ENKA INSAAT. Equity Research COMPANY UPDATE BUY remains promising, BUY maintained. TURKEY / Contracting 15 January 2013

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1 Equity Research COMPANY UPDATE TURKEY / Contracting 15 January 2013 ENKA INSAAT BUY (MAINTAINED) 2013 remains promising, BUY maintained Possible catalysts underway. Since our upgrade last October, Enka has outperformed ISE100 by 8%. Seeing it more like a catch-up process in line with our estimates, we now argue that it should continue to outperform the broader market with (i) possibly more contracting opportunities given better global macro outlook, (ii) real estate s strength in Russia (iii) possible progress in energy investments or higher dividend payout ratio given the hefty net cash of US$2bn. Multiple expansion is also underway (1Y moving historical avg. up by 4% in the last 6M). Still, the stock s 2013E P/E is on par with its peers at 14.0x. Mainly on lower risk free rate, we revise up our 12M TP to TRY7.05/sh and maintain our Buy rating on 24% upside. Opportunities in contracting up. Enka may team up with Bechtel, who is in talks for Montenegro Highway Project (possible size c.us$900mn considering Kosova highway contract) and also eyes power plant projects in Iraq and Russia. The revival of the Blue City Project by the Omani Sovereign Fund and opening up of Libya market would also be positive surprises. We reflect a conservative US$1bn backlog addition for 2013 (no yoy change) and no value for Blue City. Enka is likely to maintain its backlog at US$3.2bn in 2013, in our view. We are not concerned for Iraq operations, as the job owners are mostly multinationals and half of them are in N. Iraq. Rents and occupancies rise in Russia. We expect occupancy levels and rent levels to rise in the office segment, while retail part continues to enjoy upward trajectory. Especially from 2014 on, the positive impact of Kuntsevo renewal should be visible. We expect 17% CAGR in this segment s EBITDA during In our opinion, Enka will seek opportunities to expand its real estate portfolio as in MKH, where it raised stake by 19% for a good price in our view. Stock Data 14 January 2013 Current price Target price DPS Total return TRY5.80 TRY7.05 TRY % Current Mcap TRY16,240mn/ US$9,221mn Bloomberg Ticker ENKAI TI Number of outstanding shares (mn) 2,800 High / Low Price Range (12M) 6.00/ m Average Daily Turnover ($ mn) 9.9 Price Performance (%) 1M 3M 6M YtD Return Relative to ISE /09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 04/11 07/11 10/11 01/12 04/12 07/12 10/12 Price (TRY) Relative Price (TRY) Energy investments a bonus. We expect a decline in natural gas prices over the long run, which should benefit its existing NGPPs and precipitate the decision for the new 600MW NGPP. Global coal prices may also lead to a positive decision for the 800MW imported coal fired PP. We do not reflect any value for these investments at the moment. TRYmn E 2013E Sales 7,921 6,890 8,415 9,407 9,527 EBITDA 1,372 1,134 1,347 1,409 1,532 Net income ,150 1,157 EPS reported (TRY) DPS (TRY) P/E (x) EV/EBITDA (x) Div. yield (%) ROE (%) Elvin Akbulut Daglier elvin.daglier@ykyatirim.com.tr

