EMLAK KONUT REIC / BUY (prev. HOLD)

*         We upgrade our recommendation to "BUY" from "HOLD"... We upgrade our recommendation for Emlak Konut REIC on the back of recent underperformance, upcoming regulations that are likely to benefit the company's growth prospects and upcoming projects expected to be launched in 1H12. Our 12M target price of TL2.68 per share remains unchanged suggesting 21% return potential (including a dividend yield of 2% for 2012E).

 

*         Upcoming laws regarding the real estate sector are expected to pass through Parliament over the next month... The long awaited regulations regarding the sale of previously forested (so called 2B) lands, removal of reciprocity requirement to ease foreign individuals to purchase real estate in Turkey and urban transformation process pose significant growth potential for the residential sector in the medium to long term. Emlak Konut REIC is eager to improve its land bank with hefty cash in hand; therefore, seems to be a potential beneficiary of the sale of 2B lands in the medium term thanks to its privilege of purchasing lands from TOKI without tender process.

 

*         Underperformed the index by 14% in the last three months... Emlak Konut REIC has been underperforming the market due to the blurry sector outlook as a result of upward trend in mortgage rates and housing oversupply. Although we project housing prices (up by 10% y/y in January - REIDIN) will continue to remain under pressure in the coming period, we think that Emlak Konut REIC is one of the most resilient companies thanks to its reputable brand name, profitable business model with guaranteed revenue sharing agreements and rich portfolio. However, cash deterioration due to flexible revenue collection scheme (in order to attract demand) seems inevitable.

 

*         We project 10k unit sales in 2012E, in line with the company guidance... Emlak Konut REIC sold a total of 12.6k units with a total of TL3.2bn revenue in its 32 projects in 2011. Although we tend to stay conservative for the coming period due high uncertainty in the markets, we project that Emlak Konut REIC will launch three major projects (including Ayazaga with TL1.2bn min revenue share) in 2012 in addition to Metropol Istanbul (with TL501mn min revenue share) project,  which have been launched last month. Reportedly, 60% of the first phase (308 units) of Metropol Istanbul has already been sold.

 

*         Risks... Delays in upcoming projects and contractor defaults pose downside risk for the stock. New land acquisitions and tenders on the existing land bank pose positive potential.

BGC Partners