Buy on revival in demand and prospects for business diversification

Transcription

1 YKY Company Note Research DOGUS OTOMOTIV Buy Tulin Tekin Senior Analyst TURKEY DOAS.IS Coverage initiation TL US Share Price MCap (US$ mn) 371 Price Performance US$ Rel.to ISE 1-month 18% 26% Year-to-date 16% -8% TL/US$ TL US$ ISE , Buy on revival in demand and prospects for business diversification We issue a Buy recommendation for motiv with a target MCap of $504 mn (TRY6.18 per share) and a 36% upside potential on the back of recovery in the domestic automotive market and approval of long awaited transfer of nation-wide vehicle inspection stations by the Council of State. Our valuation does not include the impact of vehicle inspections, but we think Court decision will serve as a catalyst for value correction. Uncertainty is over: Council of State allowed the transfer of motor vehicle inspection stations to the winning consortium, TUV, in which has a 33.3% stake. Motor vehicle inspection stations will help diversify its business from full value dependence on marketing of imported cars. Considering s 2005 financial performance against domestic automotive market in general and a healthy growth expectation over 10% in 2006 in the domestic auto market, is clearly undervalued as indicated by its 2006F P/E of 4.7x and 2006F EV/EBITDA of 3.4x. trades at discounted multiples, partly because it lacks a production base and is a marketing&sales company for Volkswagen cars; but we think a recovery in the domestic auto market and contribution of vehicle inspection stations are not yet priced in. Following two quarters of sales declines, the domestic auto sales revived in the third quarter with a strong September, in which total auto sales grew by 11%, following 20% in August and 9% in July. Strong y/y growth in the last three months support the view that domestic sales in 2005 won t be far behind the record numbers of Key Financials Key Multiples Year Net Income EBITDA Sales $ mn Growth $ mn Growth $ mn Growth 04A 05F 06F 2004A 54-5% % 1,719 59% P/E F 58 7% 82-20% 1,550-10% EV/EBITDA F 79 36% % 1,736 12% EV/SALES Market Cap,$ mn Relative to ISE (right) 6/04 7/04 9/04 10/04 12/04 1/05 3/05 4/05 6/05 7/05 8/05 10/ This report has been prepared by the Research Department of Yapi Kredi Yatirim Menkul Degerler A.S. Any recommendation contained in this report may not be suitable for all investors. The information and data contained in this report has been acquired from sources believed to be reliable, however its accuracy and completeness can not be guaranteed. This report is published solely for information purposes, neither the information nor the opinions expressed herein is to be interpreted as an offer to sell or a solicitation of any offer to buy securities. Yapi Kredi Yatirim Menkul Degerler A.S. accepts no liabilities for any direct loss arising from the use of this report. This report may not be reproduced, distributed or published completely or partly by any other party without the prior written consent of Yapi Kredi Yatirim Menkul Degerler A.S.

2 Research : Target MCap of $504 mn represents a 36% upside potential We valued with average multiples of international peers for 2006F EV/EBITDA and P/E. However, we applied a 50% discount to peers multiples because is not a production company. Unlike other listed Turkish auto companies, does not have a production base in Turkey, and is dependent on the importation of Volkswagen family vehicles, including Volkswagen, Audi, Skoda, Seat, and luxury group Porche, and Scania, Krone trucks and trailers. has between 11-12% share in domestic auto sales. Table 1: International Peer Comparison motiv 2006F EBITDA ($ mn) 111 EV/EBITDA of Peer average 3.5 N et debt ($ mn) as o f 1H ) Estimated Target MCap ($ mn) 38 1 Net Profit ($ mn) 79 P/E of Peer average 4.8 2) Estimated Target MCap ($ mn) 37 9 Estimated Value of Automotive Business ($ mn)-avg.of Dogus Ho lding ( 3.98%) -($ mn)* 125 Estimated Target Mcap ($ mn) 50 4 Current Mcap ($ mn) 371 Upside Potential 36% Target Share Price (YTL) *: Value attributable to Dogus Holding from its 51% stake in Garanti Bank Source: Bloomberg, YKY Research Table 2: Summary Financial Statements E 2006E $ mn $ mn $ mn Sales 1,719 1,550 1,736 Gross Profit/ Loss Gross Margin 11.9% 13.0% 14.0% Operating Profit/ Loss Operating Margin 5.1% 4.3% 5.5% EBITDA EBITDA Margin 6.0% 5.3% 6.4% Net Income/ Loss Net Margin 3.1% 3.7% 4.5% Source: YKY Research Page 2

