Aksa Enerji OUTPERFORM. 07 September Massive cut in 2011 production target more than priced in... Upside Potential* 80%

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1 Equity / Mid Cap. / Utilities 07 September 2011 Bloomberg: AKSEN TI Massive cut in 2011 production target more than priced in... We have revised our valuation for reflecting the changes in the company s guidance for electricity production in 2011 and delays in new capacity additions. As a result, we lowered our 12M target share price to TL4.7 from TL5.65 while we maintain our OUTPERFORM recommendation for AKSEN shares. Capacity additions on track despite some delays continues to increase its installed capacity as planned with fuel type diversification efforts. The first phase (120MW) of a 270MW NGPP investment in Sanliurfa was operational by July 11. The company s Northern Cyprus fuel oil based power plant s installed capacity was increased to 120MW via an additional steam turbine investment with a capacity of 13MW in August 11. Thus, the company s installed capacity reached to 1,707MW as of August 11, up from 1,574MW as of June 11. We assume that the company will increase its installed capacity to 2,036MW by the end of 2011, in parallel to the company guidance. Regulatory change forcing a shift in sales mix is the main driver for lower production The regulation change necessitated a change in s sales breakdown target for Previously, the company projected to sell 15% of its generation to affiliated DisCos by the end of 2011, yet now targets to sell only 3%. According to the new regulation, electricity sales to affiliated DisCos must be done at market prices, instead of a set price between the two parties. Thus, the company has decided to increase the share of bilateral contracts to 50% as of 2011 year-end from 2% at 2010 year-end in the customer mix. Taking this and the delay in the startup of 300MW steam turbine combined cycle capacity at Antalya PP into account, the company revised its generation volume target to 5.5 bn kwh from previously 9 bn kwh in To be on the conservative side, we assume that the company will generate 5 bn kwh of electricity in Maintaining our OUTPERFORM recommendation Reuters: AKSEN IS Our revised 2012 EBITDA estimate implies an EV/EBITDA of only 7.8x and a P/E of 9x, which we believe are attractive considering the company s aggressive growth plans. In fact, the company aims to raise its installed capacity to 4.2GW by 2016 from 1.7GW as of August 11. We assumed a much more conservative capacity expansion to 2.2GW in our DCF model which yields a 12M target price of TL Company Update OUTPERFORM Upside Potential* 80% Stock Data TRY US$ Price at Month Target Price Mcap (mn) 1, Float Mcap (mn) No. of Shares Outstanding 578 mn Free Float (%) 5.00 Avg.Daily Volume (3M, mn) Market Data TRY ISE ,020 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to ISE Price / Relative Price TL AKSEN Relative to ISE 100 Relative Week Range (Close TRY) Asli Ozata Kumbaraci akumbaraci@isyatirim.com.tr Basak Dinckoc bdinckoc@isyatirim.com.tr Main risks to our call are continuing pressure on electricity prices, delays in the adaptation of the company s customer mix to new regulations and potential delays in new capacity additions due to deterioration in macro conditions. Please refer to important disclaimer at the end of this report. 1

2 Summary of Key Financials (TL mn) Income Statement (TL mn) 2009A* 2010A* 2011E 2012E 2013E Revenues ,079 1,748 2,074 EBITDA Depreciation & Amortisation EBIT Other income (expense), net (21) 12 (40) Financial expenses, net (33) (47) (157) (59) (91) Minority Interests (0) (1) Income before tax (92) Taxation on Income (23) (25) 18 (42) (33) Net income (74) Cash Flow Statement (TL mn) Net Income (74) Depreciation & Amortisation Indemnity Provisions Change in Working Capital (497) (533) 250 (430) 15 Cash Flow from Operations (347) (402) 281 (152) 270 Capital Expenditure Free Cash Flow (593) (806) 28 (240) 135 Rights Issue Dividends Paid Other Cash Inflow (Outflow ) (12) Change in net cash (168) (212) Net Cash (986) (1,197) (1,097) (734) (611) Balance Sheet (TL mn) Tangible Fixed Assets 997 1,330 1,479 1,456 1,470 Other Long Term Assets Intangibles Goodw ill Long-term financial assets Inventories Trade receivables Cash & equivalents Other current assets Total assets 1,902 2,385 2,652 2,796 3,054 Long-term debt Other long-term liabilities Short-term debt Trade payables Total Debt 1,002 1,276 1,515 1,396 1,450 Other short-term liabilities Total liabilities 1,430 1,561 1,897 1,873 1,997 Minority Interest 0 (0) Total equity ,057 Paid-in capital Total liabilities & equity 1,902 2,385 2,652 2,796 3,054 Ratios 1,185 1,484 1,897 1,873 1,997 ROE (%) ROIC (%) Invested Capital 1,542 2,041 1,914 1,673 1,672 Net debt/ebitda (x) Net debt/equity (%) Capex/Sales (%) Capex/Depreciation (x) EBITDA Margin EBIT Margin Net Margin Valuation Metrics EV/Sales (x) 4.6x 2.7x 1.7x 1.4x EV/EBITDA (x) 22.3x 13.8x 7.8x 7.8x EV/IC (x) 2.1x 1.5x 1.7x 1.7x P/E (x) n.a n.a 9.0x 11.3x FCF yield (%) -29% 2% -16% 9% Dividend yield (%) 0% 0% 0% 0% 0% *based on average Mcap during the year 2

