RAYMOND JAMES - TURKEY

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1 RAYMOND JAMES - TURKEY GLOBAL YATIRIM HOLDING So many projects so little time Global Yatirim/Investment Holding (GIH) is a diversified holding company, with investments in energy, finance, port management and real estate. The company has been gathering natural gas distribution assets over the past two years and aims to become a leading player with the rapid growth in natural gas consumption. In our opinion, GIH s added value lies in originating, evaluating and financing the right projects with the right partners. GIH has recently agreed to sell its brokerage arm, the major asset in the finance unit, to Gruppo SanPaolo IMI at 2.72 times 06E book value. Following this sale, real estate projects would represent 44% of GIH s portfolio. Following the financial crisis in 2001, the Turkish economy is undergoing a massive restructuring in public and private sectors. We view GIH as one of the beneficiaries of this major reform in the Turkish economy. GIH increasingly shies away from projects located in Istanbul due to low profitability and focuses on projects in second tier cities with high IRR. GIH intends to participate in a number of forthcoming privatization projects, including electricity distribution assets, Izmir port and Sabiha Gokcen airport. GIH trades at a 51% discount to its NAV based on our estimates. We initiate coverage with a BUY recommendation and set our 12-month target price at YTL per 2.26 share, representing a 52% upside potential. EQUITY RESEARCH December 22, 2006 Current Price (December 21, 2006) YTL1.49 Current Mcap (mn) US$ mth Target Price YTL2.26 Target Mcap (mn) US$ mth Forecast Returns (US$) Dividend Yield 0.0% Capital Appreciation 51.8% 12-mth Total Return 51.8% Stock Data Ticker # of Shares (mn) 3M Avg. Trd. Vol. (mn) GLYHO.IS BUY GLYHO TI 113 US$ week Range YTL 1.02 YTL 1.98 Market Data ISE 100 YTL/US$ Shareholder Structure 39, Management 37% Foreign Institutional 26% Public 37% Financials (US$ mn) E 2007E 2008E Net Sales % ch yoy n.m EBITDA % ch yoy n.m Net Income % ch yoy n.m Operating Margins E 2007E 2008E Operating Margin 24% 26% 11% 10% EBITDA Margin 31% 33% 13% 10% Net Profit Margin 14% 15% 14% 6% Financial Ratios E 2007E 2008E P/E (US$, x) P/BV (US$, x) Debt/Equity (x) Price Performance 1M 3M YTD YoY US$ Absolute 13% 17% -25% -10% ISE-100 Relative 9% 9% -19% -6% GLYHO-YTL ISE-100 Relative M-05 M-05 J-05 A-05 O-05 N-05 J-06 M-06 A-06 M-06 J-06 A-06 O-06 D "This publication has been prepared by Raymond James Yatirim Menkul Kiymetler A.S. and may be distributed by it and its affiliated companies (collectively "Raymond James") solely for the information of the customers of Raymond James. While reasonable care has been used in its preparation, this report does not purport to be a complete description of the securities, markets or developments referred to herein, and Raymond James does not warrant its accuracy or completeness. The information contained herein may be changed without notice. To the extent permitted by law, Raymond James, or its officers, employees or agents, may have bought or sold the securities mentioned in this report, or may do so in the future. Raymond James may perform investment banking or other services (including acting as adviser, lender or manager) for, or solicit investment banking or other business from, any company mentioned in this report. This report is not an offer, or solicitation of an offer, to buy or sell any security mentioned herein. This publication is for distribution in the United Kingdom only to persons of the kind described in Article 11 (3) of the Financial Services Act 1986 and may not be distributed to or passed on to any other class of persons, including private investors." Ali Riza Incekara, CFA ali.incekara@rj.com.tr Kerem Tezcan kerem.tezcan@rj.com.tr Afsin Ozdemir afsin.ozdemir@rj.com.tr

2 INVESTMENT POSITIVES A small but dynamic company Global Yatirim/Investment Holding (GIH) is a diversified holding company with investments in energy, finance, port management and real estate. GIH is a small company, even in Turkish context. But size works both ways. While many large conglomerates were not interested in small projects, GIH has invested in successful and profitable small projects that have significant positive impact on its valuation. Moreover, with its roots in investment banking, GIH has a strong team of analysts and can take decisions quickly. The company s added value lies in originating, evaluating and executing the right projects with right partners, in our opinion. A beneficiary of the massive reform in the Turkish economy Turkey has been going through a massive restructuring for the past four years. The government has sold off a number of key state owned enterprises that had been on the privatization list for more than two decades. Turkish Telecom, Tupras and Erdemir are only a few to name. However, the restructuring is not limited to state assets. The financial crisis in 2001 rocked the balances in the private sector too. Many groups, particularly those with failing banks in their portfolio, went bankrupt and had to hand over their assets to state institutions. State Deposit Insurance Fund (SDIF), which had gathered a huge portfolio of assets via bankrupt banks, has been gradually selling these assets. Many entrepreneurs, including GIH, who weathered the storm in 2001, continue gobbling up these assets. Exposure to sound projects with high IRR We like the port management business, providing stable cash flow and an estimated IRR in excess of 20%. GIH has teamed up with Royal Caribbean Cruise lines to operate Kusadasi port and with Celebi Holding to operate Antalya port. Similarly, real estate projects offer high return particularly in today s vibrant operating environment. Most of the ongoing real estate projects permits have already been obtained. While exit in real estate is obvious, we believe that businesses such ports or natural gas can be repackaged and sold to strategic investors at a nice premium in the future. Growth via forthcoming projects is promising There are a number of promising projects on the horizon. The government plans to privatize Izmir, Derince and Bandirma ports. GIH has teamed up with Hutchison Port Holdings and Exporters Association to bid for these projects. The company plans to enter the water and electricity distribution projects particularly in Anatolia, creating synergies with the established natural gas business. Company Report 2

