Ak Enerji. Up for sale? Company update 21 February Power generation. Maintained Outperform

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1 Company update 21 February 2011 Ak Enerji Power generation Up for sale? Maintained Outperform Now accepting offers: CEZ needs a price of USD1bn to break-even Both major shareholders have given a mandate to Ak Enerji, to collect offers for asset sale. We believe there are three possible scenarios: A sale of the distribution asset only, sale of distribution and some generation assets, or outright stake sales in Ak Enerji. The first two would reveal value, whereas the latter would trigger a share call if a party ended up with more than a 50% stake. CEZ acquisition valued the company at USD810m in 2008 when the JV was formed and the company raised an additional USD207m through rights issues subsequently, bringing total valuation to USD1bn (vs. the current mcap of USD764m). We are lowering our 12M PT estimate for Ak Enerji from TL5.1/share to TL4.2/share (implying 31% upside), while maintaining our Outperform rating. Our target price revision stems from the deteriorating outlook in the generation business (i.e. lower power price estimates and capacity factors in NG plants), which was partially offset by the slightly improved valuation in the electricity distribution arm. On the other hand, we expect FX losses to weigh on 4Q10 bottom-line. The stock underperformed the market by 18% over the last six months. Higher profits with higher operating fee ceilings for SEDAS Operating and retail fee ceiling of SEDAS, the distribution arm of Ak Enerji, were increased to TL165m in 2011 from TL52m in 2010 under new transition period tariffs. We calculate that the income from higher fee ceilings is equivalent to a 2.5pps increase in retail margins (which was increased by 10bps to 2.3%). Moreover, we expect SEDAS power sales to increase by 9% y/y compared with our 2011 Turkish electricity consumption growth estimate of 5% with the change in the electricity tariff structure (see our note A quiet, but fundamental change published on January 17 th, 2011 for detailed information). USDm FY2009 FY2010E FY2011E FY2012E Revenues EBITDA Net Profit Book Value P/E 27.2x -24.4x 30.3x 27.0x EV/EBITDA 17.0x 55.0x 14.5x 11.8x P/BV 0.9x 1.6x 1.5x 1.4x EV/Sales 2.6x 3.8x 2.8x 2.7x /10 03/10 05/10 06/10 AKENR (TL) ISE 100 Relative (RHS) Stock Data Bloomberg Ticker AKENR.TI Close (TL) (Feb 18) 3.20 Fair PT (TL) 4.20 Upside (Downside) 31% 52-week range (TL) Mkt cap (USDm) 764 Free float (%) 25.0 Key Owners Akkok group (20%) Dinckok family (17%) Cez AS (37%) Foreign Ownership (%) 21.7 Shares Outstanding 375,814,000 Avg. 6m Daily Vol. ($m) 5.6 ISE-100 (TL) 65,986 Performance 1M 3M 12M Absolute (%) -9.1% -16.9% -15.3% Relative (%) -8.4% -11.8% -32.7% Key Ratios (%) E 2011E EBITDA margin 13% 7% 20% Dividend Yield n.a. n.a. n.a. Net Debt/equity 73% 107% 175% ROA 2% -3% 2% ROIC 2% -3% 2% ROE 3% -6% 5% Alen Bebiroglu alen.bebiroglu@teb.com.tr +90 (216) TEB Investment Institutional Sales Direct: +90 (216) Fax: +90 (216) Mail: teb.icm@teb.com.tr tebicm@bloomberg.net 08/10 09/10 11/10 12/10 01/

2 Up for sale? Both major partners, Akkok Group and CEZ (who own a combined 75% Ak Enerji), have given a mandate to Ak Enerji, to collect offers for asset sales. CEZ s intention to exit Turkey has been reported for some time now. However we are surprised with Dinckok family s decision to sell assets or its stake in the company. Possibly, the family is not willing to buy-out its partner in distribution and believes a better price can be fetched for a controlling stake. We believe there are three possible scenarios: The sale of the distribution arm only, sale of distribution and generation assets, or the outright sale of stakes the two groups hold in the company. At this stage, there could be some offers on the table already and we could see more news flows in a relatively short period. If the company decides to sell distribution business separately, we could see a deal for SEDAS concluded quickly, whereas negotiations for the generation assets could take longer. CEZ spending so far points to a minimum valuation of USD1bn: CEZ acquisition valued the company at USD810m in 2008, and a rights issue in 2010 raised an additional USD207m, bringing total valuation to USD1bn (vs. the current mcap of USD764m). We believe the partners would not settle for anything less than 2008 valuation and presumably CEZ would at least want to recover its spending so far. Moreover, this amount excludes positive NPV created by SEDAS distribution region and increased generation capacity. A higher control premium (compared with 2008 acquisition) may also be justified if the buyer took outright control of the company by buying out both shareholders. Distribution region is the hidden gem: We believe under the two transactions scenario, electricity distribution region, SEDAS, would take priority over generation side. Ak Enerji owns 45% of company, with the rest evenly divided between Akkok Group and CEZ. Exhibit 1: Ak Enerji structure CEZ AS Akkok Group 37.5% 37.5% 27.5% Ak Enerji 45.0% AkCez (SPV of Electricity distribution company) 100.0% SEDAS 27.5% Source: The company We calculate the Ak Enerji s P/BV multiple will decrease to 1.2x from current 1.6x if SEDAS were sold separately, assuming a sale price of at least USD810m (our DCF valuation). In 2009, the company has paid USD600m for the operating rights 2

