TURK TRAKTOR / BUY (Upgraded from HOLD)

Upgrading on better outlook – near & long-term

·    We have upped our output growth estimates for Turk Traktor following the 1Q12 results due to the following: 1) Both domestic shipments and exports in 1Q12 implied higher full-year volumes than we predicted; 2) The continuation of Ziraat Bank’s loan subsidies (although limited in scope compared to 2011) as announced in late February suggests higher domestic demand than we previously forecast; 3) Turk Traktor’s decision to invest in a new plant which we believe sends a strong signal to the market on the company’s conviction on long-term output growth.

·    As before, we expect the much anticipated scrap incentive to be introduced in 2014E and predict demand contraction in 2012E and 2013E. However, we now expect the extent of the contraction to be milder at 12% in 2012E and 9% in 2013E. Our 2012E and 2013E earnings forecasts are 9% and 7% higher than before respectively. Yet, we expect a 22% y/y earnings contraction in 2012E and another 4% contraction in 2013E as we expect EBITDA margin to decline with the rising share of exports in total. 

·    The size and timing of Turk Traktor’s new plant investment are yet to be announced. We have raised our 2012-14E capex estimate by US$60mn to US$130mn, assuming that the majority of the investment will be financed with debt. We expect 26% higher output from Turk Traktor between 2015-21E while we expect domestic demand to be also 19% higher in the same period.

·    The introduction of those changes to our DCF raised our 12-mth target price to TL43.2/share from TL37.0 previously. With 51% total return potential in the next 12 months including a dividend yield of 7%, we upgrade Turk Traktor to BUY from HOLD. Turk Traktor has underperformed the market by 15% YTD and we believe that now is a good time for entry.

·    There is earnings contraction in 2012E and 2013E but at P/Es of 7.4x and 7.7x respectively, we find the stock inexpensive.

·    The key risks to our recommendation include lower tractor demand than predicted due to adverse macroeconomic conditions as well as bad harvest and the capital expenditures rising beyond our forecasts and hurting cash flow.