3 Origination is more important than financing the project Another important point to highlight is the available financing sources for these projects. Five years ago, it was close to impossible to find financing for long term projects in Turkey. Political and economic instability, poor regulatory framework among other factors have resulted in high country risk, translating into either prohibitively high interest rates or no long term financing at all. However, with the positive political and economic backdrop, foreign and local banks are now eager to finance the long term projects in Turkey. This puts a number of small players back on the map as identifying and acquiring the right project at the right price is far more important than the ability to have a large equity base. A consolidator in the natural gas distribution GIH has been gathering natural gas distribution assets over the past two years and aims to become a leading player with the rapid growth in natural gas consumption. GIH managed to merge a number of regions and convinced other players to join forces and become shareholders in the recently established Energaz, the principal operating company in the natural gas business. Energaz has the operating rights in 9 regions, of which 6 are currently operational. Despite slim margins, natural gas distribution is a stable cash flow business. GIH aims to enter natural gas trading business over the next two years. Attractive valuation 51% discount to NAV We used discounted cash flow analysis to value most of GIH s assets. Based on our estimated NAV, GIH currently trades at 51% discount to NAV. While quality projects should narrow the discount, the lack of established track record in exiting investments and the relatively small size of the company are valid concerns for investors, in our view. At this juncture, we feel more comfortable at a discount level of 25%, translating into an equity value of US$179mn, which offers a 52% upside potential. Company Report 3

4 RISKS Competitive pressure may erode profitability in forthcoming projects Almost all major Turkish holding companies have started to invest in real estate projects or wondering how to capitalize on this growing trend. This enthusiasm can be partly attributed to the wanna-be phenomenon among Turkish businessmen as evidenced in textile and retail sectors in the past. Although the company has strong project evaluation and management team, aggressive bidders or unrealistic expectations may force GIH to overpay in the upcoming projects. Therefore, rising competition in the forthcoming tenders could reduce IRR. No established track record Although the management has significant business experience, GIH s history as an investment company dates back only to The company has teamed up with the right partners to provide technical support and know how but is new in running these businesses. More importantly, apart from the sale of Global Securities, GIH does not have an established track record in exiting major investments. Potential rights issue is always a risk With an equity base of about US$100mn, GIH is a relatively small company. While debt financing is increasingly available nowadays, the company would be in need of a capital injection should it win another sizeable project. In addition, controlling shareholders may opt for a preemptive cash injection to build a war chest before entering the tenders. New businesses mean new risks Management states that they are interested in acquiring new businesses should return prospects meet the IRR requirements. Although the company has a strong project evaluation and management team, operating environments in the newly acquired businesses can change or deviate from initial expectations, which could eventually lower the project s profitability in a later stage. Reliance on real estate Following the sale of Global Securities, real estate should account for 44% of GIH s NAV. Interest rates play an integral part in determining the profitability of real estate projects. However, twin elections in 2007 may hinder a rapid decline in interest rates. Opaque shareholder structure According to stock exchange filings, GIH s free float is 90%. Management and controlling shareholders, including Mehmet Kutman directly and indirectly own 37% of the company while the remainder is publicly owned. We would have felt more comfortable with a clearer ownership structure that would have revealed the ultimate beneficiaries. Company Report 4

5 GLOBAL INVESTMENT HOLDING IN BRIEF Background GIH s origins date back to early 1990s when Mr. Kutman established the brokerage arm of the group, Global Menkul Degerler together with founding partner Erol Goker. Parallel to the growth of the Turkish capital markets throughout 90s, the company grew rapidly, becoming one of the top brokerage houses in Turkey. However, with increasing competition, margins have declined and the company struggled during turbulent times in Turkish financial markets in 1998 and In 2004, the board decided to restructure the Global group and converted the listed GMD into a holding company and renamed it Global Investment Holding. The board formulated the new strategy, identifying energy and infrastructure segments as high growth areas. In addition to the finance segment, two new business units, energy and infrastructure, were formed to implement this strategy. GIH ORGANIZATIONAL STRUCTURE INFRASTRUCTURE ENERGY FINANCE Port Management 72.5% 40% Kusadasi Cruise Port Port of Antalya 50.1% EIH 53% ENERGAZ 80% 100% Global Securities Real Estate 20% 20% 20% Park Plaza Project Kusadasi Holiday Vil. Galata Building 62% 30% 90% 45% 63% 90% Konya Corum Eregli Usak Nigde-Nevsehir Denizli 100% Global Portfolio Management Global Life Insurance Others 99.4% Global Romania 100% Bodrum Luxury Villas 90% Antalya 100% Global Kazakhastan 90% Karaman 97% Hedef Securities REIT 31.4% Pera Real Estate Inv. Trust 90% Erzincan Source: The Company Breakdown of the Portfolio Ene r gy 13% Finance 14% Source: The Company, RJS Real Es tate 73% Company Report 5

