TAV Airports Holding. OUTPERFORM (Previous: O.P) Upside Potential 18% Equity / Large Cap. / Airlines&Ground Handling Services 23/09/2014

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1 Equity / Large Cap. / Airlines&Ground Handling Services TAV Airports Holding Company Update Not leaving Istanbul Important strategic move by TAV While investors had been discussing the completion time of the third airport, which would put an end to TAV s Istanbul story, the company made a surprise bold move and signed an agreement to buy Limak s 40% stake at Sabiha Gokcen Airport for EUR 285mn. Sabiha Gokcen (SG) is the sole international airport on the Asian side of Istanbul with large catchment area of around 20mn people. With this acquisition TAV extends its footprint and will benefit from Istanbul s growth for another 20-years. SG will remain attractive even after the completion of the third airport Importance of the Sabiha Gokcen Airport will increase after the closure of Ataturk Airport. The third airport is around 60 km far away from the major public transportation hubs. Closer proximity to city centers and direct metro and other public transportation interconnections increases Sabiha Gokcen s attractiveness. Strong growth potential with room for capacity increase Upon the completion of the second runway and new terminal investment, the airport could accommodate more than 60mn passengers annually. The airport is also the main hub Pegasus and second hub of Turkish Airlines. Pegasus will double its fleet by 2019 and is expected to reach 127 aircraft by Similarly, THY is planning to add several new destinations including Middle Eastern, while increasing frequencies of the existing routes in order to reach a critical mass in the Sabiha Gokcen network, in the short term. Due to capacity constraints at Ataturk Airport, THY has been establishing Sabiha Gokcen as a second hub. Estimating TL1.0 /share potential value contribution from the acquisition Based on DCF analysis, we value SG Airport at EUR 1.022bn. EUR 285mn paid for 40% stake by TAV, implies an NPV of EUR 124mn, translating into a 5% increase in our price target for the company to TL Our new target price offers 18% upside potential for the shares. Therefore, we reiterate our OUTPERFORM recommendation for the stock. The acquisition value yields a 2013FY EV/EBITDA of 12.4x, which is in-line with peer average. Considering its higher growth potential SG deserves a premium over peers. SG operations will not have any effect on revenues and EBITDA lines of TAVHL, since it will be consolidated via equity pick-up method. SG is expected to start to have a positive contribution on TAV s bottom line starting Ticker 23/09/2014 OUTPERFORM (Previous: O.P) Upside Potential 18% TAVHL Stock Data TL US$ Price at Target Price Prev.Target Price Mcap (mn) 6,739 3,003 Float Mcap (mn) 2,733 1,218 Avg.Daily Volume (3M, mn) No. of Shares Outstanding (mn) 363 Free Float (%) Multiples 2014E 2015E 2016E P/E P/BV EV/EBITDA Price Perf. (%) 1 Mn 3 Mn 12 Mn TL US$ Relative to BIST Price / Relative Price /13 05/13 09/13 11/13 03/14 05/14 TAVHL Close(LHS) 09/ Relative to BIST Week Range (Close TL) Foreign Share (%) Foreign Share (%) 3M Average 26/06 10/07 24/07 12/08 26/08 09/09 Efe Kalkandelen ekalkandelen@isyatirim.com.tr Please refer to important disclaimer at the end of this report. 1

