TTRAK Unit Sales in September 2012

In the local market, Turk Traktor sold 1,462 tractors in September 2012, down 41.9% y/y from 2,519 tractors in September 2011- Implication on Stock: Negative. September sales figures was almost 20% below our estimate. In our view, September unit sales reading was important in figuring out whether the decline in demand will turn into a major downward trend. Although it is early to claim that a major downward has started, we are planning to revisit our unit sales estimates for 2012 and for 2013, after October sales announcement. Tractor demand has slowed down in last four months, and Turk Traktor’s sales to dealers has declined as well. We expect the y/y decline in unit sales to continue for the remainder of the year. We expect Turk Traktor to sell 27,500 units in 2012, yet the chance of reaching that number gets slim. We expect local demand to moderate further in 2013, resulting in a negative growth momentum in earnings in 2H12 and 2013. Despite relatively undemanding P/E multiples of 8.6x on our 2012 estimates and 10.1x on our 2013 estimates, unfavorable earnings growth momentum will hurt the sentiment on the stock. 

 

TTRAK (HOLD, TP TL37.8)

TURK TRAKTOR Report - 09/08/2012

TURK TRAKTOR / BUY (Maintained)

 Upward revision to earnings, still cheap

·         Turk Traktor reported 2Q12 net profit of TL102mn (+6% y/y), significantly above our estimate at TL76mn. Over 40% of the deviation from our forecast is owing to stronger operating results (much higher average selling prices and slightly better EBITDA margin). The rest is due to seemingly one-off items such as the reversal of provisions for doubtful receivables (TL5mn) and gain on sale of fixed assets (TL3mn).

·         We left the post-results analyst meeting with the following impressions: i) 2H12 volumes will be lower than what was observed in 1H12; ii) 2013 domestic volumes are unlikely to be lower than those of 2012; iii) Product mix is critical especially at home, a case in point was the introduction of 110hp, more powerful tractors in May 2012, lifting profits in 2Q12.

TURK TRAKTOR / BUY (Upgraded from HOLD)

Upgrading on better outlook – near & long-term

·    We have upped our output growth estimates for Turk Traktor following the 1Q12 results due to the following: 1) Both domestic shipments and exports in 1Q12 implied higher full-year volumes than we predicted; 2) The continuation of Ziraat Bank’s loan subsidies (although limited in scope compared to 2011) as announced in late February suggests higher domestic demand than we previously forecast; 3) Turk Traktor’s decision to invest in a new plant which we believe sends a strong signal to the market on the company’s conviction on long-term output growth.

·    As before, we expect the much anticipated scrap incentive to be introduced in 2014E and predict demand contraction in 2012E and 2013E. However, we now expect the extent of the contraction to be milder at 12% in 2012E and 9% in 2013E. Our 2012E and 2013E earnings forecasts are 9% and 7% higher than before respectively. Yet, we expect a 22% y/y earnings contraction in 2012E and another 4% contraction in 2013E as we expect EBITDA margin to decline with the rising share of exports in total. 

·    The size and timing of Turk Traktor’s new plant investment are yet to be announced. We have raised our 2012-14E capex estimate by US$60mn to US$130mn, assuming that the majority of the investment will be financed with debt. We expect 26% higher output from Turk Traktor between 2015-21E while we expect domestic demand to be also 19% higher in the same period.

·    The introduction of those changes to our DCF raised our 12-mth target price to TL43.2/share from TL37.0 previously. With 51% total return potential in the next 12 months including a dividend yield of 7%, we upgrade Turk Traktor to BUY from HOLD. Turk Traktor has underperformed the market by 15% YTD and we believe that now is a good time for entry.

·    There is earnings contraction in 2012E and 2013E but at P/Es of 7.4x and 7.7x respectively, we find the stock inexpensive.

·    The key risks to our recommendation include lower tractor demand than predicted due to adverse macroeconomic conditions as well as bad harvest and the capital expenditures rising beyond our forecasts and hurting cash flow.