TURK TRAKTOR / Downgrading to HOLD (Prev. BUY)

·         Turk Traktor shares have gained 35% in the last three months and outperformed the ISE-100 by 26%. Since our last update on February 21, the shares have surged by 19% and exceeded our 12-mth target price of TL61.5/share.

·         Since Turk Traktor reported 4Q12 financials on February 14, the following news came out: 1) 2013E dividend proposal at TL200mn (gross) which was in line with expectations, with a net yield of 5.1%; 2) Turk Traktor starting talks with EBRD for up to EUR75mn in new financing for the EUR63mn new plant investment + R&D, engine, transmissions investments at the Ankara plant; again an expected development. The terms of the financing will be unveiled when the talks are concluded.

·         As for trade data, February numbers indicate that Turk Traktor’s domestic tractor shipments fell 28% y/y while exports were flat in Jan-Feb 2013. The decline in the domestic shipments in the first two months of the year is optical in our view, as the company’s wholesale shipments were ahead of retail demand in 1Q12, forming an unfavourable base for comparison, while wholesale shipments and retail demand converged in the annual figures. Nevertheless, 1Q13 financials may indicate some weakness, unless there is a grand recovery in March.

·         There are no changes to our forecasts or 12-mth TP of TL61.5/share. Dividend ex-date is to be March 25. We foresee 1% downside potential (including the 5.1% net dividend yield) on a 12-mth outlook and downgrade Turk Traktor to HOLD. We expect 8% earnings growth in 2013E. Turk Traktor is trading at 12.1x 2013E earnings and 2013E EV/EBITDA of 10.1x.

·         We like the strong growth prospects of Turk Traktor as the company will raise capacity by 25% with the new Adapazari plant in 2014E and the tractor demand in Turkey will get a boost from a shift to more powerful models and potentially a scrap incentive in 2014. Yet, we believe that with no immediate catalyst, the share price surge may come to a stop.

·         Key risks to our downgrade are strong March data and a surprise scrap incentive. Key risks for Turk Traktor include lower GDP growth, higher interest rates, weaker TL, poor weather conditions or diseases that affect farmer’s income negatively and a disruption to credit availability.

 

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