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.

FROTO Report

Challenges to continue until 2014: Ford Otosan continues to target market leadership in 2012. Input costs have been on an downward trend; however, Ford Otosan does not expect a major improvement in operating margins in 4Q12 as cost declines will be invested to pricing (or the competitive environment will not allow for margin expansion). An EBITDA margin close to 8% looks reasonable for 2012 (previous guidance: ~9%, our recently revised estimate: 7.8%). The company expects a slight improvement in EBITDA margin in 2013 thanks to its new product line-up (our estimate +0.4 pp y-y), but acknowledges challenges posed by the ageing Transit Custom model and the phase-in phase-out period of the basic Transit model. The company broadly shares our view that the operating environment will remain challenging until 2014, when the LCV portfolio will be fully renewed.

 

Market outlook stable in 2013: The company notes that it has not finalized the budget for 2013, but broadly expects similar dynamics to 2012, for both international and domestic markets. However, the broad guidance is of limited use when assessing export volumes for 2013 due to 1) new Transit/Tourneo Custom models, 2) planned phase-out of production of Transit Connect in Turkey, and 3) relocation of remaining Transit production in UK to Turkey. Nevertheless, we forecast a 3.4% y-y increase in domestic volumes, and a 2.7% y-y decline in export volumes in 2013.

 

Dividends: The company confirms that deferred tax income resulting from accounting of incentives on investments (our estimate: TR160) will not be included in 2012 distributable income. We forecast a decline in DPS from TRY1.65 in 2012 to TRY1.41 in 2013 (yield: 7.6%).

 

Incentives: The company previously noted that it was evaluating the possibility of higher tax incentives on ongoing investments than already received incentives. However, no progress on this issue has been made so far, due to conflicting views between the Ministry of Trade and Ministry of Finance.

Capex: 2012 Capex guidance was revised down from USD540m to USD440m. However, the downward revision will not lead to a delay in projects. The company notes that it will not need incremental Capex to produce the Transit that will be relocated from UK.