TURKEY e.research@burgansecurities.com +90 212 317 2727 June 27, 2014 INITIATING COVERAGE NET HOLDING The Glow of Distant Lights We initiate coverage of with HOLD (L/T) and MARKETPERFORM (S/T) ratings and set our target price at TRL3.10/share. Existing businesses should drive strong growth in the near term; however, value creation and a potential BUY recommendation would hinge on progress in Bodrum land and shareholder restructuring. Tenders in new business segments could serve as catalysts. Strong 2014E driven by new hotels/casinos - The Company opened a new casino and completed the renovation of another one, which should boost revenues and EBITDA growth in 2014. Streamlining cross ownerships - Management is working on eliminating the complex ownership structure among three group companies, with a view to merging them under, which would lower the NAV discount, in our view. Currently, effectively owns 91% of Asyanet and 79% of Net Turizm. Bodrum land to add value - will either assume ownership of the 10mn sqm land in Bodrum or receive US$300mn, either of which should serve as a near term catalyst. The land constitutes 1/3 of our NAV, and with a conservative valuation. New business opportunities - established two JVs to bid for lottery management and duty-free tenders in more than 20 countries in MENA/CIS regions. Final bidding for National Lottery is scheduled for June 27. The Company is also interested in duty-free operations at Dalaman Airport, the tender date of which is yet to be announced. Risks - i) lack of progress regarding Bodrum land; ii) streamlining of cross ownerships taking longer than expected to conclude; iii) overbidding for lottery and duty-free tenders. Ratings & Actions L/T Rating S/T Rating Target Target Price HOLD (Initiated) MARKETPERFORM (Initiated) TRL3.1 Upside (Downside) 25% Share Data Ticker Close Price NTHOL.TI / NTHOL.IS TRL2.48 Current MCap. (TRL/US$ mn) 907 / 426 Number of Shares (mn) 366 Free Float 34% 3m Avg. Daily Turnover (TRL/US$ mn) 0.68 / 0.32 Trading Range (High / Low) 1-month 2.48 / 2.40 1-year 2.52 / 2.22 Ytd 2.48 / 2.22 Performance Absolute Relative 1-month 2% 2% 3-month 7% -9% 1-year 6% -2% Ytd 2% -13% 3.0 2.4 1.8 1.2 250 200 150 100 Consolidated Financials and Multiples (TRL) 0.6 50 2013A Δ 2014E Δ 2015E Δ 2016E Δ Revenue 195 82% 247 27% 271 10% 297 10% EBITDA 30 n.m. 40 31% 48 22% 59 23% Net Income 150 98% -5 n.m. -21 n.m. -30 n.m. P/E 6.0 n.m. n.m. n.m. EV/EBITDA 40.2 30.1 23.7 18.8 EV/SALES 6.3 4.8 4.2 3.8 Div. Yield 2.4% FCF Yield -20.6% -19.3% 7.3% 6.1% 0.0 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Price (LHS) Rel. Perf. (RHS) Jun-14 as of June 26, 2014 Relativ es are against the BIST-100 Total Return Index Burak Isyar, CFA burak.isyar@burgansecurities.com +90 212 317 2709 0
INVESTMENT THEME We initiate coverage of with HOLD (L/T) and MARKETPERFORM (S/T) recommendations, and a 12-month target price of TRL3.10 per share. We like the long-term prospects of the hotel and casino businesses, and reckon potential opportunities in lottery management and duty free operations could boost earnings growth in the future. Ongoing elimination of cross ownership among group companies and any progress regarding the land in Bodrum would unlock hidden value in the shares. Moreover, potential cash proceeds from Bodrum land could improve the Company s balance sheet and hence help its bottom line turn positive. Yet, we would rather wait to buy the stock, until we see progress on these fronts. Strong presence in hotel and casino businesses - currently generates almost all of its revenues and gross profit from its hotel and casino operations in Northern Cyprus, with a revenue contribution of 95% as at 1Q14. The Company owns/operates seven hotels in Northern Cyprus with 5,000 bed capacity, 23K sqm casino floor, and 2,500 slot machines, which recorded 31% CAGR in revenues over the last two years. Growth was driven both organically and inorganically, with new hotels and casinos opened. The Company just recently (Apr 14) opened a new hotel/casino and spent almost the entire 2013 renovating another one, which together are expected to boost revenue growth in 2014. With increased bed capacity and slot machines, we forecast 29% yoy revenue growth for the segment in 2014. Exhibit 1: 1Q14 Revenue Breakdown Others 5% Casino 43% Hotels 52% Source: Company data 2