2 Figure 01: Sabiha Gokcen Airport added 5% to our SOTP value TAV SOTP Table Business Sector TAV's Stake (%) Valuation method Target Value (EUR mn) Target NAV (EUR mn) TAV Istanbul Airport terminal 100% DCF 1,274 1,274 TAV Sabiha Gokcen Airport terminal 40% DCF 1, TAV Ankara Airport terminal 100% DCF TAV Izmir Airport terminal 100% DCF TAV Bodrum Airport terminal 100% DCF TAV Tunisie Airport terminal 67% DCF TAV Georgia Airport terminal 76% DCF TAV Macedonia Airport terminal 100% DCF TAV Medina Airport terminal 33% DCF TAV Zagreb Airport terminal 15% Equity Airports total 3,536 2,487 ATU Duty-free 50% DCF BTA Catering 67% DCF SPV - HAVAS Ground handling 100% DCF Services total Solo net debt 433 Target value (EUR mn) 2,429 target share price (TL) upside potential 6% Source: Is Investment Figure 02: SOTP & Peer Comp blended valuation indicates 18% upside potential Valuation Summary 2014E 2015E 2016E Multiples valuation: EV/SALES EV/SALES EV/SALES Global Median 3.76x 3.53x 3.40x EV/EBITDA EV/EBITDA EV/EBITDA Global Median 11.16x 10.44x 9.95x Average MCAP 2014E-2016E (mn) 3,570 Number of Shares Outstanding (mn) month Target Share Price SOTP TL Implied mcap 2,429 Target share price Blended valuation: 75% SOTP - 25% Peer Comparison TL Implied mcap 2,771 Target Share Price 21.9 Upside Potential 18% Source: Is Investment Figure 03: EV/EBITDA multiples trade at significant discount to peers Peer Table Bloomberg Estimates Company EV/Sales EV/EBITDA P/E Country 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E TAV TURKEY FLUGHAFEN WIEN AUSTRIA FRAPORT AG GERMANY ADP FRANCE MALAYSIA AIRPORT MALAYSIA BEIJING CAP AI-H CHINA SATS LTD SINGAPORE AERO DEL PACIF-B MEXICO GRUPO AERORTUA MEXICO GUANGZHOU BAIY-A CHINA *Is Investments Estimates Median -All Companies Median -Developed Median -Emerging Turkey's discount/premium to All -7% -9% -14% -27% -34% -37% -33% -45% -47% Source: IS Investment, Bloomberg 2

3 Valuation of Sabiha Gokcen Airport EUR 285mn paid for 40% stake by TAV, implies an NPV of EUR 124mn, translating into a 5% increase in our price target for the company to TL Key assumptions of our valuation: We assume that the consortium (TAV and Malaysia Airport Holdings) will use its right to extend concession rights for 4 years, thus we value the airport till We believe third airport will have a significant impact on Sabiha Gokcen s traffic growth. We assume that the third airport will be operational in During we estimate a 16.1% CAGR at number of passengers. Beyond 2020, we assume a 2.0% CAGR since the airport reaches to its peak capacity of 65mn by Concession rent increases from EUR 77mn by EUR 18mn every four years, stabilizing at EUR 134mn after 2023 Per pax fees are: International: EUR 15, Domestic: EUR 3, Transit: EUR 2.5. On the other hand, consortium pays EUR 1.5/per intl pax utilization fee to State Airports Authority. Transit passengers currently correspond to 29% of the total international pax. We assume that the transit passenger ratio will stay stable at 30% during the projection period. The second runway is expected to be finished in 2016 and will be operational by Until 2017, we assume that airport capacity stays ay 35mn passengers annually. After 2017, with two parallel runways we believe the airport could accommodate more than 65mn passengers with an additional terminal investment, which is expected to start in 2017 and cost EUR 90mn. Utilities and maintenance expenses are projected to increase by 50% with the new terminal. In addition to terminal operations, the consortium operates the jet fuel business at the airport. In 2013, airport management changed the business from supply of fuel to airlines to provision of fuel farm services to fuel suppliers. Therefore, we excluded jet fuel revenues and cost form our main calculations. We simply add operating income from jet fuel to our EBITDA estimate, which grows in line with ATM growth. Note that, in 2013 the net loss figure was EUR 55.1mn. Due to high accumulated losses we assume the consortium won t pay any tax. We expect the airport to turn bottom line positive in Duty-free operations at the airport are handled by SETUR. We don t expect ATU to operate at the airport. We only considered duty free concession revenue in our model. Net debt was EUR 323mn as of end of 2Q14. The airport discontinued the ground handling business in 2012 and sold related machinery to Celebi. In our WACC calculation we use a risk free rate of 5.5% for 2014, rising to 6.0% in 2015 and to 6.5% afterwards, since our model is based in EUR. Using an equity risk premium of 5%, and a cost of debt of 6.5%, with 30%-70% equity-debt ratio, WACC is estimated to range in 6.4% - 7.0%. 3

