TTRAK TRAKTÖR Repory

Operating performance was below our expectations
In 3Q12, Turk Traktor posted TRY50.9m net income, below our estimate of TRY58.6m, due to weaker than expected operating performance. Posted EBITDA of TRY61.0m was below our estimate (TRY69.6m) on lower than expected imported tractor sales. Consensus EBITDA (TRY61.4m) and net income (TRY48.8m) were almost in line with the posted figures.

EBITDA margin contracted slightly by 0.5ppt q-q
Despite a sharp decline in local unit sales by 45% q-q, the Company was able to sustain its profitability margins as the company increased unit prices again by 3-4% from July. Gross margin of local unit prices increased by 3pp q-q to 32% in 3Q12. However, low imported unit sales somewhat reduced the positive impact of the price hike.

Raise TP by 4% to TRY39.33 on tax incentives
We raise our net income estimates by 7% for 2012 and 2013 due to lower tax expenses on investment incentives received and higher unit prices. A change in the government incentive policy that would increase renewal demand for tractors may be an upside risk while the opposite and/or poor crop yields may constitute downside risks to our estimates.

Slowdown in unit sales to hurt sentiment on the stock
Tractor demand has slowed down sharply in the last three months and we expect the y-y decline in local unit sales to gain pace for the remainder of the year. We expect Turk Traktor to sell 25,115 tractors in 2012. We expect local unit sales to moderate further to 22,526 tractors in 2013, resulting in negative growth momentum in earnings in 2013. Despite relatively undemanding P/E multiples of 8.3x on our 2012 estimates and 9.5x on our 2013 estimates, unfavourable earnings growth momentum could hurt sentiment on the stock.