Massive land plots currently idle - The Company owns land plots totalling 15mn sqm in Turkey, Northern Cyprus, and Azerbaijan, all of which are available for potential tourism project developments. The largest is the one in Bodrum (southern Turkey), a 10mn sqm land plot that is not on the balance sheet of. The Company had delivered the land plot back in 2006 to a local contractor under a revenue sharing agreement. However, the contractor failed to meet its Jun 13 deadline to finish the construction of the residential/hotel complex (did not even start). As a result, there are three possible outcomes as per the agreement: (1) the developer exercises its call option and purchases the land for US$300mn; (2) the developer sells the land to a third party and 60% of the proceeds go to Net Group; or (3) receives back the land and registers it on its balance sheet. A recent appraisal report valued the land at US$620mn. The remaining land in Northern Cyprus and Azerbaijan is valued at TRL227mn on the balance sheet. Lottery and gaming opportunities -, which has an exclusive partnership with the New York-based Scientific Games Corp., is in pursuit of lottery management opportunities in more than 20 countries. The Company recently announced it would place a bid for the upcoming National Lottery tender, as part of a JV. Final bids for the tender will be submitted on June 27, which will be followed by one-on-one meetings with the Privatisation Administration, and subsequently an open bidding process. While not much detail is available regarding the tender, reportedly the 10-year contract period bears a revenue potential of US$6bn. Market expectations for the tender range between US$1.5-2.0bn of privatisation value. Note that a previous tender in 2009 was called off on a lack of bids above the US$1.6bn initial asking price. Duty-free opportunities - has a JV with The Nuance Group (Australia) for potential duty free operation tenders in more than 20 countries in MENA and CIS regions. already operated duty free operations at Antalya Airport, which the Company recently sold to The Nuance Group for US$146mn. The JV is planning to bid for duty-free operations at Dalaman Airport in Turkey and Ercan Airport in the Turkish Republic of Northern Cyprus (TRNC). Note that the tender for the 25-year operating rights of Dalaman Airport was completed in Mar 14 for EUR705mn. The JV has also announced its intention to run the duty-free operations at the to-be-built third airport in Istanbul - a long-term opportunity at best. The government is targeting to open that airport by Oct 17, though our main assumption is that it would not be fully operational before 2019. 3
Potential end of blockade on Turkish Republic of Northern Cyprus - A potential end of the blockade on TRNC, which would bode well for its tourism revenues, would be highly beneficial to. Currently, only Turkeybased airlines are allowed to travel to the country. In such a case, would provide the sole means of exposure to this opportunity; however, we need to admit that the probability does not seem significant in the near term. Bottom line could turn positive with Bodrum land - We expect the Company to continue to post net losses over the next few years, despite growing revenues (15% CAGR in 2013-2016E) and improving EBITDA margins (+440bp in 2013-2016E), largely driven by interest expenses and FX losses. had TRL289mn net debt as at 1Q14, while having a TRL94mn short FX position, largely in US$. With a potential cash injection from Bodrum land in the near future, the Company could pay down its debt and start posting positive bottom line, although this assumption is not embedded in our forecasts. Our interest expense plus FX loss estimate for 2014 is TRL43mn, the main reason for our loss estimate of TRL5mn for the year. Exhibit 2: Summary Financials TRLmn 2011 2012 2013 2014E 2015E 2016E Revenues 102 107 195 247 271 297 yoy 4% 82% 27% 10% 10% Gross margin 6.7% 18.0% 36.6% 34.4% 34.5% 35.0% OPEX -32-44 -59-68 -69-69 EBITDA -11-12 30 40 48 59 yoy n.m. n.m. 31% 22% 23% EBITDA margin -10.8% -10.8% 15.6% 16.1% 17.9% 20.0% Other income 350 109 230 1 1 1 Financial income -38-18 -47-30 -56-74 Net income -2 76 150-5 -21-30 yoy n.m. 98% n.m. n.m. n.m. Source: Burgan Research, Company data 4
Restructuring of cross ownerships officially announced its intention to eliminate cross ownerships within group companies Asyanet and Net Turizm. The Company is working on lowering Asyanet s ownership in Net Turizm in favour of, with a view to merging Asyanet and Net Turizm into. Currently, effectively owns 91% of Asyanet and 79% of Net Turizm. Exhibit 3: Cross Ownerships NTHOL Total 91% Asyanet Asyanet 23.4% NTHOL 59.6% NTTUR 32.7% NTTUR 40.3% Other 6.4% Free float 37.5% Total 24% Total 79% Total 60% NTTUR NTHOL 78.8% Asyanet 0.9% Total 42% B.Tibuk 2.2% Free float 18.1% Source: Burgan Research, Company data 5
