DOGUS OTOMOTIV BUY TARGET MCAP UPGRADE

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1 login request DOGUS OTOMOTIV BUY TARGET MCAP UPGRADE December 12, 2005 Price: TRL 6.05 Turkey [Automotive] Bloomberg: [ DOAS TI] Market Cap: USD m Outstanding Shares: m Six Month Avg. Daily Trading Vol. (USD m): Week High/Low: TRL 6.55 / TRL 3.10 EMEA Sales Team John Burge Head Of Sales jburge@agco.com (212) J.P. Natkin Head of Russian Equities jpnatkin@agco.com (212) Igor Chernomorskiy Russian Equities ichernomorskiy@agco.com (212) Zoran Milojevic zmilojevic@agco.com (212) Darko Horvat dhorvat@agco.com (212) Can Yazgan cyazgan@agco.com (212) Ryan Floyd rfloyd@agco.com (212) Serves 11% of market just from selling imported vehicles... DOAS was opened to the public in June 2004 as the exclusive importer and distributor for Volkswagen passenger cars in Turkey (VW, Audi, Porsche, Seat, and Skoda), VW light commercial vehicles and Scania trucks and Krone trailers. The Company captured a 10.8% share of the overall market in 2004, with total sales of 78,889 vehicles. Better than expected 9M05 figures on the back of a strong 2004 Turkey s automotive market expanded by 88% in 2004 with sales of motor vehicles hitting an all-time high of 753,731. This growth was spurred by the fall in interest rates on consumer loans, pent-up demand, a strong TL, an improving macroeconomic environment and finally the scrap incentive, which was applied until May DOAS benefited from this strong demand through the successful launch of new models and its high-end product portfolio started with a significant contraction, and the Turkish automotive industry contracted by 15% y-o-y over the first six months of However, the market started to recover in July and the 10-month period closed with a contraction of just 4% for the overall industry. Our revised forecast envisages a contraction of just 3% by the year-end, compared to the 18% contraction forecast at the beginning of the year. Distinct dividend policy The Company has a policy of distributing high dividends. DOAS guarantees to distribute 50% of its distributable income as cash or as stock dividends between Still very attractive valuation, without the MVIS Our DCF-driven target value for DOAS is US$ 700 mn, without the value MVIS. We value MVIS at US$ 45 mn and if the transfer of operating rights of MVIS is approved the firm s value will further improve to US$ 745 mn. But, currently, we do not include it to our target Mcap. Trading Tuncay Cevher EMEA Equities tcevher@agco.com John Geron U.S. Equities jgeron@agco.com Duncan Sherrer Asian Equities dsherrer@agco.com Todd Hathaway Asian and LATAM Trading thathaway@agco.com Selim Sari EMEA Trading ssari@agco.com Also view Auerbach Grayson Research on Multex.net, Bloomberg and FirstCall. This report has been prepared by our correspondent named above on the date set forth above. This report was not prepared by Auerbach Grayson & Company. The correspondent named above and its research analysts are not members of the National Association of Securities Dealers and are not subject to the NASD Rules on Research Analysts and Research Reports and the attendant restrictions and required disclosures required by that rule.[if the report is to be distributed to more than U. S. Institutional Investors Auerbach Grayson & Company accepts responsibility for the contents of this report as provided for in SEC Releases and SEC staff no-action letters.] All persons receiving this report and wishing to buy or sell any of the securities discussed herein should do so through a representative of Auerbach Grayson & Company.Auerbach Grayson & Company and its affiliates do not own one per cent (1%) or more of any class of equity securities issued by any of the companies discussed in this report. Auerbach Grayson & Company and its affiliates have not received any investment banking compensation from any of the issuers discussed in this report in the past twelve months, and does not intend to seek or expect to receive investment banking compensation from any of the issuers discussed in this report in the next three (3) months. Auerbach Grayson & Company has not acted as manager or co-manager of any public offering of securities issued by any of the companies discussed in this report in the past three (3) years. Neither Auerbach Grayson & Company nor any of its officers own options, rights or warrants to purchase any of the securities of the issuers whose securities are discussed in this report. Auerbach Grayson & Company does not make a market in any of the securities discussed in this report, and it and its associated persons do not stand ready to buy from or sell to any customers, as principal, any of the securities discussed in this report.

