before three or four years as DHMI’s plans are not
yet complete.
TAV believes the Group’s experience in airport
construction (through TAV Construction in which
TAV Airports does not have any share) and
various ongoing construction projects in hand (the
Sensitivity of DCF valuations to key inputs
DCF equity
value EURm
DCF value
DCF value
1721
1721
_____Passenger growth______
-2 pps
1498
No chg.
1759
+2 pps
2061
______Risk-free rate %_______
7.0
6.0
5.0
1615
1759
1923
Duty free per pax spend growth
-1 pps
1588
No chg.
1759
+1 pps
1955
___ Equity risk premium %____
6.0
5.5
5.0
1696
1759
1849
__Staff costs per employee,
growth relative to inflation __
+1.5 pps
1582
+1.0 pps
1721
+0.5 pps
1938
______ Ungeared beta _______
1.2
1.0
0.8
1577
1759
1945
Source: HSBC estimates
9
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TAV Airports
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5 April 2007
biggest being Doha airport in a joint venture with
Taisei) is a ‘door opener’ for the airport company.
We also regard the presence of strong strategic
partners (particularly Babcock & Brown and
Goldman Sachs) as a factor that could fortify
TAV’s chances for new contracts.
Management and operational risks: Upcoming
opportunities for growth via concession tenders can
also mean risk of overspend for growth projects and
risks associated with management control and
operational efficiency as the operational base
expands rapidly. In that sense, the recent start of
operations at three new airports (Ankara, Izmir and
Tbilisi) will also be a test for TAV.
Financial risks: New projects for expansion and
funding requirements may also bring an additional
financial burden on TAV.
Air traffic growth: TAV is exposed to volatility
in air traffic growth but this is limited at the Izmir
and Ankara airports because of DHMI guaranteed
passenger traffic volumes. Therefore, air traffic
growth risk is more related to the commercial side
of TAV’s operations.
As an emerging country, Turkey is still
susceptible to ups and downs in the economy,
which might also lead to fluctuations in air traffic
growth. That said, the outlook for Turkish air
traffic growth is strong within the context of the
country’s EU convergence theme, which backs
strong economic growth (HSBC’s macro team
forecast long-term sustainable GDP growth of
5.0-5.5% for Turkey). Also, the national carrier,
Turkish Airlines’, recent contract for Star Alliance
membership may facilitate air traffic growth
beyond IATA’s CAGR forecast for Turkey of
8.9% in 2005-09.
Tourism activity: International and domestic
tourism activity has been one of the key drivers of
strong air-traffic growth in Turkey (12.1% pa
10
between 1991 and 2005). Tourism revenues are
also directly correlated with GDP growth but could,
in the future, be vulnerable to a number of risk
factors such as terror, pandemics (avian flu) and
political events leading to international tension.
That said, despite the numerous global and
national events that occurred during the past 10
years adversely affecting Turkish economic
activity (starting with the Asian and Russian
crises in 1997-98, continuing with a major
earthquake in Turkey in 1999, followed by a
national financial crisis in February 2001 and
early 2000, the 9/11 airlines-related events in the
US in 2001 and the avian flu incident in Turkey in
early 2006), the Turkish aviation industry
managed to keep growth momentum at high rates.
Also, we believe that TAV-operated airports
would be relatively less affected by a temporary
downturn in tourist activity than airports in
Antalya, Bodrum and Dalaman, which serve as
the main centres for summer tourism in Turkey.
Concession-based operations: This creates
uncertainty for TAV’s operations beyond expiry
dates at each airport. The first existing contract to
expire is the one for Izmir airport (in January
2015), followed by Istanbul (January 2021),
Ankara (mid-2023), Tbilisi (January 2027) and
finally Tunisia (2048). Accordingly, there are no
expiries in the short and medium term to be a
concern for investors, although ground handling
services agreements with airlines are of shorter
duration (three years with main carrier THY,
2006-2009).
TAV Airports
Airports
5 April 2007
abc
VAT rebate: TAV has an ongoing court case
against DHMI claiming VAT charges (18%) on
Istanbul Airport concession fees. TAV could
potentially receive a refund of USD80m in
relation to VAT paid to date and in the future
could save an additional USD120m during the
remaining life of the concession. We calculate the
net present value of the total potential VAT
savings as EUR132m, equating to 8% of our DCF
value. This should be considered as a potential
upside to the valuation. TAV sees a possibility
that the issue can be resolved in 2007.
11
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TAV Airports
Airports
5 April 2007
Tunisia project
40-year operating rights for existing Monastir airport and a
completely new one (Enfidha) to be built by TAV for EUR400m
To become the second largest operation in portfolio after Istanbul
Ataturk. Full-year impact to be seen from 2010 onwards
We attach EUR295m value (or TRY2.6 per share), estimated
project IRR 13%
TAV’s expertise starts paying
off regionally…
A fee of EUR9.0 to be charged to
international departing passengers
Helps diversify Turkish market risk
No volume guarantee at any of the airports
On 16 March 2007, TAV announced that it had
won a tender to operate two airports in Tunisia for
40 years. One of the airports, Monastir, is an
existing one which TAV will take over from 1
January 2008. The other, Enfidha, will be built
and operated by TAV as a brand new airport
starting from mid-2009. TAV’s winning bid
Includes airside operations at both airports (ie
aircraft landing and parking fees to be
collected by TAV)
included a package with a commitment to invest
EUR400m, predominantly for Enfidha. Tunisia
tender has brought in two additional airport
operations to TAV’s portfolio, as well as regional
diversification.
The key features of the project
Below is a list of the key features of the Tunisian
airport agreement:
Start of investments in H1 2007
Other than being the second overseas operation in
TAV’s portfolio after Tbilisi, Tunisia also
resembles Georgian operations in that it includes
runway operations, which are all carried out by
DHMI in the Turkish airports. The international
passenger fee of EUR9.0 is the lowest among
TAV’s operations (USD15 at Istanbul, EUR15 at
Ankara and Izmir, USD22 at Tbilisi) but this is
compensated for by the rights for airside activities
as well as the significantly longer duration of
the project.
40-year operating rights (Monastir starting
from 1 January 2008, Enfidha mid-2009)
Initial investment (for Enfidha) of EUR400m,
for a capacity of 7m passengers pa, with
scope to increase to 22m in 40 years
12
Air traffic in Tunisia
Monastir is one of the three major airports in
Tunisia (the other two are Tunis-Carthage and
Djerba) and the largest one in terms of passenger
traffic. It processes about 40% of air traffic in
Tunisia, although the main airport in the country
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TAV Airports
Airports
5 April 2007
is considered as Tunis Carthage as its annual
capacity of 4.5m is the largest. The capacity of
Monastir is 3.5m but during the last three years
the airport has been operating above capacity,
serving 3.7m in 2004, 4.1m in 2005 and 4.2m in
2006. Tunisian airports mainly serve international
tourism traffic, predominantly from and to
Europe, in particular France, and domestic air
traffic is relatively insignificant (1% of total at
Monastir) due to the small size of the country.
can be considered relatively higher within
Tunisia. Other than that, Tunisia is a country with
stable economic growth that averaged 4.4%
during the last six years with no significant ups
or downs.
Tunisia – GDP and air traffic
12.0
25%
10.0
20%
15%
8.0
10%
5%
6.0
Snapshot of Tunisian airports
Tunis Monastir
Capacity (m)
terminal area (tho sqm)
traffic (2006)
traffic (2005)
traffic (2004)
traffic (2003)
traffic (2002)
traffic (2001)
4.50
57.4
3.65
3.65
3.45
3.05
3.19
3.36
3.50
28.0
4.20
4.10
3.67
2.84
3.93
3.92
Djerba
Others
2.0
4.00
73.0
2.42
2.42
2.24
1.80
2.20
2.14
1.05
16.40
0.23
0.23
0.23
0.22
0.21
0.21
0.0
Source: Tunisian Civil Aviation Authority (OACA)
5.00
40%
4.00
20%
3.00
0%
2.00
1.00
-20%
0.00
-40%
2002
2003
2004
No of pax (m)
-10%
-15%
-20%
2001
2002
No of pax (m)
2003
2004
Traffic grow th
2005
2006
GDP grow th
Source: OACA
With Enfidha, Tunisia will become the second
largest operation after Istanbul/Ataturk
Monastir airport pax growth
2001
0%
-5%
4.0
2005
2006
grow th
Source: OACA
Between 2001 and 2006, the five-year passenger
traffic CAGR was 1.4% at Monastir (vs 1.8% for
Tunisia as a whole), although there has been a fast
recovery since 2003 when bombing events had
caused a major fall in traffic. Due to the fact that
Enfidha will be located 60km from Monastir,
again serving mainly tourism traffic. Due to
physical limitations, Monastir airport cannot be
expanded further to serve future potential growth
in passenger traffic and the Enfidha investment
will initially aim to take up the burden from
Monastir and, in the longer term, serve expected
growth in traffic parallel to growth in international
tourism in Tunisia. For this reason, TAV plans to
increase the initial capacity of 7m passengers at
Enfidha to 22m passengers throughout the life of
the project. Based on our forecasts, which we
detail in the following section, we expect Tunisia
to rank after Istanbul and Ankara in terms of total
passenger traffic but surpass Ankara beyond 2010
to become the second largest after Istanbul in
terms of revenues generated thanks to
contribution from airside operations.
Monastir primarily serves tourism traffic, the hit
from 2003 events on the airport was harsher
compared to the whole air traffic in the country.
While terror can be considered a valid risk for any
market and region globally, Monastir’s exposure
13
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TAV Airports
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5 April 2007
Forecasts for Tunisia
We incorporate Tunisia into our financial model
for TAV under the following assumptions:
Additional investment of EUR200m to
expand capacity to 22m from 7m (EUR100m
after 15 years, another EUR100m after
another 15 years)
6% annual passenger growth (cumulative
figure for the two airports) for the first 10
years and 4% thereafter until end of contract
Financing scheme: 25% equity, 75% debt
Traffic at Monastir kept constant at 3.5m pax
pa beyond 2010 while that at Enfidha grows
towards 22m (which we reach towards the
expiry of the 40-year contract)
Share of domestic in total traffic assumed zero
EUR9 fee applied to international departing
passengers kept fixed over project life
As planned, duty free (ATU), food and
beverage (BTA) and ground handling (Havas)
services initiated parallel to the start of
aviation operations at Enfidha Airport (no
duty free and f&b assumed at Monastir)
Duty free and f&b spend per pax assumed
50% of Istanbul/Ataturk initially, rising to
75% after three years (as in Tbilisi)
ATU and BTA concession fee payments to
TAV-Tunisia of 30% and 25% respectively of
revenues generated (as in Tbilisi)
Landing and parking fee per ATM of
EUR250 (based on company guidance, ATM
growth parallel to projected pax growth)
Average ground handling charge per aircraft
of EUR270
The same WACC (9.1%) applied
Revenue share 8%, EBITDA share 10% by 2010
Our forecasts under the assumptions stated above
result in a total passenger traffic estimate of 5.3m
in Tunisia by 2010 (representing 12% of TAV’s
total estimated pax base by the same year) and
consolidated revenues of EUR59m (8.5 of total
consolidated revenues). We project 2010
EBITDA of EUR30m, or 10% of the total.
EUR295m value to TAV, project IRR of c13%
We calculate a value contribution of EUR295m
from Tunisia when we incorporate the business
into our aggregate DCF model for TAV. Given
our investment outlay assumptions and rough
projections on operational cash flows (using
EBITDA estimates), we compute a project IRR
(internal rate of return) of around 13%.
Tunisia – traffic forecasts
(million)
2006a
2007e
Monastir
growth
Enfidha
growth
Total
growth
4.2
2.3%
0.0
0.0%
4.2
2.3%
4.5
6.0%
0.0
0.0%
4.5
6.0%
Initial investment outlay of EUR400m spread
over three years (EUR100m in 2007,
EUR200m in 2008 and EUR100m in 2009)
14
2009e
2010e
4.7
4.0
3.5
6.0% -15.2% -12.5%
0.0
1.0
1.8
0.0%
0.0% 79.9%
4.7
5.0
5.3
6.0%
6.0%
6.0%
Source: HSBC estimates
Tunisia – breakdown of forecast consolidated revenues
EURm
Starting number of employees of 521 (based
on OACA data for Monastir), 1% growth pa
applied over the life of the contract
2008e
Passenger
Airside
Total aviation
Non-aviation
Total revenues
% of TAV total
EBITDA
% of TAV EBITDA
Source: HSBC estimates
2006e
2007e
2008e
2009e
2010e
0
0
0
0
0
0%
0
0%
0
0
0
0
0
0%
0
0%
21
9
30
8
38
7%
17
9%
23
9
31
16
48
7%
23
9%
24
9
33
26
59
8%
30
10%
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TAV Airports
Airports
5 April 2007
Financial model
New airports and traffic drive forecast EBITDAR +141% in 2010
Forecast EBITDAR margin grows from 44% in 2006 to 56% in 2010
We forecast net profit growth of 81% CAGR 2007-10
Strong traffic growth the key
driver
We present in the following pages the key
assumptions that we used in deriving TAV’s
financial model.
Traffic growth of 11% CAGR 2007-10
We project passenger traffic to grow at 11%
CAGR at TAV operated airports in the 2007-2010
period (11.1% excluding Tunisia, 10.7%
including Tunisia), compared with IATA’s traffic
growth forecast for Turkey of 8.9% in 2005-2009.
With expectations of a recovery in Turkish
tourism in 2007 after being hit by a series of
adverse events in 2006 (bird flu, cartoon crisis,
World Cup impact), we expect international
traffic to post strong growth this year and we
forecast c14% traffic growth at TAV’s existing
airports. In fact, tourism and air traffic numbers
for the first two months of the year present quite
an optimistic outlook, for example the number of
tourists visiting Turkey rose 16% y-o-y and total
passenger traffic at TAV’s Turkish airpports
(Istanbul, Ankara and Izmir) was up 16% y-o-y.
The inclusion of Tunisia in the portfolio from
2008 onwards (Monastir for full year 2008,
Enfidha starting from H2 2009) will further
support air traffic and the effective number of
passengers captured by TAV’s aviation
operations, which we expect to grow by 29% in
2008, after 19% that we expect in 2007. As we
also stated earlier, once operational we expect the
Enfidha airport to take up some of the burden
from Monastir, so that overall traffic growth
remains smooth at our projected 6% at Tunisia.
