Mutlu Akü - 115% upside in Mutlu Aku, maintaining BUY

·         Kartal Transformation story resurfaces again… According to the news in Haber7 and our call with Mutlu Aku, Istanbul Municipality and Kartal Municipality agreed on the Urban Transformation in Kartal and 1/1000 projects have been completed and will be hanged in the Kartal Municipality in February-March 2012. The plans will be hanging for about 1 month and afterwards the construction activity could be started. In the past 1/5000 plans had been completed around 2.5 years ago and they had altered twice after some objections. In July 2011, the Court decided on stay of execution for Kartal Urban Transformation project, following an appeal which is related with the first (unaltered) 1/5000 plans. Hence, if the new 1/1000 plans are approved which is expected soon, the court case is said to become void. The president of Kartal Transformation Project Association confirms that the 1/1000 plans will be completed very soon and they finally could start to work on the project in 2012, after waiting for 6 years since 2005. Mutlu Aku has 70k m2 land in this project, the company has been contacted many times, but they will wait for the final approval to consider what to do with the land.

·         Prices are expected to boost in Kartal… Haber7 assumes that m2 land prices now reached hit TL2,000-2,500 from TL900 in Kartal after the recent completion of the Hall of Justice there (one of the biggest in the World – a TL300mn project, exp. operational in June this year), based on their talk with a real estate broker. Mutlu Aku values its 70k land at TL111.6mn (total real estates are valued at TL125mn including TL13.4mn Bursa land), meaning around TL1,600 per m2. The approval of the transformation project is expected to boost prices further towards TL3,000-3,500 per m2 (meaning TL210mn-TL245mn value for Mutlu Aku’s land vs. its Mcap of TL218mn), according to the news. Recall that Mutlu Aku announces the value of its real estates regularly, and in case the 1/1000 plans are approved, they are likely to disclose their new land value in Kartal. Note also that non-listed Eczacibasi Holding has the biggest 330k m2 land in the project (listed Eczacibasi Ilac <ECILC TI> owns 37% of its parent Eczacibasi Holding).

·         Ruling AKP pays a big significance on Silivri and Kartal… PM Erdogan is focused on creating new “cities” in Silivri and Kartal regions as stated formerly in the party’s election manifesto. The third airport is planned in Silivri and the urban transformation is expected to transform Kartal to an important business district like Levent-Istanbul. Project Marmaray is expected to be completed in 2013 connecting two sides Asia and Europe with an underground tunnel including the railway. This is expected to bring further value to Kartal. Marmaray project will probably include a fast train, improving transportation to the region.

·         Mutlu Aku potential partnership process continues, positive potential… Recall that in July 2011, Mutlu Aku decided to start talks with international companies for a strategic partnership potential. The potential stake sale process (74.8% of the company) continues with domestic and international groups.

·         Mutlu Aku’s sales are strong, but the TL’s depreciation may hurt the margins in the seasonally strongest 4Q11… We estimate TL14mn net profit in 4Q11 (4Q10: TL11mn). We will see the tax office financials until 14 February, which are a good proxy for CMB financials in Mutlu Aku’s case (the company posts standalone results).

·         The company may take part in production of batteries for electric cars in the long-term… As a significant long-term potential, Mutlu Aku may consider taking part in production of batteries of hybrid and electric cars. In that respect, Mutlu completed R&D for Microhybrid batteries. Additionally, the company cooperates with TUBITAK-MAM and keeps in touch with foreign authorities and local automakers on electric car batteries.

·         We see 115% upside in Mutlu Aku, maintaining BUY rating… TL5.9 per share (TL334mn Mcap) comes from the core business and the rest TL2.2 per share (TL125mn) comes from the value of the real estates represented in the balance sheet. The stock trades at 6.3x 2012E P/E and 4.8x 2012E EV/EBITDA, based on our estimates, unadjusted to the land value. We think the short term expected positive news flow may drive the share performance which has been under pressure since the court case in July 2011.