DOGAN HOLDING / BUY (Maintained)

Set to grow in new areas; tax fine concerns are over

· As a flash news last Friday evening, Dogan Holding’s media arm, Dogan Yayin Holding (DYH), paid all its remaining tax liabilities of TL481mn. Dogan Holding management’s focus is now fully back on operations. The divestitures of the subsidiaries from 2011 such as DYH’s <DYHOL TI> sale of Star TV and Hurriyet’s <HURGZ TI> sale of real estate also provided much needed cash for its subsidiaries and eased concerns on their balance sheets.

· Dogan Holding’s solo net cash dropped to US$1.1bn as of 1H12 from US$1.2bn at 1Q12-end vs. its Mcap of US$988mn. Its strong financial position protects the company from macro/company specific risks as well as providing acquisition opportunities. Dogan acquired two Wind Power Plants (WPP) with 147MW in June 2012 and formed 50/50 JVs for domestic real estate projects. Dogan Holding holds 33% stake in two Hydroelectric Power Plant projects (HEPP) which have a capacity of 630MW. The plants are expected to be operational in 2012-end and 3Q13. The holding started due diligence to acquire 60% stake in the fuel distributor, “FULL” by Oct 12, 2012. Moreover, Dogan Holding has an investment in Iraq to explore petroleum together with Newage in Gas Plus Erbil (50/50 JV). Last but not the least, the Holding is also interested in Turkish and Greece Lottery privatizations and electricity distribution/generation tenders in Turkey.

· In addition to the new and lower target values of DYH and Hurriyet, we also add two WPPs into our valuation. Our sum-of-the-parts valuation now points to a 12-mth target price of TL1.20/sh (TL1.22/sh previously), indicating a 66% return potential. Our 12-mth target price is based on a 30% discount to the target value of the underlying assets of Dogan Holding. Dogan Holding also trades at a 56% discount to current NAV. The Holding’s 2-year average discount was 26% before the tax fine was brought upon DYH. Our valuation does not incorporate hidden values which may come from energy operations in Iraq and possible acquisition of FULL.

· We believe that the share price has recently been moving more with newsflow linking media owners to the 28 Feb investigation, resulting in a selloff in all Dogan Group shares before. The progress of the Parliamentary Commission investigating the matter will be closely watched by the market. But we believe that having underperformed the ISE by 18% in last three months and now that the concerns regarding DYH’s tax liabilities are gone for good, current share price offers a good entry point.

· The major risks are a worse than expected slowdown in the economy, weak TL, a stiffer competition in media sector in addition to delays in investment plans.

 

BGC Partners