Passenger traffic at TAV airports (excluding transit)
(million)
Istanbul
International
Domestic
Ankara
International
Domestic
Izmir (Int'l)
Tbilisi
Total at existing airports
Tunisia
All airports
Traffic captured by TAV (non-aviation)
Traffic captured by TAV (aviation)
2004a
2005a
2006a
2007e
2008e
2009e
2010e
15.6
10.2
5.4
3.3
1.1
2.1
1.5
0.4
39.7
3.7
43.4
15.6
15.6
19.3
11.8
7.5
3.8
1.2
2.6
1.7
0.5
48.5
4.1
52.6
19.3
19.3
21.3
12.2
9.1
4.5
1.3
3.3
1.5
0.5
53.6
4.2
57.8
22.2
22.2
24.2
13.6
10.5
5.2
1.4
3.8
1.6
0.6
60.9
4.5
65.4
31.6
26.5
27.0
15.0
12.0
5.8
1.5
4.3
1.7
0.6
68.1
4.7
72.8
39.9
34.2
29.7
16.2
13.5
6.5
1.6
4.9
1.9
0.7
74.9
5.0
79.9
43.7
37.2
32.3
17.5
14.8
7.1
1.7
5.4
2.0
0.7
81.6
5.3
86.9
47.5
40.3
Source: DHMI, HSBC forecasts
15
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TAV Airports
Airports
5 April 2007
Traffic growth at TAV airports
Istanbul
International
Domestic
Ankara
International
Domestic
Izmir (Int'l)
Tbilisi
Total at existing airports
Tunisia
All airports
Traffic captured by TAV (non-aviation)
Traffic captured by TAV (aviation)
2005a
2006a
2007e
2008e
2009e
2010e CAGR (07-10e) Long-term
23.7%
15.8%
38.3%
16.9%
4.8%
23.3%
9.0%
36.0%
22.1%
11.9%
21.2%
23.7%
23.7%
10.2%
3.3%
21.0%
18.7%
5.9%
24.5%
-13.5%
0.0%
10.6%
2.3%
10.0%
15.3%
15.3%
13.7%
12.0%
16.0%
14.3%
10.0%
16.0%
10.0%
8.0%
13.7%
6.0%
13.1%
41.9%
19.2%
11.7%
10.0%
14.0%
12.4%
8.0%
14.0%
8.0%
8.0%
11.7%
6.0%
11.3%
26.5%
28.9%
9.8%
8.0%
12.0%
11.0%
8.0%
12.0%
8.0%
8.0%
9.9%
6.0%
9.7%
9.4%
8.9%
8.9%
8.0%
10.0%
9.5%
8.0%
10.0%
8.0%
8.0%
9.0%
6.0%
8.8%
8.6%
8.2%
Source: DHMI, HSBC estimates
Y-t-d traffic data at Turkish airports
Revenue drivers - Commercial
Jan-Feb 06
Jan-Feb 2007
chg.
2.73
1.55
1.17
0.57
0.14
0.43
0.11
3.41
3.08
1.77
1.31
0.73
0.17
0.56
0.13
3.95
12.9%
14.0%
11.6%
28.0%
18.8%
31.1%
26.7%
15.9%
Istanbul
International
Domestic
Ankara
International
Domestic
Izmir (Int'l)
TOTAL
Source: DHMI
Macro forecasts used in model
Key inputs
2005 2006 2007e 2008e 2009e 2010e Long
Average CPI
GDP
EUR/USD
EUR/TRY
8.2%
7.4%
1.246
1.670
9.6%
6.0%
1.260
1.799
8.5%
4.1%
1.300
1.953
6.3% 4.0% 4.0% 4.0%
6.2% 5.5% 5.5% 5.5%
1.300 1.300 1.300 1.300
2.076 2.159 2.245
-
Source: HSBC estimates
Revenue drivers - Passnger and landing fees
Revenue drivers
Istanbul int'l departing
Istanbul domestic departing
Ankara int'l departing pax fee
Ankara domestic departing
Izmir int'l departing
Tbilisi int'l departing pax fee
Tbilisi int'l pax fee growth rate
Tbilisi domestic departing
Tbilisi landing / parking per ATM
Tunisiaint'l departing
Tunisia landing / parking per
ATM
Source: Company
16
USD
EUR
EUR
EUR
EUR
USD
%
USD
EUR
EUR
EUR
06e 07e 08e 09e
10e
15.0
3.0
15.0
3.0
15.0
22.0
6.0
250
-
15.0
3.0
15.0
3.0
15.0
22.0
2%
6.0
250
9.0
250
15.0
3.0
15.0
3.0
15.0
22.0
6.0
250
-
15.0
3.0
15.0
3.0
15.0
22.0
2%
6.0
250
9.0
250
15.0
3.0
15.0
3.0
15.0
22.0
2%
6.0
250
9.0
250
Commercial
2006e 2007e 2008e 2009e 2010e
Duty free per pax spend
growth - Istanbul
Duty free per pax spend
Ankara - % of Istanbul
Duty free Izmir - % Istanbul
Duty free Tbilisi - % Istanbul
Duty free Tunisia - % Istanbul
Duty free concession payment
- % d.free rev. (Ist, Ank, Izm)
Duty free concession fee
payment (at Tbilisi & Tunisia)
F&B spend per pax growth –
Istanbul
F&B spend per pax Ist.
domestic as % of int'l
F&B spend per pax Ankara as
% of Istanbul
F&B spend Izmir - % Istanbul
F&B spend Tunisia -% Istanb.
F&B concession payment - %
F&B revenues (Ist, Ank.,Izm.)
F&B concession fee payment
(at Tbilisi & Tunisia)
6.8% 2.0% 2.0% 2.0% 2.0%
50.0% 50.0% 60.0% 75.0% 75.0%
50.0% 50.0% 60.0% 75.0% 75.0%
50.0% 50.0% 60.0% 75.0% 75.0%
- 50.0% 50.0% 60.0%
42.5% 42.5% 42.5% 42.5% 42.5%
30.0% 30.0% 30.0% 30.0% 30.0%
10.0% 2.0% 2.0% 2.0% 2.0%
-
-
- 50.0% 50.0%
50.0% 50.0% 60.0% 75.0% 75.0%
50.0% 50.0% 60.0% 75.0% 75.0%
- 50.0% 50.0% 60.0%
39.1% 39.1% 39.1% 39.1% 39.1%
25.0% 25.0% 25.0% 25.0% 25.0%
Source: Copmapny, HSBC estimates
Cost drivers
No of staff growth
Cost per staff gr (TRY)
F&B cost margin
Duty free cost margin
Services cost margin
Other exp. cost margin
03
04
n/a
n/a
20%
45%
0%
14%
n/a
26%
23%
43%
0%
13%
Source: Company, HSBC estimates
05
06e 07e 08e 09e 10e
n/a 107% 1%
27% 20% 0%
20% 20% 19%
42% 42% 41%
10% 12% 10%
17% 19% 13%
7%
6%
18%
40%
10%
13%
1%
4%
18%
40%
10%
13%
1%
4%
18%
40%
10%
13%
11.0%
9.5%
13.0%
11.8%
8.5%
13.0%
8.5%
8.0%
11.1%
6.0%
10.7%
20.9%
16.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
8.0%
8.0%
n.m.
6.0%
n.m.
n.m.
n.m
abc
TAV Airports
Airports
5 April 2007
Basic assumptions/drivers beyond 2010:
Passenger growth and airport capacity
Istanbul: We project stable pax growth of
6% at Istanbul Ataturk between 2011 and
2020, slightly above HSBC’s long-term
sustainable Turkish GDP growth estimate of
5.5%. By-end 2020 when the contract expires,
we reach forecast pax of c65m, which is our
assumed capacity of the airport (based on
ATMs per hour of 50, operational hours per
day of 24, pax per aircraft of 150 and
operational days per year of 365)
Ankara: We reduce annual passenger growth
rate at Ankara Esenboga airport to 1%
between 2016-23 from 6% between 2010-15
due to capacity limitations (10m passengers)
Duty free and f&b per pax spend in all other
new airports (Ankara, Izmir, Tbilisi, Tunisia)
is set as a percentage of the estimated figure
for Istanbul, starting from 50% and going up
to 75% from the third year of operations
Start of food and beverage (BTA) operations
at Istanbul Ataturk domestic terminal from
2009 onwards (parallel to the expiry of
current f&b operator Usas’ contract by end2008). Spend per pax assumed at a fixed 50%
of spend per pax at international terminal
Cost assumptions
Number of staff grows at fixed 1% pa (likefor-like) and cost per staff in TRY grows at
forecast Turkish annual inflation rate
Izmir: We assume 8% stable growth for
international pax at Izmir Adnan Menderes
from 2008 until expiry in 2014 and still end
up with pax number of 2.7m, well below the
airport capacity of 5.0m pax
Cost of catering (f&b) inventory sold margin
drops from 20% in 2006 to 19% in 2007 and
18% in 2008 and remains fixed thereafter.
The reasoning is increased volumes with new
airports and improved purchasing power as
with any retail business
Tbilisi: We keep pax growth fixed at 8% for
Tbilisi until the expiry in 2026 when we reach
total passengers of 2.6m vs. capacity of 2.8m
Cost of duty free inventory sold margin drops
from 42% in 2006 to 41% in 2007 and 40% in
2008 and remains fixed thereafter
Tunisia: We assume zero pax growth at
Monastir with annual pax of 3.5m which is
equivalent to the airport’s capacity of 3.5m
until 2048. In exchange for this, we adjust
traffic at Enfidha such that it declines
gradually from 18% in 2011 to 4.6% by 2048
when traffic reaches 22m and cumulative
passenger growth rate in TAV’s Tunisian
Cost of services rendered margin drops from
12% in 2006 (10% in 2005) to a fixed 10% in
2007 and thereafter. Efficiency gains in
operations and larger scale help improvement
operations (including Monastir) is a fixed 6%
until 2017 and 4% thereafter until 2048
Commercial (Duty free and food & beverage)
Duty free and f&b per pax spend at Istanbul
Ataturk grows at 2% pa which is the
Eurozone inflation rate
Other opex margin drops from 19% in 2006
to a fixed 13% in 2007 and thereafter with the
removal of some one-off expenses in 2006
Macro and other
Long-term Turkish GDP growth of 5.5%
Long-term annual average CPI of 4.0%
Long-term EUR/USD estimate of 1.30
Dividend pay-out ratio of 50% from 2008
17
abc
TAV Airports
Airports
5 April 2007
TAV – revenue model
AVIATION REVENUES (EURm)
Istanbul passenger revenues
growth
Ankara passenger revenues
growth
Izmır passenger revenues
growth
Tbilisi passenger revenues (60%)
growth
Tbilisi aircraft landing and parking fees
Tunisia - passenger revenues
growth
Tunisia aircraft landing and parking fees
TOTAL AVIATION REVENUES
growth
NON-AVIATION REVENUES
Istanbul duty free concession income
Istanbul f&b concession income
Ankara duty free concession income
Ankara f&b concession income
Izmir duty free concession income
Izmir f&b concession income
Tbilisi duty free concession income
Tbilisi f&b concession income
Tunisia duty free concession income
Tunisia f&b concession income
Duty Free - ATU (100% of ATU)
growth
Istanbul duty free revenues
Duty free spend per pax - Istanbul Int'l
growth assumption
Ankara duty free revenues
Duty free spend per int'l pax - Ankara
Duty free spend per total pax - Ankara
Izmir duty free revenues
Duty free spend per int'l pax - Izmir
Tbilisi duty free revenues (100%)
Duty free spend per pax - Tbilisi Int'l
Tunisia duty free revenues
Duty free spend per pax - Enfidha Int'l
Food & Beverage (BTA)
growth
Istanbul total f&b revenues
f&b spend per pax - Istanbul
Istanbul int'l f&b revenues
f&b spend per pax - Istanbul Int'l (calculated)
growth assumption
Istanbul domestic f&b revenues
f&b spend per pax - Istanbul domestic
f&b spend per pax - as a % of Istanbul Int'l
Ankara f&b revenues
f&b spend per total pax - Ankara
f&b spend per pax - as a % of Istanbul
Izmir f&b revenues
f&b spend per int'l pax - Izmir
Tbilisi f&b revenues (100%)
f&b spend per pax - Tbilisi Int'l
Tunisia f&b revenues
f&b spend per pax - Enfidha Int'l
Ground Handling - Havas (100% of Havas)
growth
OTHER (O&M and others)
growth
TOT. NON-AVIATION REV (TAV stake)
growth
TOTAL GROSS REVENUES
growth
Source: Company data, HSBC estimates
18
2004
2005
2006e
2007e
2008e
2009e
2010e
62.0
-8.0%
-
75.9
22.3%
-
84.0
10.8%
3.9
3.3
2.9
1.4
-
92.3
9.8%
13.1
233.3%
15.0
3.0
4.7%
1.4