2 Financial Summary (TRYmn) E 2013E Income Statement Total revenues 7,921 6,890 8,415 9,407 9,527 COGS -6,505-5,721-6,989-7,872-7,859 Gross profit 1,416 1,169 1,426 1,535 1,669 Opex EBITDA 1,372 1,134 1,347 1,409 1,532 Depreciation Operating income 1, ,160 1,223 1,338 Financial income/expense Net other income/expense Pre-tax income 1,123 1,011 1,154 1,484 1,557 Tax Minority interest/other Net income ,150 1,157 Balance Sheet Cash and liquid assets 1,854 2,043 2,626 2,822 2,858 Inventories Accounts receivable , ,022 Other current assets ,162 1,677 Total current assets 3,786 3,711 5,197 5,480 6,264 Fixed assets 5,805 5,917 7,149 6,730 6,982 Financial and equity investments 697 1,003 1,463 1,717 1,732 Other non-current assets Total non-current assets 6,822 7,288 8,895 8,733 9,000 Total assets 10,607 10,999 14,092 14,213 15,265 Short-term debt Accounts payable Other current liabilities 1, ,028 1,149 1,164 Total current liabilities 2,093 1,704 2,259 2,274 2,327 Long-term debt Other non-current liabilities 1,750 1,889 2,335 2,186 2,204 Total non-current liabilities 2,509 2,471 2,814 2,630 2,696 Minority interest Total shareholders' equity 5,635 6,450 8,561 8,843 9,728 Total liabilities and equity 10,607 10,999 14,092 14,213 15,265 Cash Flow Statemement Profit before tax 1,123 1,018 1,154 1,484 1,557 Depreciation Changes in working capital Other Operating cash flow 1,376 1,076 1,002 1, Capex Asset sales & other Investing cash flow Change in debt Dividends Other Financing cash flow Total cash flow Net debt ,120-1,741-2,001-1,949 Key Ratios Gross margin 18% 17% 17% 16% 18% EBITDA margin 17% 16% 16% 15% 16% ROE 15% 14% 11% 13% 12% Asset turnover Working capital days Tax rate (effective) -23% -18% -24% -24% -23% Net debt-to-equity (x) n.m. n.m. n.m. n.m. n.m. Net debt-to-ebitda (x) n.m. n.m. n.m. n.m. n.m. Investment Case We like Enka thanks to the growth in its contracting backlog, steady improvement in its real estate arm in Russia and bond-like energy business. With its FX denominated US$2bn net cash, Enka is poised for new projects, especially in the energy and real estate segments. Multiple expansion is also underway (1Y moving historical average up by 4% in the last 6M). The company is at almost at par with its peers in 2013E P/E, while we believe that the positive macro outlook in the region will provide a supportive tailwind in 2013 and thus we maintain our BUY rating. Stock Triggers & Risks Triggers for Enka are backlog additions (like power plant projects in Russia and Iraq), activation of Blue City Project, and progress in its energy investments. The start of new energy investments and real estate projects may provide additional positive momentum for the stock. The key risks include political tensions where Enka operates like Iraq, weakening in Russian economy with repercussions in real estate market and weaker Euro vs. US$. Chart 1: Shareholder Structure Enka Foundation 6% Free Float 13% Tara and Gulcelik Families 28% Source: Enka Insaat Alternatif Aksesuar 4% Chart 2: EBITDA Breakdown (9M12 ) Contracting 24% Trading & Manufacturing 3% Energy 33% Source: YKY Research estimates Real Estate 40% Tara Holding 49% 2

3 Table 1: Enka Insaat SOTP Valuation Summary Segment Enka's stake (%) Construction & Contracting Valuation method EV US$ mn Participation EV US$ mn of NAV (%) 12M Participation EV US$ mn Contracting 100% DCF 2,071 2,071 20% 2,277 Power Enka Energy 100% DCF 2,969 2,969 29% 3,178 Real Estate Mosenka 80% DCF % 163 MKH 76% DCF % 550 Enka Invest 100% DCF 1,123 1,123 11% 1,232 Enka TC (Real Estate) 100% DCF 1,052 1,052 10% 1,154 Renewal of Kuntsevo 100% NPV % 157 Trading & Other Enka Pazarlama 100% DCF % 297 Pimas 82% Current Mcap % 64 Total value of participations 8,343 81% 9,072 Net Cash* 1,951 19% 2,010 NAV 10,294 11,082 Current Market Cap. 8,991 8,991 Premium (+)/Discount (-) to NAV -13% -19% * Adjusted for LT financial assets, extra dividend payment post 9M12 and stake acquisition in MKH Source: YKY Research estimates Table 2: Peer analysis: trading on par with its peers on P/E* EV/EBITDA (x) P/E (x) Company Country 2012E 2013E 2012E 2013E Orascom Egypt Budimex Poland Polimex Poland Italian-Thai Development Thailand Sino Thai Engr & Constr Thailand Arabtec Holding UAE Strabag Austria Eiffage France Bilfinger Berger Germany Hochtief Germany Astaldi Italy Impregilo Italy Grupo Ferrovial Spain Tecnicas Reunidas Spain Amec UK Balfour Beatty UK Mean (excl. outlier) Median Alarko Holding Turkey Tekfen Turkey Enka Turkey Disc/Premium to mean (%) 4% 2% -10% -6% * Data as of 14 Jan Current Mcap and 2012E-2013E net debt figures are used in the calculation. Source: Bloomberg, YKY Research estimates 3

