Emlak REIC 24/01/2013

We believe the recent increase in the VAT rates on new residential properties which obtained construction permits after January 2013 is more than reflected on Emlak’s share price. The stock underperformed the ISE100 benchmark by 1% y-t-d, despite the fall in the financing rates, expected to support the demand. Our revised 12m target price for Emlak implies a 17% upside potential thus we reiterate our OUTPERFORM recommendation for the stock. We have valued Emlak REIC via sum of the parts (SOTP) method, in which we have valued ongoing projects through DCF, and added lands at project value incorporating time value of money as well as new VAT rates over lands appraisal value.;

 

Decreasing mortgage rates to boost housing demand. CBRT’s easing bias since June 2012 caused a decline in the mortgage rates to 0.80% levels recently from 1.20% levels back in January 2012, based on weighted average of granted loans. Monetary conditions are expected to remain accommodative through 2013 which may lead to future decline in mortgage rates. One-half of Emlak’s sales are financed by housing loans, benchmarking to the previous years’ experience we expect decreasing rates to lead to a pickup in Emlak’s sales. In addition, the recent change in VAT scheme is likely to accelerate the sales of existing residential stock.;

Upcoming projects and tenders will provide positive news flow. Recently Emlak tendered 100K sqm land in Kartal for TL534mn, which was purchased for TL206mn. High participation and record 2.5x tender multiple indicate improving sentiment in residential sector, in our view. In 2013, Kuasar and other RSM projects to be developed in Kartal Land, Zekeriyaköy and Ataşehir are expected to help company to reach 2013 presales target of 10-15K.

 

Ideally positioned in real estate sector as the commercial subsidiary of the Housing Development Administration of Turkey (TOKI). 75% of Emlak belongs to TOKI, remainder 25% is listed in ISE. Emlak has the privileged access to TOKI’s landbank with no formal tender. In addition recently Emlak and the Ministry of Environment and Urbanisation have signed a protocol to cooperate for the Urban Transformation Project. Accordingly Emlak will develop earthquake-resistance houses in the outskirts of Istanbul and in return will be able to buy nationalized lands at appraisal value with no tender. Protocol enables Emlak a privileged access to evacuated lands in İstanbul.;

 

Revenue Sharing Model (RSM) enables Emlak to convert its vast landbank into cash with minimal risks. In a RSM project contractor bears all the project work i.e. project financing, design, construction, marketing and sales. Emlak has guaranteed minimal revenue set at the beginning, but benefits from any upside in revenues as well.;

 

The stock has outperformed ISE by only 1% over past 12 months, while it currently trades at 8% premium to its NAV. We think the company deserves to trade at a higher premium given the vast number of lands recorded at appraisal value in the portfolio, while ongoing projects are accounted based on the minimum guaranteed value.; Main risks for the company are 1) deterioration of economic growth 2) lift of corporate tax exemption 3) secondary Public Offering.

 

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