6 Infrastructure segment includes activities in the real estate and port management businesses. GIH currently has the operating rights of Kusadasi and Antalya ports. In real estate, there are a number of different projects, including Park Plaza, a landmark project in Istanbul as well as Kusadasi Holiday village. Infrastructure segment accounted for 10% of total revenues and 6% of EBITDA in Energy business includes activities mainly in natural gas distribution, a total of 9 regions, of which 6 are currently operational. In the natural gas distribution business, GIH teamed up with STFA, a local construction group, and formed Energy Investment Holding (EIH). GIH owns 50.1% of EIH, which has 53% ownership in Energaz, the principal operating company in the natural gas distribution business. Energy segment s contribution was small to the consolidated financials in 2005 due to the immature stage of operations and proportionate consolidation method. Finance segment accounted for 81% of total revenues and 86% of EBITDA in The flagship company, GMD, is the major contributor to consolidated financials. However, this is about to change as GIH has agreed to sell the majority stake to San Paolo IMI. Breakdown of Revenues Breakdown of Revenues E Finance 81% Real Estate 10% Source: The Company, RJS Ene r gy 9% Finance 1% Real Estate 17% Ene r gy 82% Classifying GIH is a difficult task. Is it a conglomerate, a private equity firm, a REIT with a bouquet of energy assets or simply a business development company? There is probably no clear answer to that. It certainly does not look like a traditional conglomerate as it focuses on couple of sectors, particularly after the sale of GMD. Although it functions like a private equity firm, the capital structure, the management and the investor base are certainly different from a private equity firm. GIH simply originates, acquires and manages projects. However, it does not have an established track record in this field as it restructured and transformed itself into a holding company only two years ago. In our opinion, GIH s added value lies in originating, evaluating and financing the right projects with right partners. A case in point is the Kusadasi cruise port, where it teamed up with Royal Caribbean, a leading cruise vessel operator. It makes sense for the cruise operator to strike a deal with a port operator as it would have full control over its passengers and increase the revenue per passenger. Company Report 6

7 The controlling shareholders and management own 37% of GIH, while foreign institutional investors and public have 27% and 36% stake, respectively. Ownership structure GIH Ownership Structure Public 37% Management& Controlling shares 37% Foreign Institutions 26% Management&Controlling shares Foreign Institutions Public Source:Company Company Report 7

8 VALUATION We believe that Sum of the Parts valuation is the correct method to value GIH. There are a number of projects that have long investment horizons and have different business dynamics preventing us to use one size fits all approach. As for the finance segment, the details of the sale of the brokerage arm have already been disclosed. 30% of the company will be sold at 2.0 times 05 book value of US$13.7mn, while an additional 40% will be sold at 2.72 times 06 year end book value, which we estimate at around US$16.5mn. This would yield a combined valuation of US$35.8mn for GMD or 15% of the portfolio. Global Yatırım Holding Valuation Market Cap. / Equity Portfolio as % of Sum of the Parts Valuation Method Equity Value Share Value total US$mn US$mn portfolio Energy Business Konya DCF % 5.4 2% Corum DCF % 1.0 0% Usak DCF % 0.6 0% Eregli DCF % 1.9 1% Nigde-Nevsehir DCF % 2.8 1% Denizli DCF % 5.9 3% Antalya DCF % % Erzincan DCF % 1.1 0% Karaman DCF % 1.0 0% Total % Infrastructure Unit Kusadasi Cruise Port DCF % % Antalya Port DCF % % Kusadasi Holiday Village project DCF % % Parkhotel project DCF % % Pera REIT Market Value % 6.5 3% Veli Alemdar Han DCF % 7.5 3% Bodrum Luxury Villas DCF % 4.9 2% Total % Finance Segment Global Securities 05 P/BV@2.72x % % GAM 3% of AUM % 2.2 1% Others (Hedef, Global Romania) % 1.6 1% Total % Total Portfolio % Net Cash / (Debt) 6.9 NAV Mcap Prem/Disc to NAV -50.6% As for other projects, including energy and real estate, we have used discounted cash flow analysis. We have assumed a risk free rate of 7.50% in our DCF calculations and used 450 bps equity risk premium, translating into 12% cost of equity. Based on our DCF analysis, we calculate the combined value of energy business to be around US$ 30.1mn, representing 13% of the portfolio. With a combined value of US$169.3mn, infrastructure unit accounts for 73% of the portfolio. Within infrastructure, port management represents 29% of the portfolio. In conclusion, we calculate the total portfolio value of GIH to be Company Report 8

9 US$231.9mn. Adding the estimated net cash of US$6.9mn, we find the NAV 238.8mn, representing a 51% discount to the current market capitalization of the company. We have also run a sensitivity analysis with different cost of equity rates for GIH. A 100 decline in cost of equity would increase the portfolio value of GIH by 5% to US$ 244mn. Similarly, we find the equity value to be around US$215mn should cost of equity rise by 100bps. Based on our estimated NAV, GIH currently trades at 51% discount to NAV. While quality and established projects should narrow the discount, the lack of established track record and the relatively small size of the company are valid concerns for investors, in our view. At this juncture, we feel more comfortable at a discount level of 25%, translating into an equity value of US$179mn, which offers 52% upside potential. GIH Portfolio Value Sensitivity Analysis (US$mn) US$ 215mn US$ 232mn US$ 244mn bps bps We have also looked at listed private equity firms to compare the discount levels. There are only few listed private equity companies as most developed markets view private equity as a risky asset class and do not give access to retail investors. Most of the private equity firms seen below are listed in Australia and have an average discount of 15%. Discount of Key Data for Listed Private Equity Funds Name of the listed private equity funds Mcap US$ mn Discount Auselect % Colonial Private Equity % International Wine Invest % Biotech Capital % Lion Selection Group % Strategic PDF % Macquarie Private Equity % Average % Source: Bloomberg Company Report 9