Valuation at a discount - We value with an NAV model. The hotels and casinos are valued on peer group average multiples for 2014E EV/Sales and EV/EBITDA. Bodrum land is valued at US$300mn, the lowest value out of the three options we have mentioned above. Other real estate investments are taken at book value. We included Net Turizm in our NAV at market value, though excluded its cross-ownership from its valuation. According to our calculations, the stock trades at 40% discount to its NAV. However, the land in Bodrum makes up about one-third of our NAV calculation. In other words, excluding the land, the discount to NAV would be 15%. Given the ambiguity regarding that asset (whether it will return to Net Holding, be sold again, etc.), as well as the ongoing restructuring process, we opt to apply a 25% discount to the NAV to calculate our target price for the stock. Our 12-month target price is TRL3.10, which implies a strong 25% upside potential. However, excluding the Bodrum land, the target price would be TRL2.18, 12% below current share price. Therefore, we rate the stock HOLD (L/T) and MARKETPERFORM (S/T). We would most likely raise our long term rating to BUY (assuming there is still upside by then) after we saw progress with the Bodrum land. As for our short term rating, the nearest catalyst would be the upcoming National Lottery tender. Exhibit 4: NAV Valuation Source: Burgan Research NET HOLDING Current NAV 26-Jun-14 (TRL mn) Direct stake Valuation Current NTHOL's Weight in Method Market Cap. Stake NAV Hotel & Casino 813 784 52% Merit Crystal Cove 95.9% Peer EV multiple 346 332 22% Merit Cyprus Gardens 95.9% Peer EV multiple 24 23 2% Merit Royal 95.9% Peer EV multiple 263 253 17% Merit Park 100.0% Peer EV multiple 164 164 11% Merit Halki Palace 76.8% Peer EV multiple 15 12 1% Real Estate 866 674 45% Bodrum Land 70.0% Buyout option 639 447 30% Other real estate 100.0% Appraisal value 227 227 15% Others 224 150 10% Net Turizm excl. NTHOL 78.8% Market Value 137 108 7% Azer Sans 48.1% Appraisal value 86 42 3% Total Value From Participations 1,903 1,607 106% Listed 137 108 7% Unlisted 1,765 1,499 99% Holding only Net Cash (Debt) -98-6% Total NAV 1,510 100% MCAP 907 Premium / (Discount) to Adj. NAV -40% 6
Burgan Securities - Equity Rating System 12-month Rating: Our 12-month rating system comprises the following designations: BUY (B), HOLD (H), SELL (S). The absolute upside to target value implied by the current market capitalisation is the main determinant of our rating system. Valuation tools employed most frequently are Discounted Cash Flow (DCF) and international peer group comparison, though other metrics such as historical relative valuation, price to book, return on equity, replacement value are also used wherever appropriate. Our analysts set the fair/target values with a 12-month investment horizon. Comparing the upside in a specific stock with the market s upside (determined through the aggregate upside of our coverage based on free float Mcaps), in addition to taking other yardsticks into consideration, analysts recommend BUY (B), HOLD (H), SELL (S) based on their 12-month total return views. Sector Rating Our investment horizon for industry ratings is again 12 months. This rating gives an indication as to how the analyst sees that particular industry for the next 12-month period in terms of growth, profitability, pricing power, competitive dynamics etc. The rating in this category thus reflects our analyst s assessment of the conjunctural outlook for the industry, without involving any specific benchmarks. The ratings employed are Overweight (OW), Neutral (N), Underweight (UW). Overweight (OW): Due to improving sector related fundamentals and/or attractive valuations, the sector index is expected to perform better than the BIST-100 in the next 12-months Neutral (N): The sector index is expected to perform in line with the BIST-100 in the next 12-months Underweight (UW): Due to worsening sector related fundamentals and/or expensive valuations, the sector index is expected to perform worse than the BIST-100 in the next 12-months Short-term Rating: Our short-term rating system comprises the following designations: OUTPERFORM (OP), MARKETPERFORM (MP), UNDERPERFORM (UP). Considering possible triggers, catalysts, and/or company, sector & market views, we rate the stocks as: Outperform (OP): If 3-month total return is expected to exceed the BIST-100 (sector index if specified) by more than 10% S/T Stock Rating Summary Relative Return Outperform (OP) >=10% Marketperform (MP) <+10% & >-10% Underperform (UP) <=-10% Marketperform (MP): If 3-month total return is expected to be in line (+/- 10%) with the BIST-100 (Peerperform if sector index is specified) Underperform (UP): If 3-month total return is expected to be below the BIST-100 (sector index if specified) by more than 10% To have a more balanced distribution of ratings, Burgan Securities has requested that analysts maintain at least 20% of their ratings as Underperform and no more than 25% as Outperform, subject to change depending on market conditions. Other Qualifiers Utilised: NR: Not Rated NC: Not Covered UR: Under Review Market Call Our equity market call has an investment horizon of 3-12 months. Our market calls are BUY, NEUTRAL, SELL.
