Tekfen Holding (Initiation of coverage with BUY) - Contracted to the oil price

Tekfen Holding (Buy, TRY 8.30)

 

We initiate coverage of Tekfen Holding with a Buy rating and a TRY 8.30 target price, offering 55% upside potential. Thanks to its expertise in oil & gas-related projects and a well diversified allocation between four different regions, in our view Tekfen may be a good investment for investors who believe in strong oil prices but do not want to be exposed to the political risk in Russia.

■  New opportunities in the region may result in further backlog growth. After the USD 501mn Tüpraş deal, Tekfen managed to increase its backlog to a historically high level of above USD 2bn and has registered a 4% CAGR since 2005, while others' backlogs were shrinking. We believe with SOCAR's current project pipeline in the region and new opportunities in focus countries, the backlog will continue to grow.

■  High oil prices also support fertilizer prices, which pushes margins up in the agri industry. With the increase in prices by 15% in USD terms on average in 2011, revenues grew 13% yoy in 9M11 in USD terms, while the EBITDA margin rose to 19% in 9M11 vs. 14% in 2010. We expect margins to normalize starting from 2012, yet fertilizer prices to remain high with our flat oil price expectation for this year.

■  Tekfen's share price was down 7% in USD terms despite the increase in oil prices and the stock underperformed both the ISE-100 Index and its closest peer, Enka İnşaat by 12% and 13%, respectively in the last 1M. The stock is trading at a 2012E EV/EBITDA of 4.2x which is 33% below its historic 1-year forward EV/EBITDA average of 6.3x.

■  The main risk for Tekfen is a decline in oil prices, which may negatively affect both the backlog and fertilizer prices. Also note that, after the Arab Spring the oil price required for budgetary breakeven levels for oil-rich countries increased. Yet, despite the recession fears the oil price is still resilient and the tenders in the MENA region continue.