3 Investment Idea Signs of recovery in the auto market emerged in June 2005 when domestic auto sales declined by 1% following a 15% fall in 1H05. Following two quarters of sales declines, domestic auto market closed the third quarter with a strong September: Total auto sales in the domestic market grew by 11% in September, following a 20% in August and a 9% in July. Strong y/y growths in the last three months support the view that domestic sales in 2005 may catch up with the record levels of Table 3: January-September Auto Market Jan-Sept Units Sept'05 Sept'04 % Change % Change Passenger Car 36,395 33, % 300, , % LCV 25,555 22, % 188, , % Total Market 67,321 60, % 524, , % F.Tractors 2,568 2, % 20,145 22, % Source: Automotive Manufacturers Association Financials Financially motiv performed quite well in 2005 contrary to automotive market in general. Although revenues declined by 23% to $726 mn in 1H05, margins did no deteriorate too much in 1H05 thanks to new vehicle launches and strong brand name of VW in Turkey. While operating and EBITDA margins fell slightly, gross and net margins actually improved. Table 4: 1H05 Summary Financials IFRS 1H05 1H04* Real 1H05 1H04 YTL mn YTL mn Change $ mn $ mn Change Net Profit % % Financial Gain/Expense % % Monetary Gain/Loss 0 2 nm 0 1 nm EBITDA % % Operating Profit % % Gross Profit % % Net Sales 972 1,269-23% % Margins Net Margin 4.0% 3.8% EBITDA Margin 5.9% 8.0% Operating Margin 5.2% 7.6% Gross Margin 13.8% 13.1% Jun-05 Net Debt, $ mn 9 *Restated to 31 December 2004 Source: ISE Page 3

4 Considering s 2005 financial performance against domestic automotive market in general and a healthy revenue growth expectation of 12% in 2006, is undervalued in terms of its 2006F P/E of 4.7x and 2006F EV/EBITDA of 3.4x compared to international peers. On the other hand, can not be fully compared with Turkey s main automotive companies, Tofas and Ford Otosan, because is fully dependent on the domestic market while others generate almost 50% of their revenues from exports and is a sales&marketing company. However, we think trades at such discounted price multiples that a recovery in the domestic auto market and contribution of vehicle inspection stations are not yet priced in. We expect s revenues in 2005 to stay at $1.55 bn indicating a 10% contraction however, net income to grow by 7% to $58 mn, indicating 2005F P/E of 6.4x. In 2006, we expect domestic auto market will experience a healthy growth of over 10% thus enabling to realize a 12% growth in revenues and a 35% growth in net income to $79 mn. Vehicle Inspection Stations Recently, a good news that long awaited decision of Council of State regarding approval of transfer of vehicle inspection stations has come. In December 2004, Privatisation Administration had tendered operating rights of motor vehicle inspection stations for 20 years. has a 33.3% participation in the winning company established to operate vehicle inspection stations. The so-called company TUV (TUV Tasit Muayene Istasyonları Yapim ve Isletim A.S.) will get a 10% discount and pay $552 mn to the government in cash for the privatisation of vehicle inspection stations though total privatisation amount is $613.5 mn. TUV obtained $552 mn of loan from ABN Amro Bank N.V. and Bayerische Hypo-und Vereinsbank AG. to pay this amount. Despite uncertain and extremely different figures circulated in the media, TUV is expected to undertake high investment amounts in these stations. Upon the completion of signing the agreement, stations are required to be operational within 18 months. The owner/operator of motor vehicle inspection stations will transfer 30% of its annual revenues to the government in the first three operational years, 40% of its revenues in the next seven years and 50% of its revenues in the remaining 10 years. Vehicle inspection stations are expected to create $7 bn of total revenues in 20 years but these figures are not yet confirmed. However, TUV s contribution to will be at the net income level since will consolidate it through equity method. But, we think the biggest contribution of TUV to will be its addition of a new source of income, i.e diversification. Page 4

