27 Kasım 2012 Salı

TOFAS OTOMOBIL - Turning cautious: HOLD

Downgrading to HOLD on share performance
Take-or-pay agreements are a blessing amid weak European demand. However, the recovery in European markets is likely to take time, which might impact the long-term prospects of Tofas during its next investment cycle for Minicargo. Also, considering the strong performance YTD (41% outperformance vs. XU100), we downgrade our rating to HOLD from BUY.

Negotiation for new take-or-pay agreements might start soon
Take-or-pay agreements with PSA/Fiat for Minicargo are valid until end-2015. Considering the weak financial position of PSA and possible political sensitivity given that the French government might take seats on PSA’s board, we expect PSA to seek a better deal (lower volume commitment, lower price) during the new investment cycle for Minicargo.

Our blended target price is TRY10.50/share
We increase our TP to TRY10.50, rolling over valuation (+), reflecting higher peer multiples (+), lower CoE (+), lower capex (+), but lower export estimates beyond 2015 (-), and lower normalized EBITDA margin estimate (current: 9.3%, previous: 9.8%) (-). A new product mandate by Fiat, and a fast pick-up in European demand after 2014 are upside risks.

We are cautious, but upside surprises are also possible
Our FY13E DPS is TRY0.80/share (7.3% yield), close to our yield for Ford Otosan (8.0%). We expect the share price to be strong in the short term due to inclusion in the MSCI Turkey index by end-November, and strong dividend prospects, followed by an overhang on uncertainty beyond 2015. Despite our cautious stance, we are not too bearish, as we believe: 1) the risk of non-renewal of the deal with PSA is limited, barring a major intervention by the French government; 2) a new PC mandate amid Fiat’s build-on-growth turnaround strategy is possible; 3) despite a delay in the Doblo deal for the US, we are now more positive, given Fiat’s recent comments on strategic importance of an enlarged LCV portfolio in the US.

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