10 PORT MANAGEMENT: GIH currently operates Kusadasi and Antalya ports. The company teamed up with Hutchison Port Holdings and intends to bid for Izmir, Derince and Bandirma ports along with the government s privatization efforts. Kusadasi Cruise Port: GIH acquired 30-year operating rights of Kusadasi Cruise Port together with Royal Caribbean Cruise Lines (RC) in July 2003 for US$24.3mn. GIH currently holds 72.5% of the project while RC owns the remaining 27.5%. Kusadasi port is located on the Aegean cost and is one of the busiest ports in the region. It houses a brand new terminal with a shopping complex covering a retail area of 4,885 sqm. The port has four types of revenue sources; vessel handling and passenger landing fees, duty free revenues and rental revenues. An average of 400 vessels has visited Kusadasi port annually over the past four years, bringing an average of 700 passengers in each visit. There is an average landing fee of US$6 for each customer. In addition, there is heavy motorboat traffic between the Kusadasi and Greek Island Samos. We forecast the port to generate US$ 10.3mn in annual vessel handling and passenger revenues in 2007, accounting for 80% of the total. The remainder should come from rental revenues in the shopping complex, which includes 43 stores. GIH has a 5-year duty free contract of EUR20mn with Koc group s Setur, of which 30% belongs to the port. With stable operating expenses at around US$3mn, we project an EBITDA of US$9.7mn for Kusadasi port in Our DCF analysis yields an equity value of US$70.5mn for the project, translating into US$ 51.1mn for GIH s 72.5% stake. Key figures of Kusadasi Cruise Port: Number of cruise ships '07E 611 Total number of passengers '07E 488,735 Revenues '07E (US$mn) 12.8 EBITDA 07E (US$mn) 9.7 DCF Equity Value (US$mn) 70.5 Value to GIH % stake- (US$mn) 51.1 Source: Company data, RJS estimates Antalya Port: Together with Celebi Holding, GIH acquired the operating rights of Antalya port until The contract, in which GIH has a 40% stake, was signed for US$61mn in October Antalya port is a multifunctional port, encompassing a cruise port, a marina and a commercial port. With 2970 ship per annum capacity, the port is situated on a total area of 136,000sqm in Antalya. The city has the fastest growing population in Turkey and is a favorite destination for tourists. Celebi Holding, which also has a 40% stake in the project, is also the operator of Antalya International Airport. GIH has obtained a US$40mn loan with 2 year grace period maturing in Antalya port handled 1.6mn tons of cargo and 43 cruise vessels in We project the port to handle 1.7mn cargo in 2007 and vessels with combined GRT of 4.3mn tones, Company Report 10

11 generating US$13.9mn in revenues. Operating expenses are relatively stable at around US$4.6mn per annum. Management forecasts investments to total US$11mn over the next four years. Our DCF analysis yields an equity value of US$43mn for Antalya port. Considering GIH s 40% stake, this corresponds to an equity value of US$17.2mn for GIH. REAL ESTATE: Key figures of Antalya Port: Total cargo in '07E ('000 tonnes) 1,736 Total number of passengers '07E 32,500 Revenues '07E (US$mn) 13.9 EBITDA 07E (US$mn) 9.3 DCF Equity Value (US$mn) 43 Value to GIH - 40% stake- (US$mn) 17.2 Source: Company data, RJS estimates Park Plaza Residential Project: Global Investment Holding (GIH) acquired the land from Surmeli Group for US$34mn back in 2005 via Bogazici Holding, in which GIH has a 20% stake and the remaining 80% belongs to Ofer group. According to the approved zoning and permit, total construction area was set as 88,829 sqm, including residential (57,300 sqm), and public area & car park (31,529 sqm). Residential units will be high-end luxury residences and according to our expectations, average price per sqm will be US$9,500, also inline with market rates. Although total number of units are not announced yet, we calculate that the residential sales of the project will generate US$381 mn net revenue ($9,500 x 57,300 - land and construction cost). The partnership acquired US$10 mn loan in July 2005 and scheduled to acquire another US$9 mn loan by the end of 2006 in order to commence construction. The partnership will acquire US$19 mn and US$7 mn loan respectively to use during the construction phase. Our DCF based valuation points to a value of US$174 mn. Consequently, the effect of the project to GIH s NAV will be US$56 mn Park Plaza Residential area to be sold (sqm) 57,300 Average Price per sqm (US$) 9,500 Revenue from residential sales (US$ mn) 544 Net Income from residential units sale (US$ mn) 381 Public area & Car park (sqm) 31,529 DCF Value (US$ mn) 280 Value to GIH - 20% stake - US$mn 56 Kusadasi Mixed-Use Project: This is the second mixed-use project that contains 1,254 residential units, to be completed in four phases over four years and one five star and one boutique hotel. Just as with Park Plaza project, GIH has 20% stake in Kusadasi, and remaining 80% belongs to Ofer group. Total construction area of the residential units will be 150,000 sqm and prices are set to attract foreigner individuals who consider purchasing the apartments as a summer house (Spain model). We expect that net revenue from the sale of Company Report 11

