Otokar Report 31/07/2012

OTOKAR / BUY (Maintained)

2Q12 results merit upward revision to FY12 earnings

·         Otokar reported 2Q12 net profit of TL31mn (+65% y/y), beating estimates by a wide margin. BGC estimate was TL14mn while consensus stood at TL15mn. While part of the miss was due to the company recording more from the outstanding defense orders sooner than we predicted, spare parts revenue was higher than expected too and 2Q12 EBITDA margin at 17.1% was also massively stronger compared to previous quarters owing to the delivery of higher margin internal security vehicles.

·         We calculate that Otokar has an outstanding defense order backlog of cTL259mn; cTL150mn of which will be delivered in 2H12. We raise our 2012E net profit forecast to TL71mn, 18% higher than before. We foresee 29% earnings growth in 2012E.

·         Commercial vehicle sales have also been stronger  than initially predicted with Otokar gaining market share in the midibus segment as its flagship bus ‘Sultan’ has been perceived as offering good value.

·         Otokar is gaining traction with Kent, the newest addition to its commercial vehicle fleet as well. The company recently announced that it won a EUR42mn 250-vehicle order from the Istanbul Metropolitan Municipality, 20% of which will be delivered in 4Q12 and the rest in 1H13.

·         We have revisited our valuation with a lower risk-free rate of 9% now. Accordingly, we now have a 17% higher 12-mth target price of TL42.8/share. We foresee a total return potential of 29% in Otokar shares in the next 12 months, including a net dividend yield of 5%. We maintain BUY rating.

·         With a positive momentum in armored vehicle orders, we believe that Otokar is well-positioned to benefit from high-margin defense contracts which should ultimately lead to a solid share in the mass production of Turkey’s tank project currently in development phase. Furthermore, Otokar is set to benefit from the rising demand for commercial vehicles for public transportation ahead of the local elections scheduled to be held in March 2014.

·         Key risks to our recommendation are the lack of visibility on defense orders and potential delays in contracts received. Macroeconomic downturns, a weak Euro and higher raw material costs hurt commercial vehicle sales/profitability.

BGC Partners Istanbul