3 of the region. The acquisition valued SEDAS at USD67 per MWh, while the distribution privatisations averaged USD100 per MWh (our DCF valuation corresponds to USD90 per MWh), indicating a positive NPV between USD210m and USD300m (corresponding to USD95m and USD135m for the stake held by Ak Enerji). Acquisition by a local group is more likely: There are two local groups trying to grow in electricity, Sabanci Holding (SAHOL, N/R) and Koc Holding (KCHOL, N/R). Sabanci has stated its intention to add another distributing region to their portfolio and neighbouring SEDAS would be a good fit for them. Koc Holding s subsidiary Aygaz (AYGAZ, N/R) recently signed a partnership agreement with AES Mont Blanc and is in need of a distribution region. Note that, privatisation multiples included an uncertainty discount due to regulatory risk. Now, that tariff structure for has been set by EMRA and favourable new metrics are in place for fee and investment ceilings, valuing the company would be easier and the region could fetch even higher prices. A possible call?: In 2008, Capital Market Board (CMB) has granted an exemption from the tender call to CEZ's acquisition of Ak Enerji's 37.4% stake. There are several scenarios that would trigger a call; such as i) a sale of 75% stake to a third party and ii) a sale by CEZ to Akkok Group, while a sale of CEZ shares to a third party would not trigger a call. We are revising down our estimates We are lowering our 12M PT estimate for Ak Enerji from TL5.1/share to TL4.2/share (implying 31% upside), while maintaining our Outperform rating. Our target price revision stems from the deteriorating generation business outlook (i.e. lower power price estimates and capacity factors in NG plants), which was partially offset by the slightly improved valuation of the electricity distribution arm. Exhibit 2: Ak Enerji valuation Business Currency MCAP Owned (%) Generation USD Distribution (DCF - price) USD Distribution (DCF) USD 810 Distribution acquisition price USD 600 Target Mcap USD 999 Current MCAP USD 744 Target Mcap TL 1,578 Current share price TL M PT TL 4.20 Upside / (downside) 35% Source: TEB Investment research We do not expect the company s multiples to normalise before 2014, when the 882MW natural gas plant becomes operational. The stock underperformed the market by 18% over the last six months. 3

4 We lowered our spot price forecasts (by 16% for 2011 and 22% for 2012), mainly due to changes in FX forecasts We expect Ak Enerji s spot exposure to increase in 2011 with the new regulation on electricity tariffs. Moreover, flat natural gas prices in TL terms and lower capacity utilisation in natural gas fired plants due to lower bilateral contract ratio affected our estimates. We have reduced our EBITDA forecasts by 35% and 26%, for 2011 and 2012, respectively. On the other hand, we moved operations date of 70MW Feke hydropower to 2011 from 2012, which positively affected our generation assumptions. Exhibit 3: Estimate changes (USDm) New Old Change (USD) Change (%) Capacity (MW) % 0% Sales (MWh) 3,660 3,847 3,018 3, % 26% Sales $356 $381 $357 $364 -$1 $17 0% 5% EBITDA $70 $85 $107 $116 -$37 -$30-35% -26% Net income $25 $28 $29 $15 -$3 $14-12% 94% Source: TEB Investment research New tariff component will increase share of spot sales We expect the share of spot sales to increase substantially to 30% in 2011 and the capacity factors of natural gas fired power plants to decrease due to the higher spot market exposure. Ak Enerji currently sells c90% of its power under bilateral agreements, where commercial and industrial segments have equal weight. Note that not all industrial segment sales are affected by the change in the tariff structure; large industrial consumers with direct transmission line connections will not be affected. On the other hand, the decline in discounts in bilateral contracts would benefit SEDAS. Ak Enerji s distribution region stands to benefit the most from the lack of incentives for industrials end-users to sign bilateral contracts with generation companies since industrial usage accounts for c60% of the region s total usage. Distribution asset partially offsets deteriorating outlook on generation side We value SEDAS at USD810m. We believe the subsidiary stands to benefit from the new tariff regulation (introduction of loss component in electricity tariffs) and the new transition period fee structure. However, the positive effects of these changes were partially offset by lower-than-expected retail margins and theft/loss targets (the 2011 loss target is 7.7% compared with 8.5% in 2010). We expect SEDAS power sales to increase by 9% y/y compared with our 2011 Turkish electricity consumption growth estimate of 5% thanks to the new tariff regulation. Introduction of loss component in electricity tariffs has decreased discounts offered to eligible customers by 11% on average, which wiped-out discounts in industrial tariffs and reduced the discounts in commercial tariffs. We 4