-
62
-8.0%
76
22.3%
95
25.8%
125
30.7%
102.1
10.7%
13.7
5.0%
15.5
3.0%
3.3
10.2%
1.5
21.2
8.6
166
33.0%
111.0
8.7%
14.4
5.0%
15.9
3.0%
3.6
10.2%
1.5
22.5
6.0%
8.9
178
7.3%
120.3
8.4%
15.1
5.0%
16.4
3.0%
4.0
10.2%
1.6
23.9
6.0%
9.3
191
7.1%
65.1
8.3
-
78.3
11.5
-
89.7
11.9
1.2
0.6
1.4
0.7
0.1
0.3
-
102.5
13.6
4.7
2.6
5.5
1.4
1.4
0.3
-
115.2
15.3
6.3
3.6
7.2
1.6
1.9
0.3
-
165.5
16.6%
165.5
14.8
3.9%
21.1
41.6%
21.1
1.9
21.1
1.9
26.0%
24.6
15%
202
21%
264
12%
188.1
13.7%
188.1
14.7
-1.0%
29.5
39.8%
29.5
2.3
29.5
2.3
21.6%
84.2
47.4
92%
311
54%
387
47%
217.4
15.6%
211.0
15.8
6.8%
2.8
7.9
2.1
3.3
7.9
0.4
7.9
34.5
17.1%
30.4
2.5
30.4
2.5
10.0%
1.6
1.3
50%
1.8
2.3
1.1
1.9
115.2
36.8%
55.9
18%
374
20%
470
21%
268.1
23.3%
241.2
16.1
2.0%
11.2
8.1
2.1
12.9
8.1
4.8
8.1
45.7
32.4%
34.8
2.6
34.8
2.6
2.0%
6.6
1.3
50%
3.7
2.3
1.1
1.9
123.0
6.8%
69.6
25%
455
22%
580
24%
306.5
14.3%
271.0
16.4
2.0%
14.8
9.9
2.5
17.0
9.9
6.3
9.9
52.9
15.7%
39.0
2.6
39.0
2.6
2.0%
9.1
1.6
60%
4.0
2.3
1.2
2.0
139.3
13.3%
79.8
15%
521
14%
687
18%
127.1
23.8
8.6
5.0
10.0
1.7
2.6
0.3
2.5
0.3
356.3
16.2%
299.0
16.8
2.0%
20.3
12.6
3.1
23.4
12.6
8.7
12.6
8.4
8.4
79.9
50.9%
60.8
2.1
43.0
2.7
2.0%
17.9
1.3
50%
12.9
2.0
75%
4.4
2.4
1.1
1.5
1.0
1.0
145.8
4.7%
95.9
20%
623
20%
801
17%
140.1
26.3
9.5
5.6
11.0
1.9
2.9
0.3
5.5
0.6
402.0
12.8%
329.6
17.1
2.0%
22.4
12.8
3.2
25.8
12.8
9.5
12.8
18.5
10.3
89.6
12.3%
67.4
2.1
47.3
2.7
2.0%
20.0
1.4
50%
14.4
2.0
75%
4.9
2.4
1.2
1.6
2.3
1.3
152.1
4.3%
107.5
12%
693
11%
884
10%
abc
TAV Airports
Airports
5 April 2007
Analysis of TAV revenues
EURm
2004
2005
2006e
2007e
2008e
2009e
2010e
Breakdown of gross revenues
Aviation
Non-aviation
Duty free revenues
Duty free concession
F&B revenues
F&B concession
Ground handling
Other
TOTAL revenues (before eliminations)
62
202
83
65
21
8
0
25
264
76
311
94
78
30
12
51
45
385
95
374
109
92
35
14
69
56
470
125
455
134
114
46
18
74
70
580
166
521
153
131
53
21
84
80
687
178
623
178
151
80
31
88
96
801
191
693
201
169
90
35
91
107
884
Eliminations
ATU eliminations
BTA eliminations
Havas eliminations
Other eliminations
Total Eliminations
-33
-8
0
-2
-42
-38
-12
-15
-15
-80
-46
-14
-12
-7
-78
-57
-18
-12
-9
-96
-65
-21
-14
-10
-110
-75
-31
-15
-12
-133
-84
-35
-15
-13
-148
TOTAL CONSOLIDATED REVENUES
222
305
391
484
577
668
736
Breakdown of consolidated revenues
Aviation
Non-aviation
Duty free revenues (50% of ATU)
Duty free concession fee (50%)
F&B
G. Handling
Other
62
160
82
33
18
0
28
76
229
92
39
23
23
51
95
296
109
46
35
58
49
125
359
134
57
46
61
61
166
411
153
65
53
70
70
178
490
178
75
80
73
84
191
545
201
84
90
76
94
Aviation (%)
Non-aviation (%)
Duty free / non-aviation
Duty free / Total
28%
72%
71%
51%
25%
75%
5%
43%
24%
76%
52%
40%
26%
74%
53%
39%
29%
71%
53%
38%
27%
73%
52%
38%
26%
74%
52%
39%
62
0
0
0
0
62
76
0
0
0
0
76
84
4
3
4
0
95
92
13
15
4
0
125
102
14
15
5
30
166
111
14
16
5
31
178
120
15
16
6
33
191
Breakdown of non-aviation revenues
Istanbul non-aviation
Ankara non-aviation
Izmir non-aviation
Tbilisi non-aviation
Tunisia non-aviation
Total non-aviation
158
0
0
0
0
160
229
0
0
0
0
229
285
4
5
1
0
296
307
28
19
6
0
360
339
34
23
8
8
413
393
45
30
10
16
493
431
49
32
11
26
548
Breakdown of consol. rev. by airport
Istanbul total consolidated revenues
Ankara total consolidated revenues
Izmir total consolidated revenues
Tbilisi total consolidated revenues
Tunisia total consolidated revenues
TOTAL CONSOLIDATED REVENUES
222
0
0
0
0
222
305
0
0
0
0
305
369
8
8
5
0
391
398
41
34
11
0
484
440
48
39
12
38
577
502
59
46
15
48
668
549
64
49
16
59
736
Breakdown of aviation revenues
Istanbul aviation
Ankara aviation
Izmir aviation
Tbilisi aviation
Tunisia aviation
Total aviation
Source: Company data, HSBC estimates
19
abc
TAV Airports
Airports
5 April 2007
TAV: P&L 2003-10e
EURm
Gross revenues
Eliminations
Cons. revenues
growth
Costs
Cost of catering
Growth
Cost of duty free
Growth
Cost of services
Growth
Staff costs
Growth
Concession rent
Growth
Depr. & amort.
Growth
Other opex. costs
Growth
Total costs
Growth
EBITDA
Growth
Margin
EBITDAR
Growth
Margin
EBIT
growth
Margin
Interest income
Other gains/losses
Interest expense
Trans. gain/loss
PBT
Growth
Income taxes
Tax rate
Profit bef. minorities
Growth
Minority interest
Net profit
Growth
2003
2004
2005
2006e
2007e
2008e
2009e
2010e
235
-34
0
0%
264
-42
0
10%
385
-80
0
37%
470
-78
391
28%
580
-96
484
24%
687
-110
577
19%
801
-133
668
16%
884
-148
736
10%
-3
0%
-32
0%
0
0%
-19
0%
-1
0%
-73
0%
-29
0%
-156
0%
117
0%
58%
118
0%
59%
45
0%
22%
9
1
-19
2
38
0%
29
-77%
67
0%
0
67
0%
-5
60%
-36
12%
0
100%
-26
35%
-1
9%
-94
30%
-28
-1%
-190
22%
127
8%
57%
128
8%
57%
32
-29%
14%
7
-1
-19
-6
14
-64%
-1
5%
13
-81%
1
12
-82%
-6
23%
-40
11%
-18
8900%
-40
56%
-70
5725%
-51
-46%
-52
83%
-277
46%
79
-37%
26%
149
16%
49%
28
-13%
9%
15
1
-21
6
31
127%
10
-32%
41
215%
13
27
123%
-7
17%
-46
14%
-27
50%
-66
65%
-131
87%
-13
-74%
-74
43%
-364
32%
40
-49%
10%
171
15%
44%
27
-3%
7%
17
0
-62
-12
-30
-40
20%
-70
-14
-56
-
-9
26%
-55
20%
-27
0%
-83
25%
-127
-3%
-52
299%
-63
-15%
-416
14%
121
201%
25%
248
45%
51%
68
153%
14%
22
0
-62
0
29
-6
20%
23
2
21
-
-10
10%
-61
12%
-31
14%
-86
4%
-127
0%
-58
11%
-75
19%
-448
8%
187
55%
32%
314
27%
54%
129
88%
22%
19
0
-65
0
82
188%
-16
20%
66
188%
7
59
188%
-14
51%
-71
16%
-37
19%
-89
4%
-127
0%
-62
6%
-87
16%
-487
9%
243
30%
36%
370
18%
55%
181
40%
27%
14
0
-68
0
127
54%
-25
20%
102
54%
10
91
54%
-16
12%
-80
13%
-41
11%
-90
1%
-127
0%
-63
2%
-96
10%
-513
5%
286
18%
39%
413
12%
56%
223
23%
30%
11
0
-64
0
170
34%
-34
20%
136
34%
14
122
34%
Source: Company data, HSBC estimates
Key P&L assumptions beyond 2010:
Consolidated revenue CAGR is 19% 2005-10,
drops to 7% 2010-15 and remains the same in
2015-20. Revenue falls to its 2005 levels
between 2024-28 with the expiry of all
Turkish airport contracts as well as Tbilisi in
2027 but gradually starts growing again with
main remaining operations, Tunisia and
ground handling
Share of staff costs in total costs rises from
14% in 2005 to 18% in 2006, and further to
20
20% in 2007, but gradually drops to 13% by
2020. Cost of services goes up from around
25% to 36%, while concession rent drops
from 36% to 17%
EBITDAR margin approaches 60% by 2020
but falls to 55% after expiry of Istanbul
Net interest income turns positive from 2016
and reaches 13% of PBT by 2020
Net profit CAGR is 35% 2005-10, 20% 201015e and 14% 2015-20
abc
TAV Airports
Airports
5 April 2007
TAV: balance sheet 2003-10e
At 31 Dec. (EURm)
2003
2004
2005
2006e
2007e
2008e
2009e
2010e
Cash and cash equiv.
Trade receivables
Inventories
BOT investments, current
Prepaid concession exp., curr.
Other receivables & assets
Total current assets
Receiv. from rel. parties
Goodwill
P,P&E
BOT inventory
BOT ınventory (net)
Prepaid concession exp.
Other non-current assets
Deferred tax assets
Total non-current assets
Total assets
Bank loans, current portion
Payables to related parties
Trade payables
Other payables and deferred revenue
Total current liabilities
Bank loans
Provisions for employees
Other non-current lıabılıtıes
Total non-current liabilities
Total liabilities
Total equity
Total equity and liabilities
50
7
4
0
0
3
63
68
0
0
4
130
0
0
6
209
272
73
0
8
3
84
18
1
23
43
127
146
272
58
8
4
48
0
4
122
131
0
2
1
7
0
0
8
149
270
64
1
10
32
107
40
1
0
41
148
123
271
147
13
5
0
117
32
314
203
74
18
10
134
308
71
16
835
1150
212
43
11
17
282
673
2
20
695
977
173
1150
342
16
6
0
172
34
570
0
89
32
10
398
168
88
6
791
1361
177
35
22
28
262
700
3
20
723
985
376
1361
263
20
7
0
172
34
496
0
89
35
10
454
168
192
6
954
1450
0
35
26
28
89
884
3
20
907
996
453
1450
196
23
8
0
172
34
433
0
89
36
10
606
168
255
6
1169
1602
0
35
29
28
92
972
3
20
995
1087
516
1602
143
27
9
0
172
34
385
0
89
37
10
655
168
336
6
1300
1685
0
35
35
28
98
973
3
20
996
1094
591
1685
89
29
11
0
172
34
336
0
89
36
10
604
168
418
6
1331
1666
0
35
40
28
103
854
3
20
877
979
687
1666
Net Debt
Gearing
Total debt/EBITDA
Total debt/EBITDAR
Invested Capital
Capital employed
Operating Liabilities
42
29%
0.8
0.8
189
191
34
46
38%
0.8
0.8
171
173
41
738
427%
11.2
5.9
932
950
71
535
142%
21.8
5.1
921
965
98
621
137%
7.3
3.6
1084
1133
103
775
150%
5.2
3.1
1301
1352
106
830
140%
4.0
2.6
1430
1488
112
764
111%
3.0
2.1
1461
1523
116
Source: Company data, HSBC estimates
Key BS assumptions beyond 2010:
Prepaid concession expenses (current plus
non-current) are amortised throughout the
concession period and eventually become
zero by 2021 when the Istanbul Airport
contract expires
Similarly, net BOT inventory assets (ie the
carried amount for Ankara, Izmir and Tbilisi)
diminish over time by the amount of
accumulated depreciation
(EUR764m in 2010) turns into net cash from
2016e onwards. Cash resources account for
c50% of total assets by year 2020
Inventories, property, plant and equipment,
trade receivables & payables and related party
transactions continue to account for a minor
portion of the total balance sheet size
Equity accounts for 28% of total assets in
2006, 41% by 2010 and 95% by 2020
The repayment of outstanding bank loans
(EUR854m in 2010) is completed in 2019
(we project no need for raising further loans
without new projects) and net debt
21
abc
TAV Airports
Airports
5 April 2007
TAV: cash flow 2003-10e
Year to 31 Dec. EURm
OPERATING ACTIVITIES
Profıt/loss for the year
Depreciation and amortisation
Concessıon rent expense
Operating CF bef. WC
Change in WC
Cash from operations
Income taxes paid
Interest paid
Retirement benefits paid
Cash from oper. activities
INVESTING ACTIVITIES
Disposal of trading sec.
Purchases of trading sec.
