Ak Enerji OUTPERFORM (M) 25 August 2010

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1 Equity / Mid Cap. / Utilities 25 August 2010 Bloomberg: AKENR TI Disappointing 1H10 earnings but positive newsflow yet to come New capacity additions are on track Akocak and Bulam hydroelectric power plants with 81MW and 7MW installed capacities, respectively, became fully operational in August 2010, slightly earlier than our estimate of September On the other hand, Uluabat hydro power plant with 100MW installed capacity is expected to come on stream as of September Thereby, the company s installed capacity will increase to 561MW in 3Q10 from 373MW in 2Q10, of which 203MW will come from renewable plants. We have also included the possible impact of the recently signed electricity purchase agreement with Polat Enerji into our forecasts. Revisions in our electricity price assumptions We made the major changes in our 2010 spot price (DUY) estimates for Akenerji. The DUY market pricing mechanism changed into an hourly system from monthly since December 2009 which had a pernicious effect on the spot prices. On top of this, heavy rainfalls, which resulted in excess supply of hydroelectric power plants, lowered the spot prices further. Although we already reflected a certain YoY decline in our price estimates, it seems that despite the recent recovery in demand, our estimates are relatively optimistic. Hence, we lowered our average 2010 DUY price estimate to TLkr11.95/KWh from TLkr13.76/kWh for Akenerji. Revisions in sales breakdown We revised Akenerji s sales breakdown target after the release of 2Q10 results. The company announced that it only sold 36% of the generated electricity to the DUY market and the remaining was sold to its direct and indirect customers during the first half of 2010: Thus, we decreased the ratio of the DUY portion in overall sales volume to 30% from the previous 60% and raised the other customers portion to 70% from 40% for We kept this breakdown constant until 2012 and later we reduced DUY s share to 20% and increased other customers share to 80% accordingly. Maintaining OUTPERFORM recommendation Reuters: AKENR IS The changes in our tariff assumptions resulted in a downward revision in 2010 and 2011 forecasts. Thanks to the gradual increase in the contribution of the newly added hydro capacity, our longer term estimates still support our positive view on the stock. Accordingly, our 12M target price estimate decreased slightly to TL4.3/share from TL4.6/share. The Privatization Administration has announced that the privatization process of generation assets will take off either by the end of August 2010 or at the beginning of September 2010, which might be a catalyst for Akenerji'share price performance. Review of 2Q10 Financials OUTPERFORM (M) Upside Potential* 22% Stock Data TRY US$ Price at Month Target Price Mcap (mn) 1, Float Mcap (mn) No. of Shares Outstanding Price / Relative Price TL AKENR Relative Relative to ISE mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data TRY ISE ,623 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to ISE Week Range (Close TRY) Asli Ozata Kumbaraci akumbaraci@isyatirim.com.tr Basak Dinckoc bdinckoc@isyatirim.com.tr Please refer to important disclaimer at the end of this report. 1