Buyukdere Cad. Apa Giz Plaza No: 191 Levent, Istanbul Tel: +90 212 317 2727 Fax: +90 212 317 2726 info@burgansecurities.com Burgan Securities is a prominent investment firm active in the fields of brokerage, corporate finance and asset management in Turkish capital markets. Our firm, a member of Burgan Group, one of the leading financial institutions of Kuwait, caters to the entirety of domestic/international retail/institutional investor spectrum. Supporting our corporate finance and institutional sales activities is a highly qualified research team that offers premium quality and timely research products covering a broad array of sectors and companies. Our corporate finance activities comprise mergers and acquisitions, as well as private and public equity and debt transactions. Our new product development activities are centred around derivative products, along with online trading platforms for retail clients. Burgan Securities goal is to be the investment firm of choice in Turkey through exemplary service and product quality, with a view to becoming a regional player. Zafer Onat CEO zafer.onat@burgansecurities.com +90 212 317 2867 INSTITUTIONAL SALES (sales@burgansecurities.com) Tolga Atac Head of Sales & Trading tolga.atac@burgansecurities.com +90 212 317 2770 Can Yazgan Head of Sales can.yazgan@burgansecurities.com +90 212 317 2757 Cansev Sanli Sales cansev.sanli@burgansecurities.com +90 212 317 2860 Canan Uras Sales & Trading canan.uras@burgansecurities.com +90 212 317 2825 Aysegul Yilmaz Sales & Trading aysegul.yilmaz@burgansecurities.com +90 212 317 2759 Burak Demircioglu Sales & Trading burak.demircioglu@burgansecurities.com +90 212 317 2765 EQUITY RESEARCH (e.research@burgansecurities.com) Nergis Kasabali Banking & Head of Research nergis.kasabali@burgansecurities.com +90 212 317 2753 Burak Isyar, CFA Murat Ignebekcili Retail, Beverages, Automotive, Consumer Durables, Aviation Telecom, Construction, Real Estate, Electricity Utilities, Conglomerates burak.isyar@burgansecurities.com +90 212 317 2709 murat.ignebekcili@burgansecurities.com +90 212 317 2761 Duygun Kutucu, CFA Banking duygun.kutucu@burgansecurities.com +90 212 317 2784 Umut Ozturk Oil & Gas, Steel, Fertilizers, Mid-Cap Autos umut.ozturk@burgansecurities.com +90 212 317 2703 Ece Mandaci Mining, Glass, Cement, Electronics Retail, Small Caps ece.mandaci@burgansecurities.com +90 212 317 2738 Ismail Ozer Quantitative Analysis ismail.ozer@burgansecurities.com +90 212 317 2705 Nuray Apari Senior Database Manager nuray.apari@burgansecurities.com +90 212 317 2707 Lolita Haleva Senior Editor lolita.haleva@burgansecurities.com +90 212 317 2704 MACROECONOMIC RESEARCH (m.research@burgansecurities.com) Haluk Burumcekci Chief Economist haluk.burumcekci@burgansecurities.com +90 212 317 2737 Asli Savranoglu Senior Economist asli.savranoglu@burgansecurities.com +90 212 317 2866 Burgan Yatirim Menkul Degerler Anonim Sirketi ( Burgan Securities ). All rights reserved. Burgan Securities holds the required licences (Financial Intermediation Licence Number: 346; Licence Date: 10.06.2005), and operates under the supervision of the CMB and in line with the CMB regulations. The research reports have been prepared by Burgan Securities solely for informational purposes. The receipt of the research reports should not be construed, under any circumstances, as a solicitation to purchase or sell equities or as a determination of the suitability of any investment for any particular recipient, or as any offer of any nature. The information contained in the research reports has been produced by Burgan Securities and obtained by external sources believed to be reliable, which Burgan Securities attempts to verify but neither represents nor warrants in any way its accuracy or completeness. The information and expressions of opinion stated in the research reports are inherently subject to change without notice and may become outdated. Information, text and graphics of the research reports may include technical inaccuracies or typographical errors. This information is provided without any representation or warranty of any kind, either expressed or implied, including but not limited to, the implied warranties of merchantability, fitness for a particular purpose, and non-infringement, and it is entirely your responsibility to verify any information before relying on it, and decisions based on information contained in the research reports are your sole responsibility. Under any circumstances, neither Burgan Securities nor any of its parents, subsidiaries or affiliates, agents, or representatives shall be liable to any party for any direct, indirect, special, incidental, consequential, punitive, or exemplary damages, including without limitation lost profits (even if expressly advised of the possibility) arising in any way from the information contained in the research reports. All information provided in the research reports is for non-commercial internal use; you may not reproduce, retransmit, distribute, disseminate, sell, publish, broadcast or circulate the information to anyone, without the express written consent of Burgan Securities. Burgan Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.