Disposal of inv. held to maturity
Acq. of inv. held to maturity
Loans to related parties
Acquisition of subsidiary
Concession expenses paid
Additions to BOT investments
Purchases of PP&E
Net cash used in inv. activities
FINANCING ACTIVITIES
Net borrowings raised
Change in minority interest
Effect of group restructuring
Cash from financing activities
Surplus/deficit
2003
2004
2005
2006e
2007e
2008e
2009e
2010e
67
73
0
114
1
114
-3
-8
0
103
13
94
0
113
4
117
-2
-8
0
106
41
51
70
163
-10
153
-2
-31
-2
118
-70
13
131
102
21
124
-24
-57
-2
41
23
52
127
202
-9
193
-6
-40
-2
146
66
58
127
251
-7
244
-16
-46
-2
180
102
62
127
290
-11
279
-25
-54
-2
199
136
63
127
326
-8
317
-34
-53
-2
229
350
-350
3
0
-11
0
0
-43
0
-45
467
-467
0
-39
-59
0
0
-19
-1
-114
31
-31
39
0
-61
-96
-495
-127
-5
-807
0
0
0
0
203
0
0
-269
-20
-127
0
0
0
0
0
0
-127
-100
-10
-237
0
0
0
0
0
0
-127
-200
-10
-337
0
0
0
0
0
0
-127
-100
-10
-237
0
0
0
0
0
0
-127
0
-10
-137
-64
0
-69
14
10
-23
776
42
819
-8
-34
258
217
7
4
53
64
88
3
0
91
1
4
0
-15
-119
5
0
-145
-10
-31
130
131
-27
-67
-53
-54
Source: Company data, HSBC estimates
Key CF assumptions beyond 2010:
Annual concession rent expense (cash
outflow) is fixed throughout the Istanbul
Airport contract which expires in Jan 2021
Working capital needs remain minimal due to
the nature of airport operations and change in
working capital does not have a major impact
on forecast cash flow
Assume no loan deals with related parties
Capacity upgrade investments of EUR100m
in 2024-25 (EUR50m in each year) and
another EUR100m in 2037-38 (EUR50m in
each year) at Enfidha airport in Tunisia. This
will upgrade the initial capacity of 7m
passengers at the airport to 14m by end 2025
and further to 22m by end 2038
22
Assume no group restructuring effect after
major equity deals in 2006, providing total
cash inflow of EUR315m (EUR258m in 2006
cash flow after portion used for investments
and loan repayments)
Repayment of existing bank loans will
depress cash generation in 2007-2013 but,
starting from 2014, cash generation is strong:
cEUR50m in 2014, reaching EUR350m in
2019 and EUR444m in 2020 but falling back
to cEUR190m with the removal of Istanbul
Airport operations thereafter
abc
TAV Airports
Airports
5 April 2007
TAV financial model: Key outputs (EURm)
Year to 31 December
2003
2004
2005
2006e
2007e
2008e
2009e
2010e
Total Passengers (million)
Growth
Revenues
Growth
EBITDA
Growth
Margin
EBIT
Growth
Margin
Net finance costs
Cover
Pretax Profits
Growth
Margin
Tax rate
Net Profit
Growth
Margin
16.6
33%
20.8
26%
222
10%
127
8%
57%
32
-29%
14%
-19
2
14
-64%
6%
5%
12
-82%
6%
25.3
22%
305
37%
79
-38%
26%
28
-13%
9%
1
-25
31
127%
10%
-32%
27
123%
9%
27.8
10%
391
28%
40
-49%
10%
27
-3%
7%
-45
1
-18
-159%
-5%
20%
-34
-223%
-9%
31.6
14%
484
24%
121
201%
25%
68
153%
14%
-40
2
29
-258%
6%
20%
21
-161%
4%
39.9
27%
577
19%
187
55%
32%
129
88%
22%
-46
3
82
188%
14%
20%
59
188%
10%
43.7
9%
668
16%
243
30%
36%
181
40%
27%
-54
3
127
54%
19%
20%
91
54%
14%
47.5
9%
736
10%
286
18%
39%
223
23%
30%
-53
4
170
34%
23%
20%
122
34%
17%
42%
46%
4.0
42%
9%
42
29%
0.4
16.0
18%
9%
0.8
17%
9%
46
38%
0.4
6.9
4%
19%
1.6
7%
9%
755
437%
9.5
-71.9
-1%
-12%
-1.1
2%
9%
535
142%
13.3
0.9
5%
5%
0.4
5%
9%
621
137%
5.1
3.0
8%
12%
1.1
9%
9%
775
150%
4.1
4.0
10%
17%
1.4
11%
9%
830
140%
3.4
4.5
12%
19%
1.7
12%
9%
764
111%
2.7
5.4
ROCE
ROE
ROE/COE
ROIC
WACC
Net Debt
Gearing
Net Debt to EBITDA
EBITDA/Interest
201
117
58%
45
22%
-7
6
38
19%
-77%
67
Source: Company data, HSBC estimates
TAV: Forecasts on EBITDAR breakdown by airport
EURm
2003
2004
2005
2006e
2007e
2008e
2009e
2010e
Istanbul consolidated revenues
Ankara
Izmir
Tbilisi
Tunisia
TOTAL consolidated revenues
Istanbul opex (incl. depr., rent)
Ankara
Izmir
Tbilisi
Tunisia
TOTAL opex
Istanbul EBITDAR
Ankara
Izmir
Tbilisi
Tunisia
TOTAL EBITDAR
Istanbul EBITDAR
Ankara
Izmir
Tbilisi
Tunisia
TOTAL EBITDAR
235
0
0
0
0
235
-156
0
0
0
0
-156
152
0
0
0
0
152
100%
0%
0%
0%
0%
100%
221
0
0
0
0
221
-190
0
0
0
0
-190
127
0
0
0
0
127
100%
0%
0%
0%
0%
100%
306
0
0
0
0
306
-276
0
0
-1
0
-277
150
0
0
0
0
150
100%
0%
0%
0%
0%
100%
369
8
8
5
0
391
-326
-14
-16
-8
0
-364
179
-4
-3
0
0
171
105%
-3%
-2%
0%
0%
100%
399
41
34
11
0
485
-318
-46
-37
-11
-3
-416
213
18
14
4
0
249
86%
7%
6%
1%
0%
100%
441
48
39
12
38
578
-327
-46
-36
-11
-28
-448
247
25
20
6
17
316
78%
8%
6%
2%
5%
100%
504
59
46
15
48
670
-349
-50
-40
-13
-35
-487
288
32
23
7
23
372
77%
9%
6%
2%
6%
100%
551
64
49
16
59
738
-366
-52
-41
-14
-39
-513
318
35
25
8
30
416
77%
8%
6%
2%
7%
100%
Source: Company data, HSBC estimates
23
abc
TAV Airports
Airports
5 April 2007
Company profile
Turkey’s largest airport terminal operator, with 45% market share
and 27.8m passengers in 2006 according to DHMI
Operates terminals at three airports in Turkey (Istanbul, Izmir and
Ankara) and both airside and terminals at Tbilisi Airport in Georgia;
two more airports to come from Tunisia in 2008 and 2009
c75% of revenues are derived from non-aviation activities
Overview
TAV Airports has the concessions to operate
terminals at Istanbul Atatürk Airport, Ankara
Esenboğa Airport and Izmir Adnan Menderes
Airport in Turkey and Tbilisi International Airport
in Georgia. Most recently, TAV won a tender in
Tunisia to operate the existing Monastir airport
from 1 January 2008 and the rights to build and
operate a brand new airport, Enfidha, which is
expected to become operational by mid-2009.
TAV also has duty-free (ATU), food and
beverage (BTA), ground handling (Havaş) and
airport services operations (TAV O&M, TAV IT
and TAV Security), mainly at its existing airports.
Istanbul Airport is the largest in Turkey, handling
21.3m passengers (23.4m including transit) in
2006 according to the General Directorate of State
Airports Authority DHMI. Ankara and Izmir are
the third and fourth largest airports in Turkey,
with DHMI recording 4.5m and 4.4 million
passengers, respectively over the same period.
Antalya is the second largest with 14.6m
passengers (Fraport, the listed European airport
company, operates one of the two international
terminals). Tbilisi is Georgia’s largest airport,
handling 0.55 million passengers in 2006,
according to TAV Urban Georgia.
24
Not a typical European airport operator
TAV differs from most of the listed European
airport companies in that it has time-limited
concession contracts to operate the terminals only
– excluding airside activities – at Istanbul, Ankara
and Izmir. The other listed European airports
generally have full ownership of the assets and
also operate airside activities. At Tbilisi, TAV
operates both airside and landside and operations
in Tunisia will also include airside activities.
History
TAV Airports was formed as Tepe Akfen Vie
Yatirim Yapim ve Isletme A.S. in 1997, when
Tepe and Akfen joined Vienna International
Airport in a successful tender for the BOT project
for Istanbul in 1999. Having passed through
several iterations, a new holding company
structure was created in 2006, the company was
renamed TAV Havalimanlari Holding A.S. and
new strategic shareholders were introduced.
Tepe Group (Tepe) is a Turkish infrastructure and
construction conglomerate that had revenues of
EUR 413m in 2005. It is fully owned by Bilkent
Holding and its profits continue to fund
Bilkent University.
abc
TAV Airports
Airports
5 April 2007
Akfen Holding (Akfen) was founded in 1976 and
consists of 10 companies and 30 subsidiaries
operating in the construction, tourism, foreign
trade, insurance and natural gas sectors. Akfen
had revenues of EUR192m in 2005 and Hamdi
Akin, the 99.7% owner and CEO, is also
Chairman of TAV.
On 18 August 2004, TAV executed a EUR250m
BOT agreement with DHMI to construct Ankara
Airport within 36 months and then operate the
facilities for a period of 15 years and 8 months.
On 20 April 2005 TAV executed the Izmir BOT
agreement with DHMI, under which TAV was
required to complete the construction within 24
months and then have the right to operate the
facilities for six years, seven months and 29 days.
TAV paid EUR174m (construction) costs for the
Izmir BOT contract.
In June 2005, following the end of the Istanbul
BOT contract, TAV secured the operating lease
for 15.5 years for a total consideration of
USD2,543m plus VAT.
On 6 September 2005, TAV Urban Georgia LLC
executed a USD90.5m BOT agreement with JSC
Tbilisi International Airport for an initial period of
10 years and 6 months from the construction of
the new terminal. Subsequently, the operating
period was extended by 9.5 years.
Construction was completed on Izmir in
September 2006, Ankara in October 2006 and
Tbilisi became fully operational in January 2007.
On 16 March 2007, TAV announced that it had
won a tender to operate two airports in Tunisia for
40 years. One of the airports, Monastir, is an
existing one which TAV will take over from
1 January 2008. The other airport, Enfidha, will
be built and operated by TAV as a brand new
airport starting from mid-2009. TAV’s winning
bid includes a package with a commitment to
invest EUR400m, predominantly for Enfidha.
1. TAV airport operation contracts summary
Airport
Istanbul
Ankara
Izmir
Tbilisi Tunisia
Contract type Op. lease
BOT
BOT
BOT
Duration
15.5 yrs 18 yrs 8 m 9 yrs 8 m 20 yrs 0 m
Start
40 yrs
July-05
Aug-04
April-05
Sept-05 Jan-08
End
Jan-21
Conces. price $2,543m
Cost of constr.
Int. terminal
YES
Dom. terminal
YES
Jun-23
€€ 250m
YES
YES
Jan-15
€€ 174m
YES
NO
Jan-27 Jan-48
$90.5m €€ 400m
YES
YES
YES
YES
Source: Company data
Financial and group restructuring
Due to the upfront nature of BOT contract
payments, TAV built a sizeable debt position,
with FY 2005 net debt to equity gearing ratio of
427%. This debt is financed through facilities
from various third-party lenders. Since the ninemonth accounts and prior to the initial public
offering, TAV completed a group and financial
restructuring. Izmir was separated out from Havaş
and in addition to arranging a USD70m bank loan,
the primary shareholders Tepe and Akfen sold
15% of the equity to Goldman Sachs International
and 6% to Babcock Brown Turkish Airports LLC
in December 2006. The refinancing resulted in a
cash injection into the group of cUSD336m, prior
to the IPO in February 2007.
2. TAV post 9M B/S restructuring payments
Entity paid to:
TAV Istanbul
TAV Izmir
TAV Holding
TAV Holding (inter-company loan)
TAV Ankara
Total payment
Amount
cUSD95m
cUSD39m
cUSD83m
cUSD36m
cUSD85m
cUSD336m
Source: Company data
Initial Public Offering
The initial public offering of TAV was completed
on 16 February 2007 with 38.75m shares (16% of
post-IPO capital) sold to foreign institutional and
local Turkish investors. Of the total offering, 75%
(29m shares) was sold by main shareholders Tepe
25
abc
TAV Airports
Airports
5 April 2007
(14.5m) and Akfen (14.5m), while the remaining
25% (9.69m shares) was sold as primary shares
through a capital increase. 69% of the offering
was allocated to foreign institutional investors and
the remaining 31% for local Turkish investors. In
addition to primary and secondary shares totalling
38.75m, 5.8m shares (15% of the offering or 2.4%
of post-IPO capital) were also offered (by Tepe
and Afen with equal split) as over-allotment
(green-shoe option). The shares were offered at
TRY10.0 per share, close to the high end of the
IPO price range of TRY8.55-10.30 per share and
trading started on 23 February 2007 on the
Istanbul Stock Exchange where the only listing is.
Including the over-allotment, the total offering
size was 44m shares, indicating 18.4% free float.
Ownership
The pre-IPO and post-IPO (including overallotment) ownership structure is provided in the
table below.
3. TAV ownership structure
Holder
Pre-IPO Post-IPO
Tepe İnşaat San. A. Ş.
Akfen Holding A.Ş.
Goldman Sachs International*
Babcock Brown Turkish Airports LLC
IDB Infrastructure Fund L.P.
Sera Yapi Endűstrisi ve Tic. Ltd. Şti**
Global Investment House KSCC
Global Opportunistic Fund II Company BSCC
Akfen İnşaat Tur. ve Tic. A.Ş.
Mehmet Cem Kozlu***
Free Float
27.06%
23.01%
30.00%
6.00%
4.87%
3.28%
3.00%
2.00%
0.78%
<1%***
0.00%
18.86%
15.70%
28.80%
5.16%
4.92%
3.15%
3.00%
2.00%
0.01%
<1%***
18.40%
* 14.4% of Goldman Sachs’ total 28.8% shareholding represents shares actually owned by
Tepe, Akfen and Sera but pledged for Goldman Sachs
**CEO Sani Şener is the principal beneficiary of Sera
*** 2 shares
Source: Company data
Part of the wider TAV Group
TAV’s group structure is outlined in figure 8.
TAV Airports is the entity which is now listed.
TAV Construction, a sister company within the
TAV Group, is fully owned by Tepe and Akfen
and predominantly focuses on airport projects
(although it has undertaken some other
construction work including the Majestic and
Sulafa Towers in Dubai). Recent airport projects
26
include the construction of Istanbul, Ankara,
Izmir and Tbilisi airports under BOT contracts.
Independently from TAV Aiports, it has also been
involved in Batumi, Cairo, Doha and Dubai. TAV
Construction has a strong track record of
completing ahead of schedule, with Istanbul,
Ankara and Izmir completed 8, 12 and 8 months
ahead of schedule, respectively. This is important
as the operating parts of BOT contracts are
extended by the early completion time.
TAV Group has introduced a new corporate
governance regime whereby all construction
contracts awarded by TAV Airports are done on
an ‘arm’s-length’ basis. Accordingly, the
constructor of the Enfidha airport in Tunisia will
be determined as a result of a competitive bidding
process to be held by TAV Airports.
Management
4. TAV management
Position
President & CEO
CFO
GM of ATU (duty-free)
GM of BTA (food and beverage)
GM of Havaş (ground handling)
Name Age Service
Dr. Sani Şener
Murat Uluğ
Hakan Döker
Sadettin Cesur
Müjdat Yücel
51
36
39
34
55
9
0
9
6
2
Source: Company data
Sani Şener, President and CEO, has an M. Phil.
in mechanical engineering from the University of
Sussex. He has worked for various national and
international construction firms and has been a
member of the board and managing director since
1997. His family’s investment vehicle is a
shareholder with 3.15%.
Murat Uluğ, CFO, has an MBA and was educated
at Istanbul Bilgi University in collaboration with
Manchester Business School. He has 11 years of
banking experience with ABN AMRO, HSBC and
Garanti and was finance co-ordinator of Akfen
Holding prior to joining TAV in 2006.