2 Summary of Key Financials (TL mn) AKENR Income Statement (TRY mn) 2008A* 2009A* 2010E 2011E 2012E Revenues EBITDA Depreciation & Amortisation EBIT Other income (expense), net 3 (10) Financial expenses, net 32 (6) (12) 24 (5) Minority Interests Income before tax Taxation on Income (10) 6 0 (27) (21) Net income Cash Flow Statement (TRY mn) Net Income Depreciation & Amortisation Indemnity Provisions Change in Working Capital (23) Cash Flow from Operations Capital Expenditure Free Cash Flow (71) (316) (273) Rights Issue Dividends Paid Other Cash Inflow (Outflow ) (55) (4) Change in net cash (126) (326) (160) Net Cash (194) (520) (679) (584) (468) Balance Sheet (TRY mn) Tangible Fixed Assets ,058 1,157 1,099 Other Long Term Assets Intangibles Goodw ill Long-term financial assets** Inventories Trade receivables Cash & equivalents Other current assets Total assets 861 1,505 1,781 2,023 1,989 Long-term debt Other long-term liabilities Short-term debt Trade payables Other short-term liabilities Total liabilities Minority Interest Total equity ,087 1,148 Paid-in capital Total liabilities & equity 861 1,505 1,781 2,023 1,989 Ratios ROE (%) ROIC (%) Invested Capital ,157 1,251 1,192 Net debt/ebitda (x) Net debt/equity (%) Capex/Sales (%) Capex/Depreciation (x) EBITDA Margin EBIT Margin Net Margin Valuation Metrics EV/Sales (x) 1.0x 3.1x 4.6x 3.2x 2.9x EV/EBITDA (x) 6.2x 23.3x 44.4x 13.4x 10.6x EV/IC (x) 1.1x 1.6x 1.7x 1.6x 1.6x P/E (x) 7.1x 26.8x x 12.4x 16.0x FCF yield (%) (11.2) (48.7) (20.6) Dividend yield (%) 0% 3% 0.0% 0.0% 2% *based on average Mcap during the year **Includes the equity contribution of AkCEZ 2

3 We have revised our forecasts and TP for Akenerji to incorporate i) the electricity purchase agreement with Polat Energy, ii) the changes in our assumptions regarding the kick off of Bulam hydro power plant, iii) the changes in our electricity tariff expectations, and finally (iv) the changes in company s sales breakdown. Electricity purchase agreement with Polat Energy Akenerji had announced that the company made an agreement with Polat Energy to acquire the latter s wind power generation capacity of 100MW until the end of Akenerji s management stated that they might extend the agreement period further. We have assumed that the deal will be over by the end of 2010 in our model. On the other hand, we believe that the company preferred to buy electricity through the DUY market at lower prices instead of generating and sell it at higher prices to its customers. Thus, we increased the company s sales volume estimate to 2,552 mn kwh from 2,146 mn kwh in New hydro power plant capacities became operational Akocak and Bulam hydroelectric power plants with respective installed capacities of 81MW and 7MW, became fully operational in August We had previously assumed that Bulam hydroelectric power plant would start its operations by the end of 3Q10. Uluabat hydro power plant with 100MW installed capacity is expected to come on stream by September Thereby, the company s installed capacity will increase to 561MW in 3Q10 from 373MW in 2Q10, of which 203MW will come from renewables. Since these power plants just became operational in 3Q10, we forecasted that their CUR will be low to be on the conservative side. The gradual increase in the contribution of hydroelectric power plants will have a positive effect on the company s EBITDA margin and bottomline going forward as they operate with EBITDA margins close to 90% levels. Revision in our electricity tariffs estimates We revised upwards our average regulated electricity tariff estimates to TLkr20.5/kWh from TLkr19.9/kWh for We had already estimated an increase in our average NG prices assumption for 2011 Thus, we kept our natural gas prices estimates unchanged. We made the major changes on our DUY price estimates. The pricing mechanism in the DUY market has changed into an hourly system from monthly since December 2009 and had a pernicious effect on the spot prices. On top of this, heavy rainfalls, which resulted in excess supply of hydroelectric power plants, lowered the spot prices further. The average spot prices were TLkr14.96/kWh in the first seven months of 2009 compared unfavorably with the TLkr11.41/kWh in the same period of this year. As an additional information, the average spot prices reached to TLkr17.5/kWh for the first 19 days of August 2010 on the back of higher electricity consumption due to hot weather conditions. However, we estimate that the average DUY prices to be around TLkr11.95/kWh levels for Despite the fact that Akenerji is a market player in the DUY market, it can sell its generated electricity to the DUY market at a premium to the announced DUY prices. Just to be on the conservative side, we did not include a premium to Akenerji s DUY price estimates. Revisions in our electricity prices estimates Source: IS Investment 2010E-OLD 2010E-NEW 2011E-OLD 2011E-NEW TEDAS Prices Estimate (TLkr/kWh) NG Price Estimate (TL/m 3 ) Akenerji's Spot Price Estimate (TLkr/kWh)

