We initiate our
coverage for Tumosan (TMSN), one of the largest diesel engine and tractor
producers with the highest capacity of Turkey, with a BUY rating. Our
2013 year-end target price, derived from our DCF (40%), EBITDA Multiple Growth
(30%) and International Peer Comparison (30%) approaches, is TL5.20 per share
for the Company, denoting 35% upside potential.
Main highlights of our
investment theme:
Ø Attractive valuation… The Company trades at 6.0x adj.
EV/EBITDA’13e and 8.3x P/E’13e multiples, denoting 28% and 33% discount to its
international peers according to our estimates.
Ø Commitment to 2013 year-end targets
and bonus share (free shares from parent) incentive if failed to do so… Management committed 2013
financials (as TL72.5mn for average of net income and EBITDA) which denotes 43%
and 44% discount to its international peers.
Ø Strong market share (i.e. 40%) in
value added high powered tractors…Privatized in 2004, dealer network exceeded 100
by the end of 2012 from 48 dealers in 2009. TMSN’s market share jumped to 14% in 2012
from 7% in 2008. Management targets 20% levels in the next 1-2 years.
Ø Strong indirect subsidies for the
sector… Ziraatbank
(main source of financing of tractor purchases) provides 50% interest rate
subsidy for tractor purchases.
Ø Right sector to be in for
capitalizing on growth due to underutilized arable lands and low agricultural
product yields.
Ø Possibility of direct subsidies (in
a form of scrap incentive) in few years due to above average age of tractor
park hence the need for replacement is a sweetener.
Ø Substantial dividend potential
thanks to solid balance sheet and profitability.
Downside risks are cyclicality,
relation of demand with consumer confidence and limited free float (the group
bought back 52% of the IPO to support stock as promised during the IPO). Note
that, the IPO of the Company took place in Nov’12 with a market capitalization
of TL460mn ($255mn).
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