Board of Directors
There are no plans currently to introduce share
option schemes (these are not a common practice
abc
TAV Airports
Airports
5 April 2007
in Turkey as they might bring about treasury share
issues which are prohibited under Turkish
regulation) but TAV intends to introduce
management performance incentives.
Cem Kozlu, Independent member, is a board
member of Hurriyet, Evyap Holding, Coca-Cola
Icecek, International Airlines Training Fund and a
Member of the Board of Trustees of Sabanci
University. He is also a consultant to Coca-Cola in
North Asia, Eurasia and the Middle East Group.
TAV also intends to appoint an additional
independent board member who will head the
audit committee.
5. TAV board of directors
Position
Name
Chairman
Hamdi Akin
Vice Chairman Ali Haydar
Kurtdarcan
Member
Ibrahim Suha
Gucsav
Member
Ihan II
Member
Mustafa
Kalender
Member &
Dr. Sani Şener
CEO
Member
Seref Eren
Member
Ahmet Ersagun
Yucel*
Member
Mehmet
Erdogan
Member
Mumtaz Khan
Positions within TAV Airports and
other companies include:
Chairman Akfen Holding
Chairman Tepe Construction Ind.
Inc
Board Member, TAV Holding &
Akfen Holding
Chairman of Tepe Holding
Board Member, TAV Holding and
Tepe Holding
Group CEO and President TAV
Airports
Consultant
General Secretary
External Relations Co-ordinator
Chairman/CEO EM P’ship
(Bahrain), GP & Manager IDB
Infrastructure Fund
Member
Shailesh Dash Global Investment House (Kuwait)
Member
James Bernard Babcock & Brown
Farley
Member
Suleyman Son General Manager Tepe
Construction
Member
Irfan Erciyas
Board Member Akfen
Indpt. member Cem Kozlu
Consultant to Coca Cola and Board
Member to several other Turkish
co.’s
Indpt. member TBA
N/A
airport terminals) and 75% came from nonaviation (TAV titled ‘services’) activities.
Airport segment
The airport segment comprises TAV’s operation
of Istanbul international and domestic terminals,
Ankara international and domestic terminals,
Izmir international terminal and Tbilisi
international and domestic terminals. The primary
source of income in this segment is passenger fees
and revenues are driven by the level of fees
(fixed) and passenger traffic volume growth.
Non-Aviation (services) segment
ATU, the duty-free provider, which is a 50%
joint venture with Heinemann, the German
travel retailer;
BTA, the food and beverage provider, of
which TAV owns 67% (33% is owned by
Bilintur);
Havaş, the ground handling provider, of
which TAV owns 60% with Ciner Group, a
privately held Turkish conglomerate owning
the other 40%; and
Other services, TAV O&M, whose activities
include operations and maintenance, TAV
security (67% owned) and TAV IT, which
provides IT maintenance services to airport
operating companies (96% owned).
6. TAV revenue split, FY 2005
Aviatio n
2 5%
* Note: will resign following the appointment of a second independent board member
Source: Company data
G. Hand ling
7%
Activities
Other
3%
Co mmercial
Non-aviation revenues dominate, 75% in 2005
In 2005, 25% of TAV’s revenues came from
airport activities (ie passenger fees from operating
65%
Prop erty
0%
Source: Company data
27
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TAV Airports
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9M 2006 results
9M losses driven by BOT/concession costs
TAV reported strong revenue growth in the nine
months to September 2006, up 36.1% year on
year to EUR293.6m. EBITDAR was up 18.5%
year on year (which is lower than the increase in
revenue) as TAV reported a EUR7.4m increase in
VAT not recoverable, a EUR7.0m increase in
management consultancy fees and a 77% increase
in employee costs to EUR48.0m.
EBITDA was down 60.5% year on year partly due
to the 2006 nine-month results including three
quarters of a full-year Istanbul concession rent
payment, whereas the 2005 nine-month results
included only one quarter.
Although decreases in depreciation and
amortisation drove just a 9.6% decrease in yearon-year EBIT, increased finance costs from the
additional debt as a result of BOT payments drove
EUR19.5m losses before tax, down from
EUR31.8m profit before tax in the same period a
year earlier.
Net loss was EUR37m, versus net profit of about
EUR35m in nine months 2005.
7. TAV 9M headline results, 2006 vs 2005
9M 2005
Total income
EBITDAR
EBITDAR margin
EBITDA
EBITDA margin
EBIT
EBIT margin
PBT
PBT margin
Net profit
Net profit margin
Source: Company data
28
215.6
110.6
51.3%
76.3
35.4%
26.4
12.2%
31.8
14.7%
35.3
16.4%
9M 2006 y-o-y change
293.6
131
44.6%
30.2
10.3%
23.9
8.1%
-19.5
-6.6%
-37
-12.6%
36.1%
18.5%
-60.5%
-9.6%
NM
NM
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8. TAV group structure
Division
100%
Entity
Activity
TAV Istanbul
Istanbul Atatürk Airport
TAV Istanbul Terminal Isletmeciligi A.S.
75%
Airports
95%
60%
TAV Airports
100%
TAV Esenboga
Tav Esenboga Yatirim Yapim ve Isletme A.S.
Ankara Esenboga Airport
TAV Izmir
Izmir Adnan Menderes Havalimani Uluslararasi
Terminal Ins. Isletmeciligi ve Yatirim A.S.
TAV Georgia
TAV Urban Georgia LLC
TAV Tunisia
Izmir Adnan Menderes Airport
Tbilisi International Airport
Monastir & Enfidha Airports
TAV Havalimanlari Holding A.S.
50%
67%
Akfen Holding A.S.
Services
60%
100%
Tepe Insaat A.S.
96%
67%
ATU
Duty free
ATÜ Turizm Isletmeciligi A.S.
BTA
BTA Havalimanlari Yiyecek
ve Içecek Hizmetleri A.S.
Havas
Havaalanlari Yer Hizmetleri A.S.
TAV O&M
TAV Isletme Hizmetleri A.S.
TAV IT
TAV Bilisim Hizmetleri A.S.
TAV Security
TAV Özel Güvenlik Hizmetleri A.S.
Food and beverage
Ground handling
Operations and maintenance
IT maintenance
Security services
Listing entity
Unlisted entities
TAV Holding
100%
TAV Aviation
TAV Havacilik A.S.
Private jet
TAV Yatirim Holding A.S.
100%
Dubai Branch
TAV Construction
Tav Tepe Akfen Yatirim Insaat ve Isletme A.S.
Cairo Branch
100%
Source: Company data
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Traffic
Catchment area encompasses world’s eighth most populous city
Majority of traffic is international (57.0% in 2005)
Forecast Turkish passenger traffic growth outstrips Euro average
TAV traffic growth
Catchment area
Growth has accelerated since 2002
Since 1995, total passenger numbers at Istanbul
have increased at a compound annual growth rate
of 5.8%, according to DHMI data. However, this
is affected by the 1997 Asian crisis, the 1998
Russian crisis, the August 1999 Turkish
earthquake, the November 2000 Turkish political
crisis (collapse of the three-party government
coalition) and the February 2001 devaluation of
the Turkish Lira. Since 2002, the compound
annual growth rate in passenger traffic has been a
much healthier 16.5%.
1. TAV interests, passenger traffic growth 1995-2005
25.0
20.0
CAGR 2000-2005
Istanbul 5.8%
Ankara -0.9%
Izmir
5.5%
Tbilisi 14.7%
2. TAV catchment area
Istanbul Atatürk Airport
Ankara Esenboga
Airport
Ó
Ó
Ó
U
Izmir Adnan
Menderes Airport
Source: Company data
Turkey is the second-largest country in Europe
with a population of about 70.7 million as of end
of 2006. Istanbul is the largest city in Europe and
eighth largest in the world with a population of
about c12 million. TAV estimates that its total
catchment area encompasses around
36 million people.
More than half of traffic is international
3. TAV airport portfolio traffic characteristics, 2006
15.0
Istanbul
Ankara
Izmir
Tbilisi Group*
International
Domestic
Transit
Total
52.0%
38.8%
9.2%
100.0%
27.0%
71.5%
1.5%
100.0%
31.9%
66.1%
2.0%
100.0%
100.0% 51.0%
0.0% 41.6%
0.0%
7.4%
100.0% 100.0%
% departing
45.7%
49.3%
49.5%
10.0
5.0
0.0
1995
1997
Istanbul
1999
Ankara
2001
Izmir*
2003
Tbilisi
2005
Note * Izmir excludes domestic traffic.
Source DHMI Annual Statistics Yearbook (1995-2005 figures), DHMI Istanbul (2006),
DHMI Website (2006), DHMI Izmir (2006), TAV Urban Georgia
30
Ó
Tbilisi
International
Airport
47.7%
46.4%
Note * Excludes Izmir domestic terminal as TAV only operates the international terminal.
Source: DHMI
International traffic accounts for slightly more
than 50% of TAV group traffic, with 51.0% in
2006 (down from 57% in 2005), although this
figure is slightly distorted by TAV only operating
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the international terminal at Izmir. 52%
international passenger traffic at Istanbul is aided
by its geographic location and the fact that 55
countries are within a three-hour flight.
THY Star Alliance membership drives growth
Turkish Airlines (THY) signed its first code share
agreement with Lufthansa under the preliminary
agreement signed with Star Alliance on 15
December 2006. Under the terms of the
agreement, THY’s destinations are increased to
231 (currently 100). THY contributed 42% of FY
2005 Istanbul international traffic.
Low-cost carrier traffic is negligible
Low-cost carrier traffic is negligible at Istanbul,
with Easyjet choosing to use Sabiha Gökçen
International Airport, located on the Asian side of
the Bosphorus, due to its lower charges.
However, according to TAV, Sabiha Gökçen is
nearing its capacity and therefore TAV could see
more low-cost traffic in future in our view.
Traffic growth linked to Turkish GDP
4. Istanbul traffic growth vs Turkish GDP growth, 1996-2005
30%
25%
20%
15%
10%
HSBC economists forecast 5.3%, 4.1% and 6.2%
GDP growth in Turkey for FY 2006, FY 2007 and
FY 2008, respectively. They recently cut their FY
2006 and FY 2007 forecasts from 5.7% and 4.6%,
respectively, due to the likelihood that the Central
Bank will maintain a tight and cautious stance to
meet its 4% inflation target for next year.
Exposure partially muted by DHMI guarantee
Under the terms of the BOT concessions, DHMI
guarantees departing passenger traffic growth at
both Izmir and Ankara airports. Although nonaviation revenues are still dependent on traffic
growth, TAV’s exposure to traffic growth on the
passenger fee side is negated.
Outlook for traffic growth
IATA forecasts an average passenger growth rate
of 8.9% between 2005 and 2009 in Turkey. We
expect passenger growth to outpace GDP growth,
driven mainly by THY’s fleet expansion and Star
Alliance membership.
5. Top six airlines by passenger numbers at Istanbul, 30/09/06
Turkish Airlines
Atlas Air
Onur Air
Lufthansa
KTHY
British Airways
Other
Passengers
% of total
3,484,437
1,140,443
1,053,811
216,061
122,137
111,976
1,973,674
43%
14%
13%
3%
2%
1%
24%
Source: Company data
5%
0%
-5%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-10%
-15%
Pax growth
GDP growth
Our traffic growth forecasts and assumptions on
airport capacity are shown in the section of this
report on the earnings model.
Source: DHMI Annual Statistics Yearbook (1995-2005 figures), Thomson Financial
Datastream, HSBC
Figure 4 shows a relationship between traffic
growth at Istanbul Airport and Turkish GDP
growth. Since 1996, traffic at Istanbul has on
average grown at 6.5% per annum, or 1.4 times
GDP growth.
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TAV traffic growth in context
TAV’s passenger portfolio is relatively small in
relation to those of ADP, AMS, BAA and Fraport.
However, its exposure to the fast-growing Turkish
market sees HSBC forecast growth rate outstrip
the other major airports in our comparison with
actual 9.7% for FY 2006 against an average 5.1%
(figure 7).
6. Major airports traffic, 2000-05 (m)
ADP ADR
2000
2001
2002
2003
2004
2005
73.6
71.0
71.5
70.7
75.3
78.7
AMS
BAA
27.1 39.6 124.6
26.3 39.5 121.9
26.3 40.7 127.7
28.1 40.0 133.4
30.7 42.54 141.7
32.9 44.2 146.0
FRA TAV*
VIE
ZUR
49.4
48.6
48.5
48.4
51.1
52.2
11.9
11.9
12.0
12.8
14.8
15.9
22.7
21.0
17.9
17.0
17.3
17.9
16.0
14.6
13.4
13.8
17.4
21.1
Note * TAV is Istanbul only.
Source: Company data, DHMI
7. Selected airports' traffic growth summary
ADP
1995-2005
2000-2005
2006e
AMS
BAA
FRA
3.60% 5.30% 4.50% 4.00%
1.20% 2.20% 3.20% 1.10%
4.47% 4.00% 3.50% 1.10%
TAV*
VIE
ZUR
5.8% 6.30% 1.50%
5.8% 5.90% -4.60%
9.7% 6.28% 7.60%
Source: Company data , except * HSBC estimates, DHMI
TAV less reliant on its largest customer
ADP, Fraport, Vienna and Zurich are all, to some
extent, reliant on their largest customers: in 2005,
Air-France KLM was 56.5% of ADP’s traffic,
Deutsche Lufthansa was 60% of Fraport’s traffic,
Austrian Airlines was 56.6% of Vienna’s traffic
and Swiss International was c51% of
Zurich’s traffic.
TAV is more diversified in that its largest
customer, Turkish Airlines, accounted for only
42% of FY 2005 traffic at Istanbul. BAA is the
most diversified, in that its biggest customer,
British Airways, accounted for only 27% of
passenger numbers in 2004-05.
O&D vs transfer
In general, origin and destination traffic (O&D) is
the part of the market over which an airport has a
monopoly, while transfer traffic is the competitive
part of the market. The size of an airport’s O&D
market is a function of the size and economic
characteristics of the catchment area, ground
transport links and whether there are other airports
in the area.
If an airport successfully attracts transfer traffic,
this can add to its overall size and growth,
bringing additional passenger spending in the
retail and other commercial facilities. However,
transfer traffic often involves a discount on airport
charges and is heavily influenced by the strategies
of the base airline. This generally means that
transfer traffic is more volatile than O&D traffic.
Nevertheless, a large airport with a critical mass
of transfer traffic operated by a large and
financially secure airline is unlikely to see its
main carrier move its hub elsewhere (eg Fraport).