5 Owned by the Dogus Group, motiv is an automotive distributor of VW brands. Dogus Otomotiv imports and sells VW, Audi, Seat, Skoda, Porche brand of passenger cars and LCVs, and also Scania and Krone trucks and trailers. motiv also provides after sales and spare parts services to these brands. motiv is the largest automotive importer and the third largest distributor in the Turkish domestic automotive market. It operates with 174 dealer and service locations throughout Turkey. Through its affiliates, motiv also provides vehicle financing with VDF, fleet sales with Europcar and used vehicle sales with DOD. and Volkswagen signed an exclusive distributorship agreement in The major drawback of this agreement is that any of the two parties can terminate this distributorship agreement with a 12-month notification. Despite this fact, the two groups established strong business relationship in over a decade, during which raised VW s market share in Turkey by 6-folds to 12%. Thus, we do not think a termination of this relationship likely in the foreseeable future. By contrast, looks like a potential partner in the event VW decides to establish a production base in Turkey, possibly for the manufacturing of light commercial vehicles. Table 5: Shareholders and Participations Participations, Affiliates, JVs Shareholders Participation Company Business Area % Dogus Holding Holding company 3.98% Pazarlama Marketing and after sale 86.45% Katalonya Distribution of Seat cars 50.00% Dogus Motor Sporlari Car racing organisation 99.95% TUV Tasit Muayene Istasyonlari Vehicle inspection 33.33% TUVTURK Guney Tasit Muayene Ist. Vehicle inspection 33.33% Yuce Oto Distribution of Skoda cars 50.00% Dogus Sigorta Insurance 42.00% VDF Holding Consumer financing 38.22% Volkswagen Cons. Fin. (VDTF) Sale of used cars+renting 48.00% Participation Shareholder % Dogus Insaat 35.4% Somtas Tarim Tic.A.S. 19.9% Dogus Yapi San.A.S. 10.0% Katalonya 0.2% Free Float 34.5% Source: Company Although motiv s stake in Dogus Holding seems small in proportion, it represents an important value to because Dogus Holding has a 51% of Garanti Bank, which is valued at $6.1 bn. indirectly owns 2.0% of Garanti Bank, representing $125 mn value to motiv. In our valuation, we chose to ignore any possible value from other participations. Page 5

6 Table 6: Indirect Ownership in Garanti Bank 2.0% ($125 mn) motiv 3.98% Dogus Holding 51.0% Garanti Bankasi ($6.1 bn of Mcap) Dogus Holding s sale of Garanti Bank to GE hasn t been finalized yet. Thus, we used presale participation rate of Dogus Holding in Garanti Bank. But, even after the sale of 25.5% of Garanti Bank shares to GE, Dogus Holding will receive around $1.6 bn in cash, thus the value attributable to Dogus Holding will not change due to sale of half of Garanti Bank shares. Source: Company Table 7: Market Share 11% 13 % 12 % 11% 12 % 13 % 9% 10 % 9% 6% 3% 2% 2% 0.5% E 06E Source: Company IPO Performance of motiv started to trade in the ISE on 17 June 2004 with a MCap of $493 mn (per share price: TRY6.75). Dogus Insaat sold its 34.5% stake in motiv, generating $170 mn. shares have declined by 25% in $ terms since the IPO. Page 6

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