12 residential units will be US$92 mn. GIH-Bogazici Holding partnership will generate US$7 mn revenue from the two hotels. GIH-Bogazici Holding will acquire two tranches of loan, US$45 mn in 2007 and US$15 mn in 2008 in order to finance the project. Loans will have 2-year grace period and a maturity of 8 years. Consequently, we calculate Kusadasi project s value at US$131mn based in our DCF analysis. Accordingly, GIH s stake will be US$26 mn. Kusadasi Residential area to be sold (sqm) 150,000 Residential units to be sold 1,254 Average Price per sqm (US$) 1,500 Average area per apartment (sqm) 118 Revenue from residential sales (US$ mn) 222 Net Income from residential unit sale (US$ mn) 92 5-Star Hotel construction area (sqm) 22,727 Annual Revenues from Hotels (US$ mn) 7 DCF Value (US$ mn) 131 Value to GIH - 20% stake - US$mn 26 Veli Alemdar Boutique Hotel: GIH acquired Veli Alemdar Building for US$22-23 mn. It is adjacent to the company s headquarters in the Karakoy district of Istanbul. Veli Alemdar Han is a 9-storey 12,000 sqm historical building. GIH has a 20% stake in the building. The project envisages the renovation and redevelopment of the structure as a boutique hotel with approximately 440 bed capacity. We expect that the GIH-Bogazici Holding partnership will generate US$13 mn in annual revenues from the hotel, under the assumption that the hotel will operate with 70% occupancy and charge US$125 per person per night. In order to calculate future revenues, we held occupancy rate constant and increased accommodation income with the inflation rate. According to our assumptions, DCF based valuation of Veli Alemdar project is US$38 mn. Consequently, GIH s stake for Veli Alemdar is US$8 mn. Veli Alemdar Boutique Hotel construction area (sqm) 12,000 Annual Revenues from Hotel (US$ mn) 13 DCF Value (US$ mn) 38 Value to GIH - 20% stake - US$mn 8 Bodrum Villa Project: Unlike the three projects mentioned above, GIH owns 100% of the Bodrum project. However, the holding has a 45% revenue sharing agreement with the landlord. Construction permits and zoning have not been approved yet. The project involves 9 multi-level luxury villas (500 sqm), each with private swimming pools on 3,000 sqm hillside lots, and 24 smaller villas (110 sqm). We expect that the construction will start in 3Q07, and despite the small size of the project, it is expected to be completed by the end of 2008, due to construction restriction in summer months in Bodrum. We calculate that GIH will receive US$12 mn from the sale of villas after deducting landlord s share. According to our DCF-based valuation, we calculate the value of Bodrum villa project as US$5 mn. Company Report 12

13 PERA REIT Bodrum Residential area yo be sold (sqm) 10,000 Villas units to be sold 33 Average Price per sqm (US$) 3,120 Revenue from residential sales (US$ mn) 12 Net Income from residential unit sale (US$ mn) 3 DCF Value (US$ mn) 5 Value to GIH - 100% stake - US$mn 5 Pera REIT was transformed from being a closed-end fund into a real estate investment trust in September Pera had already been a listed company on the ISE. As of 9M06, Global Investment Holding (GIH) holds 31.65% and GIH s subsidiary Global Insurance holds 4.51% of Pera REIT. Following the transformation to a real estate investment trust, GIH transferred its Denizli mixed-used project to Pera REIT. Denizli project involves 360-bed capacity 5 star hotel, 75K sqm shopping center and approximately 700 apartments. In addition to Denizli project Vakif Han is expected to be transferred to Pera REIT by 1Q06. Vakif Han building leased from the Foundations Administration for 15 years. FINANCE : Finance unit has been the backbone of GIH since its inception. Mehmet Kutman set up the brokerage arm of the group, called Global Menkul Degerler back in early 90s, when Turkish capital markets were at its infancy. Along with the development in the Turkish financial markets, GMD flourished and has become one of the leading names in Turkish brokerage community. The brokerage business generates US$54mn in revenues and US$14mn in EBITDA, accounting for 81% and 86% of the total in 2005, respectively. In October 2005, GIH sold its 20% stake in (GMD), its brokerage arm, to San Paulo IMI at 1.5 times 2005 book value. In October 2006, GIH signed another agreement with Banca IMI selling a further 30% at 2.0 times 2005 and 40% at 2.72 times of 2006 book value. The deal is subject to revisions in GMD s book value at year end but should fetch a total of US$26mn for GIH in 2007, based on our estimates. According to the agreement with IMI, GIH needs to transfer the Global brand to IMI after the transaction is completed. Therefore, GIH needs to change its trading name until the end of Separately, GIH has recently agreed to sell its life insurance business to Denizbank for US$1.9mn in December The remaining assets are small in size, including the portfolio management, Hedef brokerage business and other small finance units, which we value at around US$4mn in total. Following the sale of GMD, the impact of the finance unit will be diminished significantly on GIH. Company Report 13

14 NATURAL GAS SECTOR IN TURKEY Residential and industrial demand for natural gas has been increasing Natural gas demand in Turkey has been increasing over the years due to limited natural gas production capacity and insufficient reserves. The share of residential natural gas demand in total figure increased to 22% in 2005 from 1% in 1990 because of increasing trend in composite demand for natural gas at the expense of coal and fuel-oil. Natural gas also experienced growth in various industries since it increases efficiency significantly. Turkey's Natural Gas Demand Composition in 1990 and 2005 Residential 1% Industrial 7% Fertilisers 2% Residential 22% Fertilisers 15% Electricity Generation 77% Industrial 19% Source: BOTAS 1990 Electricity Generation 57% 2005 Domestic Natural Gas Production is still at low levels Natural Gas production has been fluctuating over the years in Turkey, but still at low levels. The natural gas production capacity experienced a CAGR of 3.7% between 1987 and Historical Natural Gas Production of Turkey over the years (mn m3) Source:TPAO Natural Gas Production The Guard of Natural Gas Sector Energy Market Regulatory Authority (EMRA) has been acting as a guard of the energy market in Turkey. The Natural Gas Law enables the authority to regulate all natural gas activities and to supply sufficient natural gas to the market. Natural Gas Trader of Turkey BOTAS was established as a subsidiary of Turkish Petroleum Corporation (TPAO) with the intention of transporting crude oil to Iskenderun Gulf. Later, the company was restructured into a State Company Report 14