3 Capacity additions on track despite some delays continues to increase its installed capacity as planned with fuel type diversification efforts. The first phase (120MW) of a 270MW NGPP investment in Sanliurfa was operational by July 11. The company s Northern Cyprus fuel oil based power plant s installed capacity was increased to 120MW via an additional steam turbine investment with a capacity of 13MW in August 11. Thus, the company s installed capacity reached to 1,707MW as of August 11, up from 1,574MW as of June 11. The company targets to increase its installed capacity to 2,036MW by the end of the year with the addition of 300MW steam turbine combined cycle capacity at Antalya, 24MW wind power plant capacity increase at Balikesir and 5MW new wind power plant capacity. In the long term, the company aims to reach an installed capacity of 4.2GW by Recall that, previously this target was expected to be reached by However, to be on the conservative side, we only incorporated the new investments for which financing have already been secured into our projection. Accordingly, we projected the installed capacity to reach to 2.2GW by 2013 and remain constant onwards. s Installed Capacity*(MW) A 2010A 2013E Fuel Oil Wind Biogaz NG Hydro Source: Company & IS Investment *IS Investment Estimate: Includes only ongoing investments Regulatory change forcing a shift in sales mix is the main driver for lower production The regulation change necessitated a change in s sales breakdown target for The company, which aimed to sell 15% of its generation to affiliated DisCos previously in 2011, now targets to sell only 3%. According to the new regulation, electricity sales to affiliated DisCos must be done at market prices, instead of a set price between the two parties. Thus, the company has decided to increase the share of bilateral contracts to 50% as of 2011 year-end from 2% from 2010 year-end in the total customer mix. Taking all this and the delay in the start-up of 300MW steam turbine combined cycle in Antalya PP, the company revised its generation volume target to 5.5 bn kwh from previously 9 bn kwh in To be on the conservative side, we assume that the company will generate 5 bn kwh of electricity in projects to have a more diversified customer base by 2016, yet we kept the company sales breakdown guidance for 2011 constant throughout our forecasted period. 3

4 s Installed Capacity*(MW) 2011E 3% 7% 10% 3% 50% 27% Northern Cyprus Balancing Market Affiliated Discos Regional Sales Bilateral Agreements Renewable Settlement Method Source: Company & IS Investment 2016E 8% 25% 3% 1% 22% KIBTEK Balancing Market Affiliated Discos Source: Company 41% Regional Sales Bilateral Agreements Renewable Settlement Method Recent Developments regarding Kazanci Holding s stake sale. Kazanci Holding, the parent company of, had obtained a loan of US$192mn with a maturity of one year and one week from Goldman Sachs by pledging 43.64% of shares earlier. Kazanci Holding utilized US$150mn of this loan to pay back some of Kazanci Holding s and other group companies outstanding debt to. In addition, Kazanci Holding decided to sell its 26.47% stake at for US$450mn to Goldman Sachs International. However, this transaction will include some protective clauses secured by Kazanci Holding against adverse economic conditions. The proceeds from the planned stake sale will be utilized to pay back the US$192mn loan to GS and the majority of the rest will be used to pay back Kazanci Holding s and other group companies remaining outstanding debt to. The transaction is expected to be completed by the end of October. The outstanding debt of Kazanci Holding and other group companies was US$347.9mn (TL562.2) as of June 11 and it is reduced to US$197.9mn after the payment of US$150mn. This is a positive development in the sense that it will provide funding for to finance its capacity investments. 4

5 Maintaining our OUTPERFORM recommendation Our revised 2012 EBITDA estimate implies an EV/EBITDA of only 7.8x and a P/E of 9x, which we believe are attractive considering the company s aggressive growth plans. In fact, the company aims to raise its installed capacity to 4.2GW by 2016 from 1.7GW as of August 11. We assumed a much more conservative capacity expansion to 2.2GW in our DCF model which yields a 12M target price of TL4.70. Main risks to our call are continuing pressure on electricity prices, delays in the adaptation of the company s customer mix to new regulations and potential delays in new capacity additions due to deterioration in macro conditions. The company currently carries TL1.4bn of total debt position, 63% of which is long term. We believe that the company is able to meet the required financing for the existing investments through its own resources and additional debt. Estimate Revisions We lowered our 2011 estimated sales volume by 44% owing to lower CUR due to lower spot market prices, coupled with the changes in the sales breakdown and the delay in the start-up of 300MW steam turbine combined cycle capacity at Antalya PP. This translated into a 31% and 33% downward revision in our revenue and EBITDA estimates, respectively. Accordingly, the bottom-line estimate for 2011 turns into red, mainly due to higher financial expenses and provision expenses related to the protocol which is signed with the company and EUAS in 2Q11. recorded TL47mn (US$28.9mn) provision expenses for the protocol regarding its Samsun PP in 2Q11. The company will pay this amount in equal installments in 10 months to EUAS, starting in January 12. After this agreement, settled with EUAS and applied for a generation license to operate the Samsun NGPP and it partially became operational in August 11. The plant is expected to become fully operational by the end of 3Q11. We have also revised down our 2012 revenue estimate by 13% due to the lower sales volume estimate. On the other hand, our EBITDA estimate fell by 21% as we estimate a natural gas price hike of 27% YoY, while assuming 21% YoY hike in electricity tariff. Since s natural gas based power plants compose 79% of its total installed capacity, it will clearly have a negative effect on company s EBITDA margin. All in all, we revise our 12 target price for shares to TL4.7/share from TL5.65/share, while we maintain our OUTPERFORM recommendation. Estimate Revisions 2011E-Old 2011E-New Change 2012E-Old 2012E-New Change Capacity (MW) 2,036 2,036 0% 2,066 2,066 0% Sales Volume 9 bn kwh 5 bn kwh -44% 10.8 bn kwh 9 bn kwh -17% Net Sales (TLmn) 1,555 1,079-31% 2,001 1,748-13% EBITDA (TLmn) % % Net Income (TLmn) n.m % Target Share Price (TL/share)-Old Target Share Price (TL/share)- New Source: IS Investment 5

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