TOFAS FABRIKA / BUY (Maintained)

Eyeing new projects with upside and dividend prospects

 

·         Tofas’ 1H12 results did not bring in much of a surprise. The impact of a 22% decline in sales volume resulted in only a 6% decline in pre-tax earnings, thanks to the execution of the payment clause of the take-or-pay contracts.

·         Domestic passenger car and LCV demand declined by 19% in 1H12. We expect flat demand in 2H12 vs. 2H11 and expect an 10% contraction in 2012E. Tofas should benefit from the relative recovery with a market share of 14.3% and we find the company’s 2012E domestic sales volume target of 125k achievable (1H12A: 54.4k).

·         European demand has been weak resulting in several downward revisions to export guidance now standing at 170k (1H12A: 84.2k). The delay in North America export project is slightly negative in our view, while new markets such as South America and Russia (especially after the latter’s entry to WTO) may compensate for some of the shortfall in 2013E, in our opinion. Exports to N. America are expected to start in 2014E.

·         We expect headline earnings to fall by 1% in 2012E and rise by 8% in 2013E. Incorporating a lower risk-free rate of 9% into our valuation, we raise our 12-mth target price for Tofas to TL10.5/share from TL9.0/share before. With a 12-mth total return potential of 32% including a net dividend yield of 7%, we maintain BUY rating.

·         Tofas’ multiples are not demanding at 2013E P/E of 8.3x and EV/EBITDA of 4.2x. We continue to like the defensive nature of Tofas’ business thanks to the take-or-pay contracts. The expectation of lower interest rates also helps consumer sentiment and is positive for automotive demand. Tofas is currently working on new model projects which may bring further upside to valuation if they involve capacity expansion.

·         Key risks to our recommendation include stiff competition and adverse macroeconomic conditions lowering earnings. If the eagerly anticipated North America export agreement fails to be signed or if the company cannot replace the Minicargo and Linea with renewed versions of the same models or all-new models when their project life ends in 2015E, there would be downside risk to our valuation.