Transfer traffic represented 7.4% of TAV Group
traffic in FY 2005 according to DHMI data. This
gives it the highest percentage of O&D traffic of
the major European airports.
8. Major airports hub characteristics
Runways
Approximate destinations
Transfer traffic % of pax
Min connecting time (mins)
Approximate share of hub carrier %
Weekly sub-two hour connections
Source: Company data, DHMI
32
ADP - CDG
AMS
BAA - LHR
FRA
TAV - IST
VIE
ZUR
4
220
32%
45-90
57%
20,961
5
203
42.3%
40-50
52%
6,813
2
178
34.6%
45-90
41%
7,173
3
233
53.7%
45
60%
12,956
3
141
7.4%
c75
c45%
n/a
2
176
34.0%
25-30
58%
n/a
3
148
30.0%
40
50%
2,847
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Airport charge regulation
Transparent regulatory regime with fixed passenger fees
Departing passenger growth guaranteed at Ankara and Izmir
Upside potential from unregulated, non-aviation activities
TAV’s charge regulation
Passenger fees and costs fixed
The General Directorate of State Airports
Authority (DHMI) is tasked with the management
of airports in Turkey and the provision of air
traffic service and its control in Turkish airspace.
The DHMI takes its authority under concession
from the Ministry of Transportation. DHMI is a
public sector company that was set up in June
1984 and currently operates 20 airports
and aerodromes.
TAV operates the international and domestic
terminals at Istanbul, the international and
domestic terminals at Ankara and the international
terminal at Izmir through long-term concession
agreements with DHMI. It also operates the sole
terminal at Tbilisi in Georgia. These concession
agreements take the form of operating leases (at
Istanbul) and Build-Operate-Transfer (BOT)
contracts (at Ankara, Izmir and Tbilisi). TAV’s
concession contracts are summarised in figure 1.
The regulatory regime under which TAV operates
is highly transparent, with passenger fees fixed for
the terms of the concession at all four airports,
departing passenger growth guaranteed by the
DHMI at Ankara and Izmir and costs fixed for the
terms of the concessions.
1. TAV airport operation contracts summary
Airport
Istanbul
Ankara
Izmir
Tbilisi Tunisia
Contract type Op. lease
BOT
BOT
BOT
Duration
15.5 yrs 18 yrs 8 m 9 yrs 8 m 20 yrs**
Start
July-05
Aug-04 April-05 Sept-05
End
Jan-21
Jun-23 Jan-15 Jan-27
Conc.price
$2,543m
€€ 250m €€ 174m $90.5m
Cost of const
Int. terminal
YES
YES
YES
YES
Dom. terminal
YES
YES
NO
YES
Int. traffic fee* USD15
EUR15 EUR15 USD22***
Domestic fee*
EUR3
EUR 3
N/A
USD6
Vol. guarantee
NO
+5% pa +3% pa
NO
40 yrs
Jan-08
Jan-48
€€ 400m
YES
YES
EUR9
EUR9
NO
Note:
* All fees are per departing passenger
** Tbilisi has nine and a half year extension for Batumi Airport construction
*** USD22 per pax in 2007 growing at fixed 2% per annum thereafter
Source: Company data
Fixed passenger fees provide visibility
TAV generates revenues for its airport operations
primarily through the collection of passenger fees.
It generally does not collect most of the other fees
typically associated with airport operators such as
landing (except at Tbilisi) and lighting fees as it
only operates the terminals.
Passenger fees at each of the four existing airports
are fixed (and will be also in Tunisia when
operations start initially at Monastir on 1 January
2008 and continue with Enfidha from H2 2009)
for the duration of the concession agreements,
with the exception of the departing international
passenger fee at Tbilisi airport, which grows at
2% per annum from a USD22 2007 base. The
passenger fees at Istanbul are subject to annual
review by the DHMI but are fixed to TAV.
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TAV Airports
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5 April 2007
Therefore, if DHMI lowers the fees it pays the
difference to TAV and if it raises fees, it collects
the difference.
Passenger growth guaranteed under BOTs
Further, departing passenger growth at Ankara
and Izmir is guaranteed. DHMI guarantees 5%
departing passenger growth at Ankara airport
from a base of 750,000 departing international
and 600,000 departing domestic passengers in
2007 and 3% per annum at Izmir from a base of
one million departing international passengers in
2006. With 2005 departing passenger traffic of
607,787, 1,311,160 and 852,085 respectively and
IATA forecasting annual average Turkish traffic
growth of 8.9%, these guarantees are on the low
side. While this caps the downside, it also caps the
upside as DHMI takes all the excess passenger
fees if growth outstrips the guaranteed rates.
However, TAV will still have the non-aviation
revenue upside from the increased volumes.
Fixed concession costs (c36% already paid)
TAV has high visibility on its concession costs
and 36% of the total has already been paid.
Under the terms of the operating lease for
Istanbul, signed in July 2005, TAV paid a
concession price of USD2,543m plus VAT (at
18%). cUSD690m (23%) was paid upfront with
annual payments fixed at USD140m plus VAT
(USD165m incl. VAT) for the concession term.
These annual payments started on 3 January 2007.
Under the terms of the BOT agreements, TAV
pays a concession price upfront, which includes
the construction costs. TAV constructed the
airports for EUR250m for Ankara, EUR174m for
Izmir and USD90.5m for Tbilisi (this includes
USD28.5m for Batumi airport as the construction
contract was part of the Tbilisi BOT contract).
Unregulated, non-passenger aviation fees
TAV does collect some unregulated, nonpassenger aviation fees. These include 400Hz
34
(fees for power sales), PCA (fees for preconditioned air sales), boarding bridge and
counters fees. Under the current lease terms, TAV
is generally able to increase non-passenger
aviation fees without a price cap. However, at
Ankara and Izmir these tariffs cannot differ by
plus or minus 25% from the tariffs set by DHMI.
BOT vs Lease contracts
Build-Operate-Transfer (BOT)
BOT contracts are usually associated with start-up
projects, run for 10 to 30 years and require design,
construction and operating expertise. The private
sector operator is responsible for project
management and maintenance and has ownership
of the assets for the duration of the agreement.
The public sector is responsible for the tariff
structure, the concession agreement and the
regulatory framework. Debt financing is more
common with BOT contracts as concession
payments are made upfront and the assets are
amortised.
BOT contract tenders are based on construction
period, with the winning bid often going to the
tender with the shortest construction period.
Lease contract
Lease contracts differ from BOT contracts in that
they are generally used for existing assets, have a
shorter duration (7-15 years) and require
operational and maintenance expertise. With lease
contracts, the private sector operator is
additionally responsible for commercial services
and the assets remain under public ownership.
The public sector maintains responsibility for the
tariff structure and the regulatory framework but
not for the concession agreement. Lease contracts
are usually equity financed for operations and
maintenance, there is no amortisation of the assets
and a periodic lease payment is made from the
private sector operator to the public sector body.
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2. Airport charge regulation
Current period
ADP
ADR
AMS
BAA
2006-10
New law 2005
Annual
2003-08
FRA
TAV
VIE
ZUR
2002-06 Istanbul 2005-21
Annual
Informal
Ankara 2004-23
Izmir 2005-15
Annual fee increase
i+3.25% if traffic Flat since 2000, in 2.0% from 1 Apr
in range 3.5-4.0%
discussion
2006
Traffic-growth
adjustment
70% of rev
difference if traffic
outside range
Dual/single till
Underlying principle
Single till
Mixed
Dual till
ROC should take Fair remuneration RONA of aviation
account of WACC
of RAB
assets capped
Regulatory target
WACC
Not published
None
None
Not published Cap of 4.1% after
tax on RONA
Tbilisi 2005-27
i+6.5% (LHR) i+0
2% if traffic Fixed fees except Max= i-0.35*traffic
No formula
(LGW,STN)
growth = 4% Tbilisi int. pax fee growth (formula to
which grows 2%
2009)
per annum
None
33% of rev Passenger growth
None
None
difference if traffic
guarantees at
growth not 4% Ankara (5%) and
Izmir (3%)
Single till
Dual till
Dual till
Dual till
Aim for Airport charges Make concession Not linked to ROC ROCE should
ROC=WACC should cover opex
payments
or COC take account of
and capex
WACC
7.75% pre-tax
10% pre-tax
Not applicable
Not applicable
7%
Source: Company data, HSBC
TAV regulation in context
As TAV operates the terminals rather than the
entire airport operations, comparisons of the
regulatory regime are made rather difficult. We
have outlined the main components for each
airport in figure 2.
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Revenue base
Airport activities represent c25% of TAV 2005 revenues
Revenue split will change with Ankara, Izmir and Tbilisi
Commercial revenues represent c64% of 2005 revenues
TAV segment reporting
Airports segment
1: TAV consolidated revenue split, 2004 and 2005
Aviation revenues were EUR75.9m in FY 2005,
which was a 22.3% increase over FY 2004.
However, 2005 was not a ‘normalised’ year for
the airport segment as Istanbul Airport moved
from a BOT contract to a 15.5 year operating
lease in July 2005. Furthermore, 2006 will be
slightly distorted by the partial inclusion of
Ankara and Izmir. TAV reported aviation income
of EUR70.7m in the first nine months of 2006.
Year to 31 December (EURm)
FY 2004 FY 2005 2005 % of
total
Sales of duty-free goods
Aviation income
Ground handling income
Concession fee - duty-free
Catering services income
Income from car parking operations
Bus services income
Area allocation income
Lounge services income
Income from hotel reservations
Baggage transfer system income
Ticket sales income
Prime valet services income
Prime class income
Other operating income
Total operating income
Sales and returns discounts
81.7
62.0
0.0
32.6
17.8
7.5
0.0
8.9
1.0
1.0
0.7
0.0
0.0
0.0
0.0
213.3
-0.5
92.5
75.9
22.8
39.1
23.3
12.6
6.9
7.9
3.3
2.8
0.3
0.7
0.5
0.4
0.0
289.0
-0.7
30.3%
24.9%
7.5%
12.8%
7.7%
4.1%
2.3%
2.6%
1.1%
0.9%
0.1%
0.2%
0.2%
0.1%
0.0%
94.8%
-0.2%
Net operating income
Advertising income
Utility and general part.
Furniture & fixture renewal income
Concession return income
Rent income (sublease)
Project income
Provision released
Other operating income
Total
212.8
3.7
3.1
0.0
0.3
1.0
1.4
0.0
9.5
222.3
288.3
6.0
3.4
4.5
0.0
1.3
1.3
0.0
16.5
304.8
94.6%
2.0%
1.1%
1.5%
0.0%
0.4%
0.4%
0.0%
5.4%
100.0%
Source: Company data
Figure 1 details TAV’s consolidated revenue split
(ie after group eliminations). We estimate that
non-aviation revenues contributed c75% in 2005,
with airport activities contributing the remaining
25%. However, we note that this split is subject to
change as 2007 will see the first full year of
contributions from Ankara, Izmir and Tbilisi.
36
Istanbul
Traffic growth drives revenues
With passenger fees fixed at USD15 per departing
international passenger and EUR3 per departing
domestic passenger, TAV is dependent on traffic
volume growth to drive revenue growth.
Compound annual traffic growth of 23.6% at
Istanbul Airport from 2003-05 resulted in TAV
Istanbul revenue growth of 16.4% (also 2003-05).
Ankara and Izmir
Passenger fees fixed for BOT contract term
Both passenger fees and departing traffic growth
are fixed at Ankara and Izmir, and therefore
revenues from these airports are guaranteed for
the term of the respective BOT contracts.
TAV receives EUR15 per departing international
passenger at Ankara and Izmir and EUR3 per
departing domestic passenger at Ankara (it does
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5 April 2007
not operate the domestic terminal at Izmir). These
fees are fixed for the life of the BOT contracts.
DHMI guarantees departing annual passenger
traffic growth of 5% at Ankara and 3% at Izmir.
These growth rates are guaranteed from starting
points of 750,000 departing international and
600,000 departing domestic passengers at Ankara
in 2007 and 1,000,000 departing international
passengers at Izmir in 2006.
If passenger growth exceeds the guaranteed level,
the excess fees are collected by DHMI. However,
TAV should benefit from traffic growth
exceeding the guaranteed rates through the
potential non-aviation uplift. 2007 will be the first
full year contribution from Ankara and Izmir.
Tbilisi
Traffic growth drives revenues
Revenues from Tbilisi are dependent on passenger
traffic growth, with TAV receiving USD22 per
departing international passenger in 2007,
thereafter growing at 2% per annum, and
USD6 per domestic passenger fixed for the
contract term.
Other airport revenues
TAV collects some unregulated, non-passenger
aviation fees including boarding bridge charges,
400Hz (power supply to aircraft at gates),
check-in counter revenues and PCA
(pre-conditioned air).
Under the current lease terms, TAV is generally
able to increase non-passenger aviation fees
without a price cap. However, at Ankara and
Izmir these tariffs cannot differ plus or minus
25% from those set by DHMI. These revenues are
highly correlated with air traffic movements.
Services segment
TAV estimates that it received USD8 in nonaviation revenues per passenger at Istanbul for the
first nine months of 2006. At Ankara it would
expect to receive less per passenger as it is mainly
domestic and at Izmir it would expect the amount
to be higher as it only operates the international
terminal. Total services revenues contributed
EUR308.5m (before eliminations) in FY 2005,
which was a 52.6% increase over FY 2004,
although TAV only purchased its 60% share in
Havaş in July 2005.
ATU – Duty-free
ATU is a 50% joint venture between TAV and
Unifree, a Turkish retailer owned by Heinemann,
the German distribution, travel retail and logistics
company. ATU was incorporated in January 2000
and it operates all of the airside duty-free stores at
Istanbul, Ankara, Izmir and Tbilisi through
sub-contracts with TAV. ATU also subcontracts
some retail space to other operators through
annual per square metre rental contracts. ATU
pays a fixed percentage of revenues to TAV and it
also pursues tenders outside TAV operations.
ATU’s right to operate at Istanbul is
subcontracted from TAV. Therefore, it is subject
to similar performance measures as a duty-free
operator from outside the group would be.
Spend per passenger is the key measure
2. ATU duty-free spend per international passenger (EUR/pax)
FY 2003 FY 2004 FY 2005 9M 2006 FY 2006e
Spend per pax
14.3
14.8
14.8
15.8
15.8
Source: Company data, HSBC estimates
ATU revenues are driven by passenger traffic and
spend per passenger. Progression in spend per
passenger over the past three years is shown in
figure 2. ATU guarantees EUR13.0 minimum spend
per international passenger to TAV Istanbul,
although this is not particularly stretching given the
track record in passenger spend. TAV’s mid-term
target is EUR20 per passenger.
