TURK TRAKTOR - No change in our view: HOLD

Operating performance was in line with our expectation
In 4Q12, the company posted TRY52.0m in net income, slightly above our estimate (TRY50.4m) and consensus estimate (TRY46.8m) due to lower income taxes on investment incentives. Posted EBITDA (TRY59.1m) was in line with our estimate (TRY59.8m) and consensus estimate (TRY58.0m).

EBITDA margin increased by 5.1ppt y-y
Despite a sharp decline in high-margin local unit sales by 32% y-y, the company was able to increase its profitability margins by raising prices more than 15-16% y-y. Hence, gross margin of local unit sales increased by 6.1pp y-y to 26.9% in 4Q12. However, increasing share of low-margin imported products reduced the positive impact of the price hike.

Raising TP by 4% on raised income estimates
We raise our net income and EBITDA estimates by 3% and 4% for 2013 and 2014 thanks to slight improvement in profit margins on slightly higher unit prices. A change in government incentive policy that would increase renewal demand for tractors may be an upside risk while the opposite and/or poor crop yields may be downside risks to our estimates.

TURK TRAKTOR / BUY (Maintained)

·         Turk Traktor beat our expectations in 3Q12 with a strong gross margin despite weak volumes and better financial income. We have upped our 2012E net profit forecast by 15% to TL259mn (-7% y/y).

·         We have made a 4% downward revision to 2013E tractor demand forecasts to 51k units. We still expect 4% demand growth in 2013E and are more optimistic than the company on outlook. We expect 5.5% GDP growth in 2013E (vs. 2.8% in 2012E). Also, the 19% increase in resources allocated to agriculture in the government’s 2013E draft budget bodes well for farmers’ sentiment, although it may not necessarily imply direct subsidies for tractor purchases. Our 2013E net profit forecast is 4% higher than before and now implies a 2% contraction y/y. 

·         Turk Traktor announced that the company obtained a TL90mn investment incentive for the new plant it intends to build in Adapazari. No further details such as the exact investment cost or capacity are known yet but an announcement is likely to come soon. We pencil in an investment budget of TL279mn between 2012-14E in our model.

·         We do not expect the much anticipated scrap incentive to be introduced before 2014E. If introduced sooner, it would have a positive impact on Turk Traktor.

·         Due to the decline in 10-year Turkish bond yield, we lower the risk-free rate to 8.5% from 9% in our DCF. Our new 12-mth share price target for Turk Traktor is TL54.8, 11% higher than before. With 25% total return potential including a 6% projected dividend yield, we maintain BUY rating. We assume a 70% dividend payout ratio on 2012 net earnings in 2013E.

·         Key risks to our recommendation include lower GDP growth, weaker TL, higher interest rates, lower credit availability, disruption in government subsidies for agriculture and poor crop lowering farmers’ income. A higher than predicted investment budget for the new plant would also lower cash flow and valuation. Weaker demand outside Turkey would hurt Turk Traktor’s exports.