2 DOGUS OTOMOTIV Target Mcap Upgrade Recommendation : BUY Upside Potential : 42% Company Data 12/12/2005 Shares Outstanding (mn) 110 Stock Price (YTL ) 6.05 Target Stock Price (YTL) 8.60 Free Float Rate (%) 34% Average Daily Volume (US$ mn) 6.83 Market Cap. (US$ mn) 493 Target Mcap 700 Exchange Rate (US$/YTL) Key Financials E 2006E Gross Margin 13% 12% 14% 14% Operating Margin 6% 5% 7% 8% Ebitda Margin 5% 6% 7% 8% Net Margin 7% 3% 5% 6% ROE 28% 24% 33% 38% FCF Margin 4% 4% 3% 5% Relative Performance (US$) DOAS XU100 Rel % 1 m 23.9% 11.2% 11.5% 3 m 61.5% 14.4% 41.2% 12 m 93.1% 74.0% 11.0% Share Price Performance Price YTL 7.2 Share Price & ISE-100 Index ISE ,000 Following the brillant performance in 3Q05 and recent corporate tax rate cut to 20% from 30%, we revised our target Mcap for Doas from US$ 555 mn to US$ 700 mn. With the current Mcap of US$ 493 mn, Doas shares carry an attractive 42% upside potential to our new target US$ 700 mn. We reiterate our BUY rating for Doas. Serves 11% of market just from selling imported vehicles... DOAS was opened to the public in June 2004 as the exclusive importer and distributor for Volkswagen passenger cars in Turkey (VW, Audi, Porsche, Seat, and Skoda), VW light commercial vehicles and Scania trucks and Krone trailers. The Company captured a 10.8% share of the overall market in 2004, with total sales of 78,889 vehicles. Better than expected 9M05 figures on the back of a strong 2004 Turkey s automotive market expanded by 88% in 2004 with sales of motor vehicles hitting an all-time high of 753,731. This growth was spurred by the fall in interest rates on consumer loans, pent-up demand, a strong TL, an improving macroeconomic environment and finally the scrap incentive, which was applied until May DOAS benefited from this strong demand through the successful launch of new models and its high-end product portfolio started with a significant contraction, and the Turkish automotive industry contracted by 15% y-o-y over the first six months of However, the market started to recover in July and the 10-month period closed with a contraction of just 4% for the overall industry. Our revised forecast envisages a contraction of just 3% by the year-end, compared to the 18% contraction forecast at the beginning of the year. Distinct dividend policy The Company has a policy of distributing high dividends. DOAS guarantees to distribute 50% of its distributable income as cash or as stock dividends between Still very attractive valuation, without the MVIS Our DCF-driven target value for DOAS is US$ 700 mn, without the value MVIS. We value MVIS at US$ 45 mn and if the transfer of operating rights of MVIS is approved the firm s value will further improve to US$ 745 mn. But, currently, we do not include it to our target Mcap /04 10/04 02/05 06/05 10/05 40,000 32,000 24,000 16,000 8,000 - IFRS29 Forecasts and Ratios Fiscal Sales Net Profit EBITDA P/E EV/Sales EV/Ebitda Year (US$ mn) (US$ mn) (US$ mn) (X) (X) (X) , E 1, E 1, E 1, Nur Karabacak Tel: (90-212) nkarabacak@atainvest.com 12 December