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TAV Airports
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Spend per passenger is a function of the space
devoted to retail. ATU has 10,549 square metres
of retail space at TAV’s three Turkish airports, of
which 5,068 square metres is located in arrival,
3,838 square metres is located in departure and
1,643 square metres is subcontracted.
3. ATU retail space breakdown (sqm)
ATU operated arrival
ATU operated departure
Subcontractor departure
Total retail space
Istanbul
Izmir
Ankara
Totals
1,039
4,051
871
5,961
292
1,432
629
2,353
860
1,232
143
2,235
2,191
6,715
1,643
10,549
Source: Company data
There is 5,961 square metres of retail space at
Istanbul, of which 14.6% is subcontracted to other
retail operators. In 2007 and 2008, TAV expects
to undertake some refurbishment work at Istanbul
to increase penetration. At Ankara there is 2,235
square metres of retail space (six shops – five in
departure, one in arrival) of which 6.4% is
subcontracted to other retail operators. At Izmir
there is 2,353 square metres of retail space (11
shops – two in arrival, nine subcontracted) of
which 26.7% is subcontracted to other operators.
All international passengers are eligible for dutyfree (arrival and departure). TAV estimates that
60% of duty-free spend comes from departure
passengers and 40% from arrival passengers.
ATU benchmarks itself in terms of spend per
passenger to European airports including Paris –
CDG, Manchester, Rome and Madrid. Figure 4
shows that in the first nine months of 2006, TAV
recorded spend per passenger at the top of this
group, suggesting limited room for expansion.
life of the Istanbul operating contract. ATU is
proportionally consolidated in TAV’s accounts.
4. Duty-free spend per passenger benchmarking, 2005 (USD)
(TAV 2005 left hand side, TAV 9M 2006 right hand side)
20
18
16
14
12
10
8
6
4
2
0
TAV
Paris - CDG Manchester
ATU pays a concession fee to TAV for the shops
it operates. This fee was increased from 35% to an
average 42.5% in July 2005 (42.5% is a blended
average of the 43% it pays for perfumes,
cosmetics, tobacco, alcohol and luxury foods and
the 30% it pays for other goods) and fixed for the
38
Madrid
Source: ATU Business Development
Fit for purpose
ATU receives detailed management information
on duty-free spending patterns, as all customers
must register their boarding cards. For example,
ATU is aware that 60% of all customers are
Turkish citizens, with Germans second and
Russians third. This management information
allows ATU to tailor its offering (for example its
product placement) to maximise spend per
passenger. Duty-free shops occupy the prime sites
within the departure hall of the international
terminal at Istanbul.
5. ATU - pricing benchmark, current
150
100
50
0
Chocolate -
Alcohol -
Cigarettes -
Perfume -
Mars
Absolut Blue
Benson &
Christian
Hedges
Dior
Celebration
ATU pays c42.5% of revenues to TAV
Rome
Istanbul prices
Most competitiv e EU prices
Source: Company data
Heinemann, TAV’s JV partner in ATU, has
wholesale supply operations, giving ATU
purchasing power versus its competitors. TAV
monitors its pricing benchmark compared with the
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TAV Airports
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other airports (mainly European). Istanbul pricing
versus the most competitive EU prices is detailed
in figure 5. To put it into context, TAV believes
that its pricing is 5-10% cheaper than Fraport’s.
Spend per passenger is the key measure
6. BTA food and beverage spend per passenger (EUR/pax)
FY 2003 FY 2004 FY 2005 9M 2006 FY 2006e
Spend per pax
1.5
1.9
2.4
2.5
2.5
Source: Company data, HSBC estimates
Outlook for ATU
When the concession ends, ATU’s contract also
ends. However, future operators of the airport
could well retain ATU’s services, as although
ATU does not own the buildings, it does own all
the other assets such as furnishings and IT
systems, which could potentially make it too
onerous to switch operator.
We believe there is space to increase duty-free
services at each airport according to demand.
The key revenue driver for BTA is again spend
per passenger. In FY 2005, BTA reported EUR2.4
per passenger and in the first nine months of 2006
it reported EUR2.5 per passenger.
BTA has 18,262 square metres of floor space
devoted to food and beverage, of which 20.2% is
subcontracted to other operators. 54% of the total
food and beverage floor space is located at Istanbul.
BTA pays 39.1% of revenues to TAV
BTA – Food and Beverage
BTA was incorporated in 1999 in partnership with
Bilintur, Tepe and Akfen. BTA is 67%-owned by
TAV (with Bilintur holding the other 33%) and it
handles the food and beverage operations of
Istanbul International terminal and operates the
airport hotel. It also operates in Ankara, Izmir
and Tbilisi.
BTA operates some food and beverage outlets
itself and others it subcontracts to third parties. It
has increasingly supplied the products to
franchised operations at the airports and in August
2005 it started to supply all sandwiches and
bakery products of Starbucks Coffee Shops in
Turkey through its cake and bake factory, which
is 15-20 minutes from Istanbul Airport.
BTA has identified Gloria Jeans, Cafe Crown and
Schiller Chiemsee Coffee Shops as potential new
customers and it is in negotiations to provide inflight catering operations within the local market
by 2009.
7.BTA food and beverage space breakdown (sqm)
Istanbul Ankara
BTA airside
BTA landside
Total BTA space
of which subcontracted %
5,251
4,559
9,810
15.7%
1,430
3,619
5,049
25.4%
Izmir
Totals
1,944
1,459
3,403
25.4%
8,625
9,637
18,262
20.2%
Source: Company data
BTA pays a concession fee to TAV which is 35%
of daily revenues from food, beverage and hotel
services and 10% of daily revenues from the
airport staff cafeteria. On a weighted average
basis (of income from stores operated by BTA
and third parties) BTA pays out 39.1% of its
venues to TAV. This concession fee is fixed for
the life of the concession contracts.
Outlook for BTA
TAV is targeting a significant increase in
revenues from BTA. TAV says it aims to drive
this growth by signing new customer contracts
and, if BTA’s negotiations are successful, by
providing in-flight catering operations within the
local market.
Furthermore, BTA is in negotiations to provide
services at Istanbul domestic terminal from 2009
when DHMI’s contract with Usas expires.
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TAV Airports
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Havaş – Ground handling
9. Havaş - ground handling aircraft handled (thousands)
TAV bought a 60% share in Havaş in July 2005
for USD125m. The other 40% is held by Ciner
Group, a privately owned Turkish conglomerate.
Havaş is one of two Turkish ground handling
companies with the licence to operate (see below).
It operates at 10 airports in Turkey (see figure 8)
and has a customer portfolio of over 200
scheduled and charter airlines. Customers include
British Airways, Cathay Pacific, Singapore
Airlines and FedEx.
Revenues driven by contract wins
Revenues are driven by contract wins and Havaş
recorded a significant contract win in January
2006 when it signed a tender to service Turkish
Airlines at Istanbul Airport for three years
(Turkish Airlines represented 42% of Istanbul
international traffic in 2005). It has also formed a
strategic partnership with Cyprus Turkish Airlines
to undertake ground handling operations in Ercan
Airport, Northern Cyprus, as of 1 January 2007.
8. Havaş ground handling operations in Turkey
FY 2004
FY 2005
9M 2005
9M 2006
51.8
58.5
46.6
94.2
Aircraft handled
Source: Company data
Highly regulated, one of two Turkish operators
Ground handling is a highly regulated business
and Havaş has an ‘A’ group working licence in
Turkey. Requirements are that it must operate in
at least three international airports, have minimum
paid-up capital of USD3m, an indefinite
performance bond of USD1m to DHMI and meet
minimum personnel and equipment requirements.
The annual costs are EUR450,000 for the
minimum personnel and EUR80,000 for the
minimum equipment and in addition an
investment for minimum equipment of
EUR1.53m.
The other licensed Turkish operator is Çelebi. As
can be seen in figure 10, Çelebi has a larger
market share than Havaş with 62%. However,
Çelebi generates less revenue per flight, operating
at a 21% discount.
10. Turkish ground handling market statistics, 2005
Ó
Ó
Istanbul Ataturk Airport
Ó
Ó
Ó
Trabzon
Ankara Esenboga Airport
Ó
Ó
Ó
Izmir Adanan Menderes Airport
Kayseri Erkilet
Nevsehir
Bodrum - Milas
ÓÓ
Dalaman
Antalya
Adana Sakirpasa
Source: Company data
Ground handling is an employee-intensive
business and therefore divisional employee
numbers (and consequently costs) rise with
contract wins. TAV measures its ground handling
business against thousands of aircraft handled
and, as can be seen in figure 9, progress has been
robust since 2004 and the Turkish Airlines
contract is reflected in the 102% increase year on
year between 9m 2005 and 9m 2006.
40
No. Of Flights
Market share
Revenues (EURm)
Revenues per flight (EUR)
Havaş
Çelebi
58,537
37.9%
66.2
1,131
96,037
62.1%
85.5
891
Source: Havaş, Çelebi
Other services
TAV reported EUR20.8m of revenues from other
services in the first nine months of 2006 (and
EUR11m in FY 2005). 84% of the nine-month
revenues came from TAV O&M, 6% from TAV
IT and 10% from TAV Security.
TAV O&M (100%)
Incorporated in September 2004, TAV O&M is a
100% subsidiary of TAV, providing core terminal
services. These include cleaning, routine
maintenance and heavy maintenance in Istanbul,
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TAV Airports
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5 April 2007
Ankara and Izmir. It has a revenue-sharing
scheme in place with Havaş for car park
operations and bus services whereby EUR9.1m in
bus and car parking revenues was recorded in
eliminations in the first nine months of 2006.
11. TAV airports car parking capacity utilisation, current
Parking spaces
Utilisation
Istanbul
Ankara
Izmir
Tbilisi
7,076
c70%
4,050
c15-20%
2,200
c10%
225
n/a
our commercial category and our property
category includes all rentals and similar income,
whether in terminals or elsewhere.
According to our regrouping, 25% of TAV’s total
FY 2005 revenues came from aviation activities
(at Istanbul), 65% from commercial activities
(ATU, BTA and TAV Istanbul non-aviation), 7%
from ground handling and 3% from other services
(TAV O&M, TAV IT and TAV Security).
Source: Company data
TAV O&M reported EUR17.5m revenues in the
first nine months of 2006.
TAV IT (96%)
TAV IT is a 96% subsidiary which became a
separate entity in October 2005. It provides IT
maintenance services to airport operating
companies. TAV IT owns all the software,
hardware and licences relating to the operation of
the systems at Istanbul, Ankara and Izmir. In
August 2006, TAV IT signed a management
information services contract with Sabiha Gökçen
International Airport.
TAV IT reported nine-month 2006 revenues of
EUR1.25m.
TAV Security (67%)
TAV Security was incorporated in January 2001
with Tepe Defence and Security Systems JCS. It
became a separate entity in 2006 and TAV has a
67% stake. It provides security at all TAV airports
except Tbilisi.
TAV Security reported EUR2.1m revenues in the
first nine months of 2006.
TAV revenue base in context
We have restated TAV’s post-elimination
revenues and those for the major European airport
operators to aid comparison. Our aviation
category includes airport fees and security
services; we have included retail, catering,
bureaux de change, car parks and advertising in
BAA and TAV stand out for the scope of their
commercial activities (TAV is 40% higher than
the average) and only ADP, ADR, Fraport, TAV
and Vienna undertake ground handling activities.
The Other segment for Fraport is proportionally
large as it includes all activities that are not
confined to the Fraport location.
Aviation activities
TAV’s scope of aviation activities is more limited
than the major European airports as it operates the
terminals under concession contracts and
therefore primarily collects passenger fees and not
other fees such as landing and lighting.
With aviation revenues driven by passenger traffic
growth and fee tariffs which are set by regulatory
bodies, non-aviation activities are increasingly a
focus of airport operators in the search for growth.
Commercial activities
Commercial penetration is partly a function of the
volume of retail space but also a function of skill
in utilising that space (note that retail space
includes food outlets in addition to shops). It can
also be significantly affected by terminal layout
and passenger flows through the terminal. Figure
12 depicts retail space per passenger against
commercial revenue per passenger (the
concession fees received for retail, food and drink
outlets, bureaux de change, advertising and car
parks divided by the total number of passengers).
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TAV Airports
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5 April 2007
Real estate not a factor for TAV
12. Retail space* per m pax (sqm, l.h. axis) and commercial
revenue per pax (EUR, r.h. axis)
1200
8
1000
7
6
800
5
600
4
3
400
2
1
200
0
0
ADP
ADR AMS BAA FRA TAV** VIE
Retail space per m pax
Commerial rev ex parking per pax
Parking rev per pax
ZUR
Source: Note: * includes food outlets
TAV compares favourably with the other airports
in terms of commercial revenues per passenger
and it is 27% above average.
Airport operators as retail operators
The typical model for airport retail operation is
that the airport operator is effectively a landlord,
albeit a fairly hands-on one, providing space
where third-party retailers operate retail outlets.
The airport company will retain overall control of
the layout of terminals and location of retail
outlets in the terminals and will usually work with
its retailers to further their common interests.
The model heavily used by BAA is to act as the
retailer in addition to the landlord. This gives
control of all aspects of retail activities to the
airport company. If done well, this approach
allows the airport to capture more of the retail
value chain, but it is a departure from the core
business of operating the aviation activities.
TAV and ADP have a kind of hybrid model where
they have joint venture companies to operate
duty-free (ATU for TAV and SDA for ADP).
42
Although the investment community is
increasingly focusing on real estate, it is not a
significant factor for TAV in comparison to the
major European airports. This is because TAV
operates the terminal buildings through
concession contracts and therefore does not
actually own the physical assets. Although TAV
does have some rental income through its ATU
and BTA subsidiaries, which subcontract a
portion of the retail and food and beverage space
to other operators, it is not possible to separate
this from the revenues recorded under each
subsidiary and therefore rental revenues are
wrapped up in our commercial revenues.
