Enka Insaat (Market Perform) - 4Q12 Earnings Review: Weak contracting margins hit the operating line

4Q12: Weak contracting margins hit the operating line

 

Q4 NI came in line with estimates.

Q4 NI of ENKAI came at TL283mn, in line with consensus estimate of TL286mn but lower than our forecast of TL310mn. Hence the company reached TL1,128mn NI in 2012, posting 33% yoy growth. On the operating front the company missed expectations. Overall EBITDA was TL339mn in  Q4 vs. consensus and our calls of TL392mn and TL410mn, respectively. Particularly weak margins of contracting segment weighed on operating line. The segment posted c.2% EBITDA margin in Q4, way lower than normalized levels. The main drift from our estimate looks like to be this weakness. On the other hand the company’s top line was quite strong in Q4 as TL3,223mn revenues were much higher than both consensus and our estimates of TL2,614mn and TL2,559mn, respectively. The main reason of the divergence from our forecast was c.TL600mn higher than expected top line from the energy arm. Hence the company’s overall EBITDA margin was c.10% vs. our c.16% call and consensus estimate of c.15%. On the back of this overall relatively weak operating line we did not like Q4 results of ENKAI. The initial impact to results in the market was neutral to slightly positive. However we believe that worse than expected EBITDA margin should have some negative implications on the stock price in the short term. In the long run we maintain our Market Perform rating with TL5.9/share, indicating 10% upside potential.

While the company generated TL339mn EBITDA in Q4, since it incurs TL136mn ,capex and working capital needs remained relatively unchanged, net cash increased to TL3,994mn (US$2.2bn) in Q4 from TL3,785mn (US$2.1bn) in Q3. Net cash constitutes c.27% of current Mcap. 

 

Contracting margins were disappointing

The company generated TL14mn EBITDA in the contracting segment, corresponding to very poor margin level of c.2% (12% in Q3 and 23% in 4Q11). We were expecting an EBITDA margin of 15% in Q4. Note that contracting revenues of TL741mn in Q4 were slightly higher than our TL705mn call and up by 64% and 5% yoy and qoq. Thus top line of the segment reached TL2,298mn, indicating 47% growth yoy. However in Q4 COGS of the segment surged much more rapidly than top line. COGS were c.TL700mn in Q4 vs. c.TL570mn in Q3. We need to discuss with the management about reasons of deterioration in cost structure of the segment in Q4.

 

Real estate margins were strong again

Real estate segment posted 77% EBITDA margin in Q4. Actually this was even higher than robust margin of 73% in Q3. We foresee an EBITDA margin of 75% for the segment. The segment’s EBITDA margin was 67% in 4Q11. This strong performance was mostly attributable to continuation of depreciation of Ruble in Q4. The segment’s top line was TL208mn (US$116mn) in Q4 vs. TL191mn (US$104mn) in 4Q11. On dollar basis revenues went up by 11% mainly due to better occupancy rates. 

 

Robust top line contribution from the energy segment

Energy segment posted TL2,168mn top line in Q4, which is significantly higher than our expectation of TL1,565mn. Hence the segment’s top line grew 41% and 27% qoq and yoy, respectively. On the other hand EBITDA of TL153mn of the segment was only notch above our TL145mn call. Note that for the power segment, yoy fluctuations are limited in dollar terms on EBITDA front thanks to take-or-pay agreements. In 2011 the segment’s EBITDA was US$260mn and in 2012 it was US$264m.

 

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