3 Valuation We value DOAS at US$ 700 mn... We valued DOAS using Discounted Cash Flow analysis. Our DCF driven target value for Doas is US$ 700 mn, implying 42% upside potential from the current Mcap of US$ 493 mn. We have assumed a conservative CAGR of 2.6% for the growth of the automotive industry between However, we assumed a higher CAGR of 4.5% for Doas over the same period in terms of unit sales. We project a 4% fall in revenues for 2005 and a 15% growth in EBITDA. Imports and distribution account for around 75% of EBIT, while automotive-related businesses contribute 21% to EBIT. The contribution of the import and distribution segment to sales revenues is 70%. Under stable and favorable macroeconomic conditions, we believe the Company will capture further market share through the launch of new models. Our estimates suggest an 12% market share for DOAS. We took the 2030 Turkish Eurobond rate as the risk-free rate, which tends to around 8%. With a risk-free rate of 8%, the WACC is calculated at 10.2%. DCF Valuation Summary 2005 (US$ mn) Forecast Cash Flow Period Terminal Growth Rate 1% PV of Free Cash Flows 505 PV of Terminal Value 165 Net Cash 2005E 30 DCF Value 700 Number of Shares 110,000,000 Value of VIS 45 Target Market Cap 700 Current Market Cap 493 Discount (-)/ Premium (+) -30% Upside Potential 42% Due to recent uncertainty occured after the decision taken by the Council of State, yesterday, we do not add the value of MVIS to our fair Mcap calculation, which we previously included. Please kindly, check the following page for the valuation of MVIS. Source: Ata Invest Estimates 2

4 Valuation (cont d ) Value of Motor Vehicle Inspection Stations (MVIS) After deducting the government s share we value the VIS at US$ 136 mn. Participation value of Doas to the value is US$ 45 mn, with 33.3% stake. Total planned investment for the project for 20 years is in between US $ 120 mn and US$ 150 mn. This business profit margins are high, while costs are very low due to its service business characteristic. Consortium has the right to provide franchising to the third parties for the stations. Average pay-back period of the project is forecasted to be 3-4 years and expected revenue generation for twenty years is around US$ 12 bn, as net cash flow projected is US$ 1.5 bn, again for the twentyyears period. The venture will also permit cross-selling opportunities, which are expected to increase revenue by at least 20%. The government s share, will be 30% between 1-3 years, 40% 3-10 years and 50% years. Motor Vehicle Inspection Stations 2005 Forecast Cash Flow Period PV of Free Cash Flows 546 PV of Terminal Value 142 Terminal Growth Rate 3% TOTAL Value 688 Finance -552 Total Value 136 DOAS s participation 45 Source: Ata Invest Estimates We assumed 16.3% CAGR at revenues and 30% CAGR at operating cash flow between , which is still lower than the shareholder companies forecasts. We deducted US$ 552 mn lump-sump payment from DCF-driven value at one-time. Cash Flow Statement (US$ mn) P.Car LCV Turck -Bus TOTAL Revenues Government share 30% 30% 40% 40% 40% Government share (US$ mn) TUVTURK revenue Cost of services Gross Profit Tax Gross Profit- Tax Capex Change in Working capital Gross Cash Flow Source: Ata Invest Estimates 3

