Otokar Report

OTOKAR / 3Q12 Earnings Review & Update

BUY (Maintained)

Good 3Q results and a promising outlook

· Otokar reported 3Q12 net profit of TL16mn (+314% y/y), slightly above our estimate of TL14mn. All operating items came out in line with expectations. Otokar reversed TL1.6mn of provisions for doubtful receivables in 3Q12, the cause for the deviation between our estimate and the actual net profit.
 

· We calculate that Otokar has an outstanding defense order backlog of cTL205mn; cTL73mn of which will be delivered in 4Q12 and TL94mn in 2013E. The company also announced two contracts for diesel buses totalling EUR83.5mn, 90% of which (cTL180mn) will be delivered in 2013E, in our view.
 

· There are no major changes to our 2012E forecasts. We expect net profit to reach TL71mn (+29% y/y). We project a dividend payout ratio of 80% (previously 70%) on 2012E profit and expect gross dividends of TL57mn in 2013E. Net yield would be 5%.
 

· We have upped our 2013E net profit forecast by 25% based on the anticipation of higher armored vehicle sales (with the rising military needs) and bus sales (ahead of the local elections). We forecast net profit of TL80mn (+13% y/y) in 2013E.
 

· The incorporation of higher 2013E estimates resulted in a 6% increase in our DCF-based target price. Our 12-mth target price is now TL45.2/share (TL42.8/share before). We foresee a total return potential of 17% 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. An MoU signed with the Kazakh government may result in new armored vehicle orders which are not part of our forecasts. Furthermore, Otokar is set to benefit from the rising demand for buses for public transportation ahead of the local elections scheduled to be held in March 2014 but likely to be pulled forward to Fall 2013E.
 

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