Time to take a breather, downgraded to HOLD
§ Positives already priced in. Thanks to its defensive nature and strong earnings, Enka outperformed BIST-100 by 52% ytd and multiple expansion continued (13% up vs. 2012 avrg forward P/E). On higher backlog and realizations, we revise up estimates and raise 12M TP to TRY7.35/sh (prev. TRY6.3). Though we remain bullish for contracting, upcoming real estate taxation code in Russia may erode margins. With limited upside, we downgrade Enka to HOLD from BUY. The stock is trading at premium to peers with 2014E P/E of 15.3x. Major upside risks are weaker TRY and addition of new large projects.
§ Contracting back to good old days. Enka added c.US$2bn new projects (mainly from Iraq) and contracting revenues are set to almost double to US$2.3bn in 2013E thanks to faster completion ratios. EBITDA margin also recovered to 19% and we see 18% as sustainable with its focus on engineering projects. Given new Kosovo project and potential in Iraq, we estimate c. US$2bn addition p.a. as well and backlog to stay around US$4bn in 2014 (9M13: US$3.5bn). Thus, contracting valuation is up by 34% to US$2.6bn (24% of NAV).
§ Higher taxation risk in real estate. We expect stabilization in Russian real estate and growth to be propelled by new projects (Kuntsevo and Sergei Posad from from mid-2014 on). Revenues are likely to post a 16% yoy growth in 2014E on top of 9% rise in 2013. Yet, we reflect erosion in margins especially in older properties due to upcoming policy that will shift to cadastral values rather than book values in real estate taxation. Thus, we reflect a 2pp decline in real estate sector margins from 2014 on.
§ Either new projects or higher dividends. Energy remains like a bond business in the next 5 years while Enka eyes similar projects in Turkey and abroad. We assign a low probability to power plant tenders in Egypt due to civil unrest and strained relationship with Turkey. Nuclear power plant could be a potential target for Enka if Russia or Japan decides to take a Turkish partner provided that terms are convenient. We believe that if there is no new project with heavy CAPEX, Enka will start increasing dividend pay-out after 2014 given its underleveraged financials (US$2.5bn net cash).