5 3Q05 results are brilliant Significantly higher than our net income estimation of US$ 38.9 mn, Dogus Otomotiv disclosed US$ 60.5 mn net income for 9M05. The company outpaced FY04 net income of US$ 54.1 mn, at the first nine months 2005, which is a great result as we consider the 6% contraction at the sector. Due to new models, launches of the existing models, together with the strong demand at retail segment (dealerships) and other business lines (consumer finance, second hand car sales), the company exhibited an impressive performance at 3Q05. Positive impact of strong TRY against Euro has also to be highlighted, since Doas is an importer. Doas increased its net income by 78% on q-o-q basis at 3Q to US$ 31.7 mn. It is also crucial to note that, the company obtained this strong bottom-line through operating activities, which makes us confident on the coming periods strong performance. Sales revenues of the company declined by 11% at 9M05 to US $ 1,217 mn compared to the same period previous year, which is in line with the contraction at the sector. However, the company managed to increase its sales revenues by 12% on q-o-q to US$ 491 mn at 3Q05. Note that, November and December are the most active months of all in automotive sector and Doas has very strong positioning in the market for these two months, due to its new models and launches. On unit basis, the company sold 32,821 passenger cars in 9M05, which was 41,131 in 9M04. The company s market share at 9M05 at PC segment was 11%. Light commercial vehicle (LCV) sales of the company, on the other hand, increased by 10% in 9M05 to 22,503. The company increased its market share at LCV segment to 12% at 9M05, from its 9M04 level of 11%. Turkey is the second largest LCV market of the world for VW after Germany. Higher than expected operational performance affected the company s profit margins, as well. At 3Q05, the company increased its gross margin to 16% versus 14% at 2Q05, Ebitda margin to 9% versus 6% at 2Q05, and lastly net margin to 6% from 4% at 2Q05. In 9M05, gross margin increased to 15%, Ebitda margin increased to 7% and net margin increased to 5%, which are all 1 percentage point over 1H05 figures. The company managed to increase its profitability, without losing market share, which is generally a zerosum game, in other words, one has to accept decrease at its market share, in order to increase its profitability or the opposite. The company had only US$ 1.6 mn net other operating income (including net financial expenses) at 3Q, which was also US$ 1.6 mn at 2Q and US$ 4.1 mn at 1Q, which implies US$ 7.3 mn net other operating income (including net financial expenses) for 9M05. Majority of the other operating income came from the income from participations. Doas had US$ 9.7 mn short-term and US$ 3.9 mn long-term financial debt, following US$ 45 mn cash assets, this provided the company with a net cash position of US$ 31.5 mn, as of end-3q. The company had US$ 9 mn net debt position at 2Q and US$ 27.5 mn net debt position at the same period previous year. Note that, 4

6 Doas will distribute at least 50% of its distributable earnings to its shareholders as cash or stock dividends between The company s cash dividends corresponded to a high 9% dividend yield in 2004, which we expect to be at the same levels in The company generated US$ 52.7 mn cash from its operating activities at the first nine months of 2005, while its used US$ 4.6 mn cash for its investment and US$ 56.2 mn cash for its financing activities. Doas had a good hedging policy against fx risk. As a net importer, the company had only US$ 20.4 mn open position as of 3Q05, which generally stemmed from the Euro-denominated trade payables. As a reminder, 37% of trade payables had a maturity of between 0-1 months and remaining had a maturity of between 1-3 months, while 98% of trade receivables had a maturity between 0-1 months, which we appraise as a good working capital management. Receivable turnover days of the company stayed same at 14 days at 3Q compared to 2Q, while inventory turnover days were down to 49 days versus 71 days at 2Q and payable turnover days increased to 58 days versus 54 days at 2Q. Ebitda, Net Income & Dividends Financial Highlights (US$ mn) Sales 2,500 2,000 1,500 1, E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 0 Sales 1,727 1,655 1,712 1,776 1,887 1,945 1,967 2,061 2,222 2,328 Ebitda Net Income Dividends Dividends Dividends vs Dividend Yield Dividend Yield 15% 12% 9% 6% 3% E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 0% Dividend Pay-out Dividend Yield 8% 8% 10% 10% 11% 11% 11% 12% 13% 14% Source: Company Data, Ata Invest Estimates 5