4 Electricity Tariffs vs Natural Gas Prices Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec03=100 Natural Gas Electricity Source: TEDAS & BOTAS DUY Prices (TLkr/kWh)!"#$%! Source: PMUM Revisions in the sales breakdown Akenerji has three main types of customers: direct customers, indirect customers and DUY market. The company previously stated that they target to sell 60% of its generated electricity to the DUY market and the rest to its direct and indirect customers. However, the company sold only 36% of its generated electricity to the DUY market and the rest is sold to other customers in 1H10. Thus, we revised our sales breakdown target for We decreased the ratio of the DUY portion in the overall sales volume to 30% from 60% and increased its other customers portion to 70% from 40% for We kept this breakdown constant until 2012 and later we decreased the DUY share to 20% and increased the other customers share to 80%. We kept it constant until the end of our forecast period. The company applies a certain discount rate over the regulated tariffs for its direct and indirect customers. We assume 2% average discount for its direct customers because direct customers have a physical direct line to the power plant. We supposed 10% average discount for its indirect customers since the indirect customers are supplied through the national grid. 4

5 Akenerji s Sales Breakdown E Direct Customers Indirect Customers DUY Source: Company and IS Investment The table below summarizes our revised forecasts for Akenerji. Despite the increase in sales volume, revenues and EBITDA, our FY10 net income estimate slumped from TL23mn to TL0.3mn mainly due to the revisions in our net financial expense estimates and our projections for AkCEZ s bottom-line. The bottom-line expectation in FY11 decreased by 10% from TL119mn to TL107mn owning to the changes in our price and sales breakdown estimates. The changes in our tariff assumptions resulted in a downward revision in 2010 and 2011 forecasts. Thanks to the gradual increase in the contribution of the newly added hydro capacity, our longer term estimates still support our positive view on the stock. Accordingly, our 12M target price estimate decreased slightly to TL4.3/share from TL4.6/share. Revisions in our estimates 2010E-OLD 2010E-NEW Change 2011E-OLD 2011E-NEW Change Sales (TL mn) % % EBITDA (TL mn) % % Net Income (TL mn) 23 0 n.m % Target Share Price-Old Target Share Price -New Source: IS Investment TL4.6/share TL4.3/share Going Forward: -New capacity additions Akenerji s Uluabat hydroelectric power plant investment with a total installed capacity of 100MW is expected to be operational by September Thus, the company s installed renewable capacity will reach to 203MW in 3Q10 from 103MW in 2Q10. The company is also in the process of arranging financing for Egemer natural gas based power plant with a total installed capacity of 900MW. Once the financing of the investment is completed, we will include it into our valuation for the company. If we add all the recently announced investments, the company s total installed capacity will reach to 1,808MW by 2014, where the share of the renewable capacity will increase to 24%. 5

6 -Interested in the upcoming generation assets privatizations The Privatization Administration announced that they target to start the privatization process of the generation assets either by the end of August or at the beginning of September. Deputy Head of the Privatization Administration stated that they will privatize some of the assets via the Transfer of Operating Rights (TOR) methodology, some of them by stake sale and some of them through asset sale. The PA will first sell four large scale thermal plants; Hamitabat (1,120MW), Soma A-B(1,034mw), Can (320MW), and Seyitomer (600MW) in separate tenders. The first tender is expected to get underway with the privatization of Hamitabat, a natural gas fired plant. The PA will privatize the remaining generation assets in nine different portfolios. Akenerji stated that they will follow the tenders closely to get a stake from these assets which will help the company to easily achieve its long term 3,000MW target. Therefore, we believe the newsflow regarding the privatization tenders may be a catalyst for the share price. This report has been prepared by Yatırım Menkul Deerler A.. ( Investment) solely for the information of clients of Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary. The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of Investment. ( This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. 6