15 Economic Enterprise (SEE) in Thus, with the implementation of Natural Gas Market Law, BOTAS became a natural gas trader of Turkey, responsible for import, distribution, sales and pricing activities. NATURAL GAS SECTOR: OPPORTUNITIES AND CHALLENGES Growth drivers for natural gas sector: Low penetration levels Although the privatization of natural gas distribution rights increased the gas consumption level in Turkey, the penetration and consumption level per subscriber is still low compared to European countries. Gas Consumption Distribution Line per subscriber (m3) per subscriber (m) Italy Austria Hungary Turkey Source:CEER, 2005 Geographic advantage Turkey is at the intersection point of three continents and acting as a bridge between Middle East gas supply and European demand. With the completion of gas storage projects, Turkey will also have the sufficient infrastructure for the storage, usage and transfer of natural gas to European countries. Turkey imports its natural gas mostly from Russian countries (38%), Iran (24%) and Bluestream (22%). Source:BOTAS New investment opportunities Restructuring of the energy sector in Turkey will attract foreign investors and the recent opening of the gas pipelines is expected to increase trade with the European countries. Company Report 15

16 Challenges for natural gas sector in terms of gas distribution: Restrictions in terms of Distribution Regions The uniqueness of each gas distribution region such as geographical conditions, urban population plus growth potential of residential and industrial subscribers are the main challenges of the gas distributors. The privatization of gas distribution rights for 30 years with a renewal chance of an additional 30 years is a barrier to entry for new investors. Competition between investors The competition to acquire the gas distribution rights of a specified region might result in lower subscriber and service fees. ENERGAZ / COMPANY OVERVIEW Energaz A.S was established with the intention of combining the business activities of 9 natural gas distribution company under one entity. Okyanus Group, Global Investment Holding, STFA Group and TEFIROM are the existing owners of the company. Energaz is expected to bid for EMRA s (Energy Market Regulatory Authority) remaining natural gas and electric distribution tenders. Remaining gas distribution tenders for Agri, Havza-Vezirkoru-Bafra, Cukurova, Van, Seydisehir-Cumra regions are expected to be completed in *Acquisition of Konya and Corum regions' distribution rights * Konya and Corum region - Gas Distribution started. * Investments into Konya and Corum region. *Reorganization under Energaz * Investments into Antalya, Erzincan and Karaman Regions. * Gas Trading & Storage Projects. * Acquisition of Konya-Eregli regions' distribution right. *Acquisition of Usak, Denizli and Nigde-Nevsehir regions' distribution rights. * Gas distribution starts in Usak and Konya-Eregli regions. * Investments into Denizli and Nevsehir-Nigde Regions. * Acquisition of Antalya, Erzincan, Karaman regions' distribution rights. * Gas Distribution tenders for remaining regions * Electricity distribution tenders. Source:Company Energaz/Timeline Function of Gas Distribution Companies in Turkey Gas distribution companies activities include constructing, operating, and expanding distribution network to deliver natural gas through steel pipes within a licensed region. Company Report 16

17 The chart below depicts the gas distribution framework of Energaz in a specified region; Steel Pipes Regional Hubs City Hub Steel Pipes End Users BOTAS INVESTMENT BY DISTRIBUTOR ENERGAZ / OWNERSHIP STRUCTURE Energaz s major shareholders are EIH (Energy Investment Holding) (53%), Okyanus Group (29.5%) and Tefirom (17.5%). Global Investment Holding owns a 26.6% indirect stake in Energaz through its 50.1% stake in EIH. STFA Group also has 49.9% of Energy Investment Holding (EIH). The table below illustrates the reorganized structure of Energaz which is expected to be completed by Q4 06. GIH STFA 50% 50% EIH 53% Okyanus Tefirom 30% 18% ENERGAZ Konya Corum Eregli Analya Usak Karaman Niğde/Nevşehir Erzincan Denizli 63% 30% 90% 90% 45% 90% 63% 90% 90% Soruce: The Company, RJS STFA Group: Founded in 1938 by two civil engineers in Turkey, STFA Group has specialized mainly in road, bridge and tunnel construction as well as other engineering activities. With its 700km pipeline experience, the company is an important partner for Global Investment Holding. STFA Group has a 26.4% indirect stake in Energaz. Company Report 17

18 Okyanus Group: Okyanus Group was established by Nusret Argun in The group currently operates in construction, residential unit development, health-care, energy and tourism sectors. The company has a 29.5% stake in Energaz. Okyanus Group also has (50/50) joint venture with PERA REIT for real estate project development in Denizli. Tefirom Group: Tefirom Group has operations in construction (contracting), logistics and international transportation. The company also engages in foreign trade and educational services. The group has a 17.5% stake in Energaz. ENERGAZ / COMPETITORS Energaz currently operates in 9 different regions of Turkey. As the first mover in the natural gas distribution sector, the company operates in major regions at profitable terms. Aksa, the major competitor, runs 13 smaller regions. Zorlu Holding operates in two large regions with an estimated subscriber figure of 248K in Energaz beats Aksa and Zorlu Holding with its strong subscriber figure combined subscriber figure for Energaz is estimated to be 708K in 9 regions (10 cities). ENERGAZ / INVESTMENT OPPORTUNITIES IN NATURAL GAS Gas distribution tenders Energaz is expected to submit bid for the 5 remaining regions, among which Cukurova is the largest region including cities with high subscriber growth potential like Adana and Mersin. Gas Storage The need for underground natural gas storage has been increasing in line with Turkey s rising consumption trend. It is estimated that the total natural gas consumption in Turkey will reach to 45bn m 3 in 2010, therefore, TPAO and BOTAS signed Natural Gas Underground Storage Project in 1999 to construct a gas storage unit with a capacity of 1.6bn m 3. The project s aim is to regulate the seasonal fluctuations in consumption and to Company Report 18

