TRKCM - COMPANY UPDATE - BUY - INVEST IN LONG TERM GROWTH PROSPECTS

INVEST IN LONG TERM GROWTH PROSPECTS

We decrease our target price for TRKCM to TL2.74 from TL3.38 per share on the back of further increase in natural gas prices. We also cut our growth and margin assumptions for 2012 and 2013 due to sluggish domestic demand, weak economic activity in EU and increasing energy costs. However, TRKCM’s long term growth prospects are still very promising along with company’s investments. Our valuation indicates 29% upside potential thanks to stronger yield of DCF, hence our recommendation is BUY. Although TRKCM trades at only 8% and 12% discount in terms of EV/EBITDA’12e and EV/EBITDA’13e multiples respectively, we believe peer comparison does not fairly reflect the company’s long run prospects.

Strong long term growth expected with ongoing investments…

TRKCM will be loaded with heavy investments (building float lines) in Ankara (Polatlı), Bulgaria and Russia in the next few years. Increasing investment activities of automobile producers within the bounds of Serbia, Romania and Bulgaria makes the latter one attractive to TRKCM for further investment, we believe. Auto producers interested in making investments to Bulgaria since the country offers low production and labor costs and a flat corporate tax rate of 10%. Bulgaria is also a good starting point to export automobiles to the European Union. Overall capacity increases of TRKCM will become operational gradually starting from 2013 and upon the completion of these investments TRKCM’s total production capacity will reach to 2.6mn tons from current 1.6mn tons. Accordingly we expect TRKCM’s revenues to increase by 21% and 24% y/y in 2013 and 2014, respectively. Sise Group’s continuous efforts to increase efficiency in all operations may result in margin enhancement in the long run, in our opinion.

DCF indicates a rich upside potential in the long run…

We expect total revenues to show a mere 1.5% y/y increase in 2012YE due to ongoing problems in Europe. As you may recall, both natural gas and electricity prices were increased again by 9.8% and 4% respectively (effective as of 1st of October). Hence, price hike in natural gas and electricity reached 29% and 13% ytd. Therefore, further pressure to the margins of glass companies including TRKCM seems inevitable in 4q12. However, in the long run, our DCF still yields 49% upside potential even though we remained to be conservative for the next years. Our five years’ (2012e-2016e) average expected EBITDA margin is 22.7% vs. previous five years’ average (2007-2011) EBITDA margin of 27.4%.