Paradigm shift in Iraq:
downgrade to REDUCE
We downgrade Mardin Cimento to REDUCE as we lower our target price by 37% to TRY4.79. Our downgrade is based on the rapid change in the market structure of northern Iraq, which is diluting Mardin Cimento’s position in the market. We see 13% downside on a 12-month horizon.
Margins are normalizing
Lucrative export sales to northern Iraq have been a significant element in the company’s valuation. FOB prices hovering around USD80/tonne had provided the company with strong margins. Nevertheless, capacity investment in Iraq and intensified competition from Iranian producers have impacted market share and cement prices negatively.
We cut our DCF-based TP to TRY4.79 from TRY7.61
We incorporate a lower share of lucrative export sales, leading to 55% and 56% reductions in our 2012 and 2013 EPS estimates. Our new TRY4.79 TP implies 13% downside on a 12-month horizon. We therefore lower our recommendation to REDUCE. Stronger-than-expected demand in Iraq and Iran are the main upside risk to our estimates and target price.
Issues in export market are structural
While export prospects look weak, 640kg per capita local consumption in south-east Anatolia implies a healthy growth profile. Nevertheless, we believe the aforementioned issues in northern Iraq are structural, because: 1) Iran has 10m tpa excess capacity and competitive pricing (thanks to its lower cost structure), which results in sticky market share gains from Turkish producers; and 2) demand normalization in Iraq is likely to lead it to lower its import requirements in the longer term (which would cause Mardin further harm). Mardin’s EBITDA margin has contracted a substantial 13.6ppt so far in 3Q12, which we believe will be permanent in the long term.
We downgrade Mardin Cimento to REDUCE as we lower our target price by 37% to TRY4.79. Our downgrade is based on the rapid change in the market structure of northern Iraq, which is diluting Mardin Cimento’s position in the market. We see 13% downside on a 12-month horizon.
Margins are normalizing
Lucrative export sales to northern Iraq have been a significant element in the company’s valuation. FOB prices hovering around USD80/tonne had provided the company with strong margins. Nevertheless, capacity investment in Iraq and intensified competition from Iranian producers have impacted market share and cement prices negatively.
We cut our DCF-based TP to TRY4.79 from TRY7.61
We incorporate a lower share of lucrative export sales, leading to 55% and 56% reductions in our 2012 and 2013 EPS estimates. Our new TRY4.79 TP implies 13% downside on a 12-month horizon. We therefore lower our recommendation to REDUCE. Stronger-than-expected demand in Iraq and Iran are the main upside risk to our estimates and target price.
Issues in export market are structural
While export prospects look weak, 640kg per capita local consumption in south-east Anatolia implies a healthy growth profile. Nevertheless, we believe the aforementioned issues in northern Iraq are structural, because: 1) Iran has 10m tpa excess capacity and competitive pricing (thanks to its lower cost structure), which results in sticky market share gains from Turkish producers; and 2) demand normalization in Iraq is likely to lead it to lower its import requirements in the longer term (which would cause Mardin further harm). Mardin’s EBITDA margin has contracted a substantial 13.6ppt so far in 3Q12, which we believe will be permanent in the long term.
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