4 Chart 3: Historical multiples: Multiple expansion likely to continue P/E: EV/EBITDA MF P/E AVRG since 2007 AVRG since 2009 Source: Bloomberg, YKY Research Implied, Jan/2007 May/2007 Sep/2007 Jan/2008 May/2008 Sep/2008 Jan/2009 May/2009 Sep/2009 Jan/2010 May/2010 Sep/2010 Jan/2011 May/2011 Sep/2011 Jan/2012 May/2012 Sep/2012 Jan/ MF EV/EBITDA AVRG since 2007 AVRG since 2009 Implied Implied, 10.4 Jan/2007 May/2007 Sep/2007 Jan/2008 May/2008 Sep/2008 Jan/2009 May/2009 Sep/2009 Jan/2010 May/2010 Sep/2010 Jan/2011 May/2011 Sep/2011 Jan/2012 May/2012 Sep/2012 Jan/2013 Table 2: Enka Insaat YKY Research estimates vs. consensus: just fine-tuned and added E 2013E 2014E TRYmn Consensus YKY Difference Consensus YKY Difference Consensus YKY Difference Net Sales 9,643 9,407-2% 10,119 9,527-6% 10,365 9,784-6% EBITDA 1,389 1,409 1% 1,474 1,532 4% 1,551 1,645 6% Net Income 1,052 1,150 9% 1,088 1,157 6% 1,191 1,241 4% EBITDA margin 14% 15% 15% 16% 15% 17% Net margin 11% 12% 11% 12% 11% 13% Source: Enka Insaat, YKY Research Chart 4: Enka Insaat Backlog breakdown as of 9M12 Backlog incl. Blue City: USD3.3bn Other 11% Backlog excl. Blue City: USD2.5bn Other 14% Oman 20% Iraq 20% Oman 40% US Embassies 11% Russia 18% Iraq 28% US Embassies 14% Russia 24% Source: Enka Insaat, YKY Research 4

5 Table 3: Enka Insaat Segmental breakdown US$mn E 2013E 2014E Revenues 5,120 4,708 5,013 5,238 5,293 5,390 Contracting 1,879 1, ,265 1,362 1,385 Real Estate Trading & Manufacturing Energy 2,404 2,681 3,233 3,111 3,029 2,965 Revenues (% of total) Contracting 37% 24% 19% 24% 26% 26% Real Estate 8% 8% 8% 8% 9% 11% Trading & Manufacturing 9% 11% 9% 8% 8% 8% Energy 47% 57% 64% 59% 57% 55% EBITDA Contracting Real Estate Trading & Manufacturing Energy EBITDA (% total) Contracting 32% 29% 32% 26% 28% 26% Real Estate 32% 31% 32% 38% 38% 42% Trading & Manufacturing 3% 4% 4% 3% 3% 3% Energy 32% 35% 32% 33% 31% 28% EBITDA Margin 17% 16% 16% 15% 16% 17% Contracting 15% 20% 27% 16% 18% 17% Real Estate 72% 64% 64% 68% 69% 64% Trading & Manufacturing 7% 5% 7% 6% 6% 6% Energy 12% 10% 8% 8% 9% 9% Source: Enka Insaat, YKY Research 5

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