5 expect the tariff change to result in higher power sales for distribution regions, specifically in the industrial segment. Distributors would also benefit from higher fee ceilings. In our previous notes we argued that EMRA has a large area to manoeuvre in when it comes to the distribution regions margins, thanks to the expiration of Transfer of operating rights (TOR) component at the end of 2010, which totalled TL2.5bn for all regions. The authority has decided to transfer this amount to the distribution companies via higher fee ceilings, instead of increasing highly publicised retail margins. Exhibit 4: SEDAS fee structure change (TLm) Tariff component Brief description Change Operating fee Reflects the costs of running the network Retail service fee Covers the costs of metering and billing activities Total fees Investment ceiling Allowed ceiling on new investments Interest rate on amortisation Interest in real terms earned over capex 9.35% 9.97% 0.62% Amortisation period Amortisation period of capex Retail margin Regulated gross margin 2.23% 2.33% 0.10% Source: EMRA and TEB Investment research Considering SEDAS s cost of running the network including metering and billing activities was TL52m in 2010, it is obvious that a large portion of the TL114m increase in operating and retail fees would be recorded as income by the company. We expect the company to book on average 23% of operating and retail service fees as income as efficiency gains between 2011 and 2015, while we assumed 10% efficiency for the rest of the contract term. 5

6 Exhibit 5: Ak Enerji financials (USDm) Income Statements 2009A 2010E 2011E 2012E 2013E 2014E 2015E Net Sales ,049.2 Cost of Goods Sold (-) (256.3) (235.9) (275.8) (292.9) (306.8) (657.0) (765.2) Gross Profit Gross Margin (%) 14% 11% 22% 23% 24% 23% 27% Operating Expenses (21.7) (28.7) (33.8) (36.2) (38.4) (55.8) (68.2) Operating Profit EBITDA EBITDA Margin (%) 13% 7% 20% 22% 25% 22% 25% Net Income/ Loss from Other Operations (6.4) Net Financial Income (Expenses) (3.9) (32.6) (49.3) (42.6) (109.9) (156.4) (147.0) Income from subsidiaries Minority Interests (0.4) (0.8) (0.4) (0.4) (0.4) (0.4) (0.4) Income Before Taxes 11.7 (27.6) (30.5) Taxation on Income 3.9 (3.7) 0.0 (1.9) (13.8) Net Income 15.7 (31.3) (30.5) Balance Sheets 2009A 2010E 2011E 2012E 2013E 2014E 2015E Current Assets Cash & Marketable Securities Trade Receivables Receivables from Related Parties Inventories Other Long Term Assets , , , , , ,074.8 Long Term Financial Assets Long-Term Trade Receivables Goodwill Tangible Fixed Assets , , , , ,804.0 Investments with Equity Method Deferred Tax Assets Other Total Assets 1, , , , , , ,291.8 Short Term Liabilities Financial Loans Trade Payables Other Long Term Liabilities Financial Loans Trade Payables Deferred Tax Liabilities Other Minority Interests Shareholders' Equity Total Liabilities & SHE 1, , , , , , ,291.8 Source: The company and TEB Investment research 6

7 TEB Investment TEB Kampüs D Blok Saray Mahallesi Küçüksu Caddesi Sokullu Sokak No: Ümraniye / İstanbul Phone : +90 (216) Fax: +90 (0216) Trading Kurt Atay Manager kurt.atay@teb.com.tr +90 (216) Inci Kalkavan Assistant Manager inci.kalkavan@teb.com.tr +90 (216) Institutional Sales Hasan Sevket Colakoglu Director hasansevket.colakoglu@teb.com.tr +90 (216) Tunc Ural Director tunc.ural@teb.com.tr +90 (216) Research Alen Bebiroglu Energy, Steel alen.bebiroglu@teb.com.tr +90 (216) Kenan Cosguner Logistics & Aviation, Food & Beverage, Fertilizers, Media kenan.cosguner@teb.com.tr +90 (216) Constantine Courcoulas Intern constantine.courcoulas@teb.com.tr +90 (212) Sabriye Gozde Cullas Autos, Consumer durables, Contractors gozde.cullas@teb.com.tr +90 (212) Cagdas Dogan Banks, Strategy cagdas.dogan@teb.com.tr +90 (216) Ozgur Guler Telecoms, Cement ozgur.guler@teb.com.tr +90 (216) Selim Yazici Co-Head of Research, Banks selim.yazici@teb.com.tr +90 (216) Fazil Zobu Co-Head of Research, Strategy fazil.zobu@teb.com.tr +90 (216) The information and opinions in this report were prepared by TEB Investment solely for information purposes, based on information available as of the date of this report. 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