7 BALANCE SHEET (US$ mn) 2004A 2005E 2006E 2007E CURRENT ASSETS Cash and Cash Equivalents Short-Term Trade Receivables Short Term Receivables from Related Parties Inventories Other Current Assets Total Current Assets LONG TERM ASSETS Long-Term Financial Assets Investments in Associates Tangible Fixed Assets Intangible Fixed Assets Deferred Tax Assets Other Long-Term Assets Total Fixed Assets T O T A L A S S E T S SHORT TERM LIABILITIES Short-Term Financial Loans Short-Term Trade Payables Short-Term Payables to Related Parties Taxes Payable Other Short-Term Liabilities Total Short-Term Liabilities LONG TERM LIABILITIES Long-Term Financial Loans Provisions for Retirment Pay Deferred Tax Liabilities Total Long-Term Liabilities TOTAL LIABILITIES Minority Interests TOTAL SHAREHOLDERS EQUITY TOTAL LIABILITIES AND S.HOLDER'S EQUITY INCOME STATEMENT 2004/ / / /12 Net Sales 1, , , , Cost of Sales (-) 1, , , , GROSS PROFIT (LOSS) Operating Expenses OPERATING PROFIT (LOSS) Income & Expenses From Other Operations -net Financial Expenses net Net Monetary Gains/ (Losses) Profit Before Tax Taxation on Income (-) Minority Interest NET PROFIT AFTER TAX

8 ATA INVEST INC. Emirhan Cad. Atakule No: 145/ A Istanbul - TURKEY Tel-PBX: DOAS Key Contacts Sales Tel-Direct: Fax: Title Tel-Direct Elif Erdem Asst. Director eerdem@atainvest.com Mehmet İlgen Asst. Director milgen@atainvest.com Emre Yılmaz Associate eyilmaz@atainvest.com Fax: Research 6291 Title Tel-Direct Nergis Kasabalı Senior Vice President nkasabali@atainvest.com Altuğ Karamenderes Chief Economist akaramenderes@atainvest.com Sales - USA AUERBACH GRAYSON & CO INC. 25 West 45th Street New York NY USA Tel-PBX: Title Tel-Direct John Burge EVP jburge@agco.com Can Yazgan VP cyazgan@agco.com Trading - USA Title Tel-Direct Tuncay Cevher VP tcevher@agco.com For additional information, please contact: Mehmet Sami, Executive Board Member Tel-D : Fax : msami@atainvest.com Disclaimer This report has been prepared on behalf of Ata Invest solely for the information of its clients. The information and statistical data contained herein have been obtained from sources which we believe to be reliable but in no way are warranted by us to accuracy or completeness. All opinions and estimates in this report constitute our judgment as of this date and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Ata Invest, with all relevant licenses obtained from the Turkish Capital Market Board, may have taken part in public offerings, or may from time to time perform investment banking or other services or solicit investment banking or business from any company The mentioned in this document. Neither Ata Invest nor any of its officers or employees accepts any liability for any direct or consequential i n - loss arising from any use of this report. This report may not be reproduced, distributed or published by any person for any purpose without the prior consent of Ata Invest. Any investments referred to herein may involve significant risk and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Investors should make their own investment decisions without relying on this report. 7

9 Trading: Operations: Auerbach Grayson & Company Incorporated 25 West 45th Street New York, NY Telephone: (212) WORLD facsimile (212) Contacts: (212) (212) Jonathan L. Auerbach (212) David S. Grayson (212) Sales: John Burge, Head of (212) Conal Saturno-Sanjana, Asian Ex-Japan (212) Richard Kim, Asian Ex-Japan (212) Zoran Milojevic, EMEA & LATAM (212) Darko Horvat, EMEA & LATAM (212) Ryan Floyd, EMEA & LATAM (212) JP Natkin, Russian (212) Igor Chernomorskiy, Russian (212) Timothy Irons, Western European (212) Can Yazgan, EMEA (212) Antoinette Ligas, Western European (212) Chris von Hoffmann, Western European (212) Trading: Julien Libaire, EMEA and European (212) Tuncay Cevher, EMEA (212) Robert Preziosi, European (212) Duncan Sherrer, Asian (212) John Geron, U.S. (212) Todd Hathaway, Asian and LATAM (212) Selim Sari, EMEA (212) Information Systems Research Services: Ismael Sadek, Information Alexander Doncov, Research (212) Operations: Frank Muller, Head of (212)