19 provide the natural gas supply to the Turkish market. Energaz is planning to become a part of these projects in future. BOTAS s projects: i) Salt Lake Natural Gas Underground Storage Project, estimated to begin in 2007 and to be completed by ii) Tarsus Natural Gas Underground Project iii) TPAO s (Turkish Petroleum A.O) studies for Northern Marmara and Degirmenkoy gas fields for underground gas storage facilities are still continuing. Gas Trading In line with the government s plan of unbundling natural gas activities, Botas needs to limit its natural gas imports to 20% of total consumption by As Botas transfers its current gas purchase contracts to third parties, Energaz expects to bid at the tenders and acquire some portion of Botas s gas purchase agreements in ENERGAZ / BUSINESS OVERVIEW (GIH) increases exposure to the energy sector Global Investment Holding (GIH) is active in the energy sector with its 26.6% indirect stake in Energaz. Energy segment constitutes 12% of current NAV and accounts for 27% of consolidated revenues in GIH financials in 2006E. Energaz is planning to submit bids for gas distribution tenders, in which Aydin-Mugla and Cukurova regions have more subscriber potential compared to other regions. GIH also aims to diversify its energy activities by applying EMRA s electric distribution tenders. Global Investment Holding s (GIH) consolidated revenues are promising high growth, but..? By providing door-to-door gas distribution service to its subscribers, GIH s total consolidated revenue from Energaz is expected to increase by more than threefold to US$22 mn in 2006E. We expect a CAGR of 17% in total consolidated revenues between 2007 and 2017E on the back of a 18% CAGR in gas revenues. Due to the tough competition during natural gas distribution tenders, GIH s margins are very low in some of the regions. EMRA revises margins per each region after the eighth operating year based on cost + estimated 10% premium. GIH Consolidated Revenue Breakdown between E 1000 US$ mn CAGR:17% E 2009E 2011E 2013E 2015E 2017E Gross Gas Sales Revenues US$ mn Source: Company data, RJS Total Subscription Revenues US$ mn Company Report 19

20 The revenue and cash flow generators of gas distributors Subscriber fees and gas sales are the revenue driver of distribution regions, which are officially determined in tender documents by gas distributors. GIH generates most of its revenues from subscriber fees; however, different subscription revenue schemes for each region forced Energaz to work with low margins in some regions. We should also remind that according to Natural Gas Law, subscriber fees for each region will be re-determined by EMRA after the fifth operating year. Moreover, the gas distribution can be described as a stable cash flow business, thanks to the deposit fees which are collected from subscribers against nonpayment of receivables. The deposit fees are determined by EMRA each year based on the natural gas price increases. Consolidated Subscription Revenues between E Consolidated Deposit Fees between E Total Subscription Revenues US$ mn Total consolidated deposit fees US$ mn US$ mn US$ mn E 2009E 2011E 2013E 2015E 2017E Source: Company data, RJ E 2009E 2011E 2013E 2015E 2017E Source: Company data, Residential subscribers share in total consolidated consumption will increase We expect that the total consolidated industrial consumption will almost triple the residential gas consumption figure in 2007E based on the huge gas sales to industries. On the other hand, we estimate that the total consolidated residential gas consumption which is expected to constitute 30% of total consumption in 2007 will increase to 52% in Breakdown of Gas Consumption between E 100% 80% 60% 40% 52% 20% 0% 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Industrial Subscribers Gas Consumption Residential Subscribers Gas Consumption Source: Company data, RJ estimates Company Report 20

21 INVESTMENTS GIH will complete almost half of the required investments for the energy projects in the first four years until 2009E. The figure will gradually decline after 2011E to US$2.7mn. Energaz has plans to bid for gas distribution rights of two more regions. It is worth to mention that we did not incorporate the potential investments for these regions. GIH Consolidated Investments for Nine Regions US$ mn E 2009E 2011E 2013E 2015E 2017E Source: Company data, RJ Total Consolidated Capex (US$ mn) Company Report 21

22 VALUATION OF THE ENERGY BUSINESS We used DCF analysis to determine the fair value of GIH s energy arm, Energaz. Employing a risk free rate of 7.5% and equity risk premium of 4.5%, we determined a cost of equity value of 12%. We have used a 2% perpetuity rate to calculate the terminal value for each specified region. We have calculated the total value for nine regions at US$151.6 mn, corresponding to US$30.1 mn for GIH s stake. Region Region Value GIH stake (%) GIH Value Konya % 5.4 Corum % 1.0 Usak % 0.6 Ere gli % 1.9 Nigde-Nevsehir % 2.8 Denizli % 5.9 Antalya % 10.3 Erzincan % 1.1 Karam an % 1.0 TOTAL SENSITIVITY ANALYSIS We have also run a sensitivity analysis for Energaz to determine the fair value under a +/-100bps change in cost of equity. A 100bps increase in cost of equity would decrease GIH s stake in the energy business to US$26.4 mn. Similarly, a 100bps decrease would push the valuation to US$34.8 mn. The Impact of -1 bps change in cost of equity Region Region Value GIH stake (%) GIH Value Konya % 6.1 Corum % 1.1 Usak % 0.8 Ere gli % 2.2 Nigde-Nevsehir % 3.3 Denizli % 6.9 Antalya % 11.7 Erzincan % 1.4 Karam an % 1.3 TOTAL The Impact of +1 bps change in cost of equity Region Region Value GIH stake (%) GIH Value Konya % 4.9 Corum % 0.9 Usak % 0.5 Ere gli % 1.7 Nigde-Nevsehir % 2.4 Denizli % 5.1 Antalya % 9.2 Erzincan % 0.9 Karam an % 0.8 TOTAL Company Report 22