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TAV Airports
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13. Selected airports' revenue base, 2005 (EURm)
3500
3000
2500
Handling
Other
Property
Commercial
Aviation
2000
1500
1000
500
0
ADP
ADR
AMS
BAA
FRA
TAV
VIE
ZUR
Average
9%
10%
12%
11%
Source: Company data, HSBC
14. Selected airports' relative revenue base, 2005 (%)
100%
6%
7%
90%
80%
7%
7%
18%
3%
12%
11%
13%
30%
31%
9%
19%
70%
10%
21%
20%
10%
20%
39%
60%
21%
64%
20%
3%
25%
9%
50%
9%
40%
Handling
Other
Property
Commercial
Aviation
8%
61%
30%
58%
53%
48%
44%
20%
44%
41%
32%
25%
10%
0%
ADP
ADR
AMS
BAA
FRA
TAV
VIE
ZUR
Average
Source: Company data, HSBC
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TAV Airports
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5 April 2007
Costs and margins
Concession fees are the major operating expense for TAV
Staff costs are relatively modest at 15% of total 2005 costs
TAV does not expect staff numbers to trend upwards
TAV operating expenses
Concession fees are fixed
1. TAV cost breakdown, FY 2005
Cost of cate ring
inventory sold
Cost of duty free
Depreciation a nd
2%
inventory sold
Amortisation
1 4%
19 %
Cost of services
rend ered
5%
Other operating
expenses
20%
Concession rent
expenses
25%
Employee bene fit
expense
1 5%
expenses) is fixed. Furthermore, as FY 2005 only
includes a half-year payment, we expect the
percentage of fixed costs to increase to 34.4% in
FY 2006 (figure 2).
2. TAV expenses, FY 2005 and FY 2006e
(EURm)
2005 2005 %
2006e 2006 %
Cost of catering inventory sold
Cost of duty-free inventory sold
Cost of services rendered
Employee benefit expense
Concession rent expenses
Other operating expenses
Depreciation and Amortisation
Total expenses
5.9
2.1%
39.9 14.4%
14.8
5.4%
40.8 14.7%
69.9 25.3%
54.1 19.5%
51.3 18.7%
276.7 100.0%
6.9
1.8%
45.6 12.0%
27.0
7.1%
66.2 17.4%
130.9 34.4%
74.3 19.5%
13.1
3.4%
380.4 100.0%
Source: Company data, HSBC estimates
Source: Company data
Pending VAT case may lower concession cost
Concession fees are the major operating expense
for TAV, at 25% of total FY 2005 operating
expenses ( EUR69.9m). Employee benefit
expense was a relatively small 15%, or
EUR40.8m. Depreciation and amortisation was
19% of expenses (EUR51.3m) and other operating
expenses were 41%, or EUR114.7m (of which
EUR60.6m, or 22%, was cost of goods sold).
Concession rent expenses
TAV won the tender at USD2,543m plus VAT to
operate Istanbul Airport for 15.5 years. TAV paid
23% up front (USD585m) and makes annual
payments of USD165m (including VAT) from 3
January 2007. These payments are fixed for the
duration of the contract and therefore the largest
single item of TAV’s cost base (25% of FY 2005
44
TAV currently pays VAT on concession
payments to DHMI as part of the Istanbul
terminal operation contract. VAT is paid at 18%
and the total amount payable to DHMI over the
life of the contract is USD457.7bn. However, the
validity of VAT on concession payments to
DHMI is currently the subject of a court case. If
the court case is successful, TAV could:
Potentially receive a refund of cUSD80m in
relation to concession payments made to date;
and
Save cUSD120 during the remaining life of
the concession.
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TAV Airports
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Employee benefit expenses
Staff costs are a relatively small proportion of
TAV’s expenses at 15% of FY 2005 expenses
(9% of 9m 2006 Istanbul Airport expenses).
Airport staff members are not unionised.
The majority of staff members are employed by
Havaş, which is unsurprising as ground handling
is a labour-intensive business.
Of the 1,510 staff employed by TAV Istanbul
Airport, around c1,100 are employed in security
roles. This is driven partly by the high level of
security provided at the airport relative to other
airports, where all persons (not just passengers)
entering the terminal building have their persons
and luggage scanned, as required by Turkish
authorities. However, TAV expects the number of
security staff required to reduce slightly as less
labour intensive Explosive Detection Scanners
(EDS) are introduced.
3. TAV employee breakdown
2003
TAV Airports
TAV Istanbul
TAV Esenboğa
TAV Izmir
TAV Georgia
TAV O&M
BTA
Havaş
ATU
TAV IT
TAV Security
Total
1,315
2004
2005 30/09/2006
1,660
88
1,510
74
410
967
215
889
3,815
932
82
96
9,078
4,380
enables TAV to depreciate the fixed asset
investments. Furthermore, EUR400m capex to be
incurred for Tunisia in 2007-09 will add to the
depreciation costs. Nevertheless, our projections
suggest depreciation costs will still account for a
minor portion of total costs in the upcoming years,
of around 13%.
Other operating expenses
Other operating expenses include cost of
inventory for the duty-free (ATU) and food and
beverage (BTA) businesses and cost of services
rendered as well as a catch-all bucket for other
operating expenses.
EUR54.1m of other operating expenses (20% of
total FY 2005 expenses) includes:
EUR15.0m (5.4% of total FY 2005 expenses)
is maintenance expenditures;
EUR6.7m (2.4% of the total) is utility cost; and
EUR6.0m (2.2% of the total) is VAT not
recoverable.
TAV in context
We have restated selected airports costs into
labour, depreciation and amortisation and other –
to better compare performance.
In figures 4 and 5 on the following page we chart
absolute levels by these categories and also EBIT
Source: Company data
so that the full total equals group revenues. We
have also charted these categories on a relative
Depreciation and amortisation
basis so that we can better compare the airports.
Depreciation and amortisation was a relatively
small proportion of TAV’s operating expenses in
FY 2005 at 19%. However, its share went down to
negligible levels in 2006 (2.3% in 9M 2006) due
to full-year accounting of Istanbul Ataturk airport
under under concession agreement (vs BOT until
July 2005) where there is no depreciation writeoff for the fixed assets. This is likely to change as
all other terminals are BOT contracts, which
45
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TAV Airports
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4. Selected airports cost breakdown, 2005 (EURm)
3500
3000
2500
EBIT
Other
Dep'n/ amort
Labour
2000
1500
1000
500
0
ADP
ADR
AMS
BAA
FRA
TAV
VIE
ZUR
Average
Source: Company data, HSBC
5. Selected airports relative cost breakdown, 2005 (%)
100%
90%
15%
17%
9%
21%
25%
30%
29%
25%
22%
28%
32%
80%
26%
70%
23%
39%
61%
30%
60%
30%
50%
40%
11%
38%
13%
13%
14%
18%
13%
27%
30%
48%
17%
20%
31%
43%
31%
28%
27%
10%
17%
20%
14%
13%
0%
ADP
Source: Company data, HSBC
46
ADR
AMS
BAA
FRA
TAV
VIE
ZUR
Average
EBIT
Other
Dep'n/ amort
Labour
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TAV Airports
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5 April 2007
6. Selected airports EBITDA and EBIT margins, 2005
51.8%
50%
48.9%
47.5%
44.4%
43.2%
40%
34.5%
30.4%
30.0%
31.2%
30%
25.6%
24.8%
25.9%
24.9%
21.6%
21.3%
20%
16.8%
14.5%
9.2%
10%
0%
ADP
ADR
AMS
BAA*
EBITDA Margin
FRA
TAV
VIE
ZUR
TAV*
EBIT Margin
Note: * equals TAV adjusted for concession rent expenses
Source: Company data
Adjusted TAV margins in line
Ground handling activities tend to depress
margins and this helps to explain why Fraport,
Vienna and TAV have lower margins than BAA.
TAV’s EBIT margin is the lowest in the sector at
9.2%, after Fraport at 14.5%, not only due to
ground handling but also because of the
concession payments. However, concession
payments can be treated as depreciation and
interest and if we add back EUR37.8m, which we
estimate to be the equivalent interest element of
the concession rent expense in 2005, then TAV’s
EBIT margin improves to 21.6%. This brings it
broadly into line with the peer group.
We add back the full EUR69.9m FY 2005
concession rent expense to EBITDA to get to
EBITDAR. This lifts the adjusted EBITDA TAV
margin in the chart from 25.9% to 48.9%.
EBITDA and EBIT margins are detailed in figure 6.
Note, however, that TAV’s business model differs
in a number of ways including rental rather than
ownership of airport assets and focus on terminal
rather than airside and terminal operations.
47
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5 April 2007
Capex cycle
Capex peaked in 2006 with Ankara, Izmir and Tbilisi investments
High visibility as concession agreements require upfront capex
Tunisia brings in EUR400m new capex for 2007-09e
TAV’s capex cycle
Investments continue with Tunisia
include EUR400m capex for Tunisia (with our
assumed split of EUR100m in 2007, EUR200m in
2008 and EUR100m in 2009).
1. TAV’s capex cycle, 2003-10e (EURm)
TAV’s capex cycle in context
700
600
500
400
300
200
100
0
A capex programme can bring both risk related to
airport charges and project management risk.
2003 2004 2005 2006e 2007e 2008e 2009e 2010e
Capex
BOT payments
Concession payments
Source: Company data, HSBC estimates
In addition to maintenance capex, which we
expect to be less than EUR10m per annum, TAV
has BOT payments for Tunisia and ongoing
Istanbul concession payments. Although strictly
speaking only the BOT payments are part of
capex (as concession payments are expensed
through the P&L), we have outlined all three in
figure 1 as Istanbul concession payments are
clearly also significant.
BOT payments are specified and (construction)
costs are paid upfront, therefore TAV has a high
level of visibility on future capex requirements.
FY 2006e and FY 2008e are the peaks of TAV’s
capex cycle. FY 2006e includes EUR268.9m
BOT investments (EUR123m Izmir, EUR133m
Ankara and EUR13m Tbilisi), while 2007-09 will
48
In our view, these sources of risk are mitigated to
some extent in the case of TAV because all capex
on existing airports is agreed upfront (and paid
upfront in the case of BOT payments) in the
concession agreements; therefore airport charge
risk is alleviated. TAV’s capex risk is
predominantly wrapped up in the new Tunisia
project and in any future BOT/concession wins
and associated payments.
2. Major airports' capex cycle, 2001-10e (EURm)
3500
3000
2500
2000
1500
1000
500
0
ADP
FRA
2001-2005
TAV*
VIE
ZUR
2006-2010
Source: Company data, HSBC estimates * TAV capex includes BOT investment costs
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TAV Airports
Airports
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Appendix
TAV also splits revenues and profitability by
Airports and Services (see figure 2). In this split,
Istanbul revenues include both aviation and nonaviation revenues achieved at the airport. We have
further broken down Istanbul revenues in figure 1.
TAV reports EBITDAR, rather than EBITDA, to
adjust for the concession rent payments which it
pays for the operating lease on Istanbul Airport
(USD165m per annum including VAT). For the
other segments, EBITDA is the same as
EBITDAR.
1. TAV Istanbul revenue split, 2005
Other
14%
Car parking
5%
Food and
beverage and
airport hotels
5%
Duty free
39%
Source: Company data
Aviation income
37%
2. TAV segment reporting
Year to 31 December (EURm)
2004
2005
% of 2005
total
Istanbul
Ankara
Izmir
Tbilisi
Airports
ATU (50% consolidation)
BTA (full consolidation)
Havaş (60% consolidation)
Other
Services
Eliminations
Total revenues
160.0
0.0
0.0
0.0
160.0
83.0
21.0
0.0
0.0
104.0
-42.0
222.0
202.0
0.0
0.0
0.0
202.0
94.0
29.0
48.0
11.0
182.0
-80.0
305.0
66.4%
0.0%
0.0%
0.0%
66.4%
30.9%
9.5%
15.8%
3.6%
59.9%
-26.3%
100.0%
Istanbul*
Ankara
Izmir
Tbilisi
Airports EBITDAR
ATU (50% consolidation)
BTA (100% consolidation)
Havaş (60% consolidation)
Other
Services EBITDAR
Eliminations
Total EBITDAR
116.0
0.0
0.0
0.0
116.0
9.0
1.0
0.0
0.0
10.0
1.0
126.0
139.0
0.0
0.0
0.0
139.0
6.0
-1.0
0.0
2.0
7.0
4.0
146.0
93.3%
0.0%
0.0%
0.0%
93.3%
4.0%
-0.7%
0.0%
1.3%
4.7%
2.7%
100.0%
Airports EBITDAR margin
ATU (50% consolidation) margin
BTA (full consolidation) margin
Havaş (60% consolidation) margin
Other margin
Services EBITDAR margin
Eliminations margin
Total EBITDAR margin
72.5%
10.8%
4.8%
n/a
n/a
9.6%
-2.4%
57.7%
68.8%
6.4%
-3.4%
0.0%
18.2%
3.8%
-5.0%
49.0%
Note * Istanbul figure is EBITDA R as TAV reports profitability for Istanbul before concession
rent expense
Source: Company data
49
TAV Airports
Airports
5 April 2007
Notes
50
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TAV Airports
Airports
5 April 2007
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Notes
51
TAV Airports
Airports
5 April 2007
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Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the views expressed herein
accurately reflect their personal view(s) about the subject security(ies) and issuer(s) and that no part of their compensation was,
is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report:
Cenk Orçan
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
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be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
52
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TAV Airports
Airports
5 April 2007
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the
analysts' valuation for a stock.
From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which
identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors
should take.
Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of
the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.
For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.
Rating distribution for long-term investment opportunities
As of 04 April 2007, the distribution of all ratings published is as follows:
Overweight (Buy)
45%
(16% of these provided with Investment Banking Services)
Neutral (Hold)
35%
(16% of these provided with Investment Banking Services)
Underweight (Sell)
20%
(12% of these provided with Investment Banking Services)
HSBC & Analyst disclosures
Disclosure checklist
Company
TAV HAVALIMANLARI HLDG AS
Ticker
Recent price
Price Date
Disclosure
TAVHL.IS
11.40
03-Apr-2007
1
Source: HSBC
1
2
HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3
At the time of publication of this report, HSBC is a market maker in securities issued by this company.
4
As of 28 February 2007 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5
As of 28 February 2007, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services.
6
As of 28 February 2007, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7
As of 28 February 2007, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-securities services.
8
A covering analyst/s has received compensation from this company in the past 12 months.
9
A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company, please see the most recently published report on that company available at
www.hsbcnet.com/research.
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TAV Airports
Airports
5 April 2007
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* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1
2
3
54
This report is dated as at 05 April 2007.
All market data included in this report are dated as at close 03 April 2007, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
TAV Airports
Airports
5 April 2007
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Disclaimer
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Global Transport Research Team
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