FROTO REPORT

ü  Fuelled by deferred tax income, 3Q12 bottom line exceeded estimates, despite lower operating margins: Ford Otosan reported TRY 144.4mn net profit for 3Q12, exceeding the consensus and our estimate. The deviation between our bottom line estimate and the announced figure mainly stemmed from the reported deferred tax income (benefiting from investment incentives), despite lower than expected operating margins. The top line met our expectation, while the gross margin improved slightly, contrary to our forecast of a stable margin, although EBITDA was significantly below our estimate, mainly due to higher than expected operating expenses.

ü  Revising export estimates slightly downwards: While we maintain our FY12 domestic sales estimate at 118k vehicles (a 16% contraction), which implies a 0.8pp market share loss to 14.6% for the whole year, we reduce our FY12 export estimate 4% to 197k units, implying an 8% contraction, due to further export contraction to Europe, and despite the strong exports to North America. While we maintain our 2013e domestic sales estimate at 126k units, we cut our export estimate 4% to 211k vehicles.

ü  Downgrade to Hold: Having incorporated the 3Q results, Ford’s decision to move its Transit production from Southampton to Turkey by the end of 2013 and the lower cost of capital estimate, we revised our valuation and estimates and raised our target share price to TRY 20.0, from TRY 17.8. As our revised target price indicates only 8% upside potential, we downgrade the stock to Hold (from Accumulate). Nevertheless, at the fundamental level, we still like the solid business model and its attractive dividend policy even during a heavy investment period, as well as management’s efforts to diversify export markets.