Tupras (Buy, TRY 49.00)

We resume our coverage of Tupras with a 12M TP of TRY 49/share, assigning a 60% weight to our DCF-driven SOTP model and 40% to peer multiples. Defensive in a cyclical industry thanks to its domestic premium as the sole refinery for the large Turkish market, Tupras offers a stable dividend stream (above 7.5% yield) and also sustainable growth through investments like the residuum upgrade project (RUP). Consequently, with a 25% upside potential, we rate the stock a Buy.

■  Despite the bleak outlook for the refineries in 2012, we expect Tupras’ refinery margin to exceed the benchmark Med-complex thanks to 1. its flexibility to process different crude types and select among different suppliers 2. domestic premium 3. product optimization and RUP project. Our net refinery margin estimates stand at USD 4.1, USD 3.6 and USD 4.6 per bbl for 2011E-2013E. We reduce it to USD 2.8/bbl by 2020 to factor in the impact of the new refineries and lower crude spreads. A USD 1/bbl change in the refinery margin affects our TP by 23%.

■  We expect the RUP to increase Tupras’ competitiveness vs. new refineries and benefit from the end of the downward cycle when commissioned in 2014E. For the RUP, we calculate ca. USD 368mn EBITDA in 2015 (30% of the total) and an NPV of USD 705mn with the conversion of black products mainly to diesel, which is in short supply in Turkey.  

■  Tupras’ 2012E P/E stands at 8.6x, a 9% discount to peers, and EV/EBITDA at 5.9x, a 7% premium, in USD terms. The strong balance sheet, sound dividend stream and the RUP justify a premium, in our view. Despite outperformance, its 12M forward earnings growth relative to the ISE is still higher than its relative price performance, too. The short- term catalyst is the dividends, while any impediment to access to Iranian crude oil (50% cut reduces TP by 8%) or fall in oil prices (USD1/bbl decline leads to 2% lower TP) are the major risks.