23 GIH FINANCIALS We expect that GIH revenues will grow by 23% in 2006 thanks to the fivefold revenue increase in the energy unit. According to our calculations, revenues should rise by 46% in 2008E on the back of a rapid growth in the energy business revenues due to a 48% surge in GIHs subscriber figure. According to our assumptions Global Investment Holding will continue to consolidate the revenues from asset management segment since the deal with IMI does not include asset management business. We envisage that GIH s revenues will increase by 46% and 48% respectively in 2008 and 2009, thanks to the huge revenue jump of infrastructure unit. Since the company owns 35% of Pera REIT, in order to sustain consistency, we use REIT booking method for the infrastructure segment. Therefore, GIH will book the residential unit sale revenues when it delivers the invoices and the title deeds. In 2008, GIH will be delivering villas in Bodrum and more importantly delivering the ultra-luxury apartments at Park Plaza in In line with the group s new business focus strategy, GIH will generate bulk of its revenues (82%) from energy unit, while generate highest portion of its EBITDA (58%) from its infrastructure unit in 2010E. We believe that GIH will experience some margin contraction going forward as a result of declining margin in energy segment. High margins of the real estate projects, on the other hand, offset this contraction in the coming years. Breakdown of Revenues Breakdown of Revenues E Finance 81% Real Estate 10% Source: The Company, RJS Ene r gy 9% Finance 1% Re al Estate 17% Ene rgy 82% Breakdown of EBITDA Finance 86% Ene rgy 35% Breakdown of EBITDA E Real Estate 58% Real Estate Ene rgy 6% 8% Source: The Company, RJS Finance 7% Company Report 23

24 Income Statement - US$ mn E 2007E 2008E 2009E 2010E Revenues Finance Unit % YoY change -8% -89% 2% 2% 2% Energy Unit % YoY change 250% 582% 44% 28% 16% Infrastructure Unit % YoY change 57% 38% 90% 213% -21% EBIT EBIT Margin 24% 26% 11% 10% 17% 11% Finance Unit % YoY change 26% -8% -89% 2% 2% 2% EBIT Margin 26% 26% 26% 26% 26% 26% Energy Unit % YoY change 107% 162% 35% 85% -62% EBIT Margin 23% 14% 5% 5% 7% 2% Infrastructure Unit % YoY change 618% 72% 44% 205% -19% EBIT Margin 11% 52% 65% 49% 48% 49% EBITDA EBITDA Margin 31% 33% 13% 10% 11% 7% Finance Unit % YoY change 33% -8% -89% 2% 2% 2% EBITDA Margin 33% 33% 33% 33% 33% 33% Energy Unit % YoY change 112% 158% 32% 75% -56% EBITDA Margin 27% 16% 6% 6% 8% 3% Infrastructure Unit % YoY change 432% 60% 8% 35% 8% EBITDA Margin 19% 63% 73% 41% 18% 24% Net Income Net Margin 14% 15% 14% 6% 13% 4% Finance Unit % YoY change % 106% -94% 2% 2% Net Margin 15% 15% 273% 15% 15% 15% Energy Unit % YoY change 119% 13% 45% 76% -53% Net Margin 21% 13% 2% 2% 3% 1% Infrastructure Unit % YoY change 342% 131% 72% 295% -72% Net Margin 8% 23% 39% 35% 44% 16% Company Report 24

25 Balance Sheet - US$ mn E 2007E 2008E 2009E 2010E ASSETS Current Assets Liquid Assets Marketable Securities Short-Term Trade Receivables Short-Term Receivables from Related Parties Other Short-Term Receivables Inventories Other Current Assets LONG TERM ASSETS Long-Term Trade Receivables Long-Term Financial Assets Goodw ill Real Estate Investments Tangible Fixed Assets Intangible Fixed Assets Long Term Deffered Tax Assets Other Long-Term Assets TOTAL ASSETS LIABILITIES SHORT TERM LIABILITIES Short-Term Financial Loans Current Install & Int.of Long-Term Loans Short-Term Leasing Obligations Other Short-Term Financial Liabilities Short-Term Trade Payables Short-Term Payables to Related Parties Short-Term Advances Received Short-Term Provisions Other Short-Term Liabilities LONG TERM LIABILITIES Long-Term Financial Loans Long-Term Advances Received Provisions Deferred Tax Liabilities MINORITY INTERESTS SHAREHOLDERS EQUITY Share Capital Capital Reserves Premium in Excess of Par Mkt. Value Surplus of Financial Assets Shareholders Equity Inflation Adjustments Income Reserves & Retained earnings Legal Reserves Extraordinary Reserves Special Reserves Current Year Income /(Losses) Retained Earnings /(Acc. Losses) TOTAL LIABILITIES AND S.HOLDERS EQUITY Company Report 25

26 RAYMOND JAMES SECURITIES TURKEY Stock Ratings: Buy: Stocks with a forecast 12mth (US$) absolute total return of greater than %15% Hold: Stocks with a forecast 12mth (US$) absolute total return of between 15% and -15% Sell: Stocks with a forecast 12mth (US$) absolute total return of less than -15%