4 Figure 04: Sabiha Gokcen Valuation Summary Istanbul Sabiha Gokcen Airport Passenger Traffic 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2034E Total % YoY Grow th (%) 32.6% 21.9% 14.7% 10.3% 9.3% 8.3% 4.8% 4.8% 0.4% International % YoY Grow th (%) 33.1% 22.9% 16.0% 11.9% 10.8% 9.8% 5.4% 5.4% 1.0% Domestic % YoY Grow th (%) 32.3% 21.4% 14.0% 9.4% 8.4% 7.4% 4.4% 4.4% 0.0% CAGR% Forecasts (mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2034E Departing Passengers International Transit Domestic Passenger Service Charge International (EUR/pax) Transit (EUR/pax) Domestic (EUR/pax) Aeronautical Revenues % International PSR Transit PSR Domestic PSR Other Aeronautical Revenues Non-Aeronautical Revenues % Duty-free Concession Rental & Commercial Car Park Other Non-Aeronautical Revenues Total Revenues excl. jet fuel operations % Jet Fuel Profit Margin % Operational Expenses Staff Cost Utilities Maintenance Rent Utilization Fee Others Total Opex % Financials (EUR, mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2034E Total Revenues excl. jet fuel operations % EBITDAR excl fuel % EBITDAR excl fuel margin % 57.0% 58.0% 60.0% 60.0% 61.0% 62.0% 63.0% 64.0% 71.0% EBITDAR Concession Rent EBITDA excl fuel % EBITDA excl fuel margin % 7.9% 10.0% 19.4% 25.5% 35.0% 33.2% 34.9% 37.9% 44.9% EBITDA % Depreciation EBIT Tax Capex WCR Change in WC FCF WACC 6.4% 6.8% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Discounted FCF PV of FCFs net debt (as of June 31, 2014) Target Value to TAV TAV Acquisition Price Net Contribution Source: IS Investment 4

5 Figure 05: The airport has not recorded any profit Sabiha Gokcen revenue, net profit and net profit margin between ! "# Source: MAHB Figure 06: Sabiha Gokcen EBITDA and EBITDA margin % between $%&'( $%&'(! "# Source: MAHB 5

6 Transaction Details TAV to buy 40% of Sabiha Gokcen Airport for EUR 285mn TAV and Limak has signed a share purchase agreement (SPA) regarding the sale of 40% shares of Istanbul Sabiha Gokcen International Airport Construction and Investment. (ISG) and Airport Management (LGM) and 19,6% of the share of ISG Ground Handling for EUR 285mn. ISG which generated EUR 214mn revenues and EUR 84mn EBITDA in 2013, had a debt position of EUR 324mn debt (E/D ratio of 25/75). The transaction value multiples a FY 2013 EV/EBITDA multiple of 12.4x, while it will be financed by debt. After taking into account financing costs and PPA, the transaction is expected to be EPS accretive after However, ISG, LGM and ISG Ground Handling shares are subject to various share transfer restrictions, including a right of first refusal of other shareholders of the companies and authorization of Turkish Competition Board. Figure 07: Transaction multiples Source: TAV Presentation Figure 8: Sabiha Gokcen Airport passenger number (mn) and utilization rate (%) (Assuming 30mn pax till 2016 and 60mn afterwards)* 45 International Pax (mn) Domestic Pax (mn) Capacity Usage (%) 120% % 71% % % % % 100% 80% 60% 42% 15 39% % % % 12% 0.8 8% Source: ISG, Is Investments 40% 20% 0% 6

7 Price / Recommendations TL 02/13 02/13 03/13 03/13 04/13 04/13 05/13 Source : BIST/ Is Investment Estimates 05/13 UP MP 06/13 06/13 MP Estimate P/E & Actual P/E Estimate P/BV & Actual P/BV /09/ /10/ /11/ /11/ /12/ /01/ /01/ /02/ /03/ /04/ /04/ /05/ /06/ /06/ /07/ /08/ /08/ /13 16/09/ /13 MP 09/ /09/ /10/ /11/ /11/ /12/ /01/ /01/ /02/ /03/ /04/ /04/ /05/ /06/ /06/ /07/ /08/ /08/ /09/ /13 UP 10/13 10/13 11/13 11/13 12/13 12/13 Relative to BIST100 02/14 02/14 03/14 03/14 04/14 04/14 05/14 05/14 06/14 06/14 08/14 08/14 09/14 Estimated Forward P/E Source : BIST/ Is Investment Estimates 12M Trailing P/E Estimated Forward P/BV Source : BIST/ Is Investment Estimates Current P/BV This report has been prepared by Yatırım Menkul Deerler A.. ( Investment) solely for the information of clients of Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary. The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of Investment. ( This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. 7