Equity / Mid Cap. / Utilities 11 February 2010 Bloomberg: AKENR TI New hydro plants offset the negative impact of lower DUY prices... Revisions in our natural gas price and electricity tariffs estimates In contrary to our expectations, there was no hike in natural gas prices in February 2010. Thus we have revised down our average NG price estimate for 2010 from TL0.68/m 3 to TL0.62/m 3. Parallel to this, our 2010 TEDAS tariff estimate slightly declined to TLkr19.3/kWh from TLkr19.6/ kwh. We made the major overhaul on our DUY price estimates. The DUY system is changed into a hourly based bidding system as of December 2009, which had a negative impact on prices. To be on the conservative side, we lowered our DUY price estimates for Akenerji throughout our forecast period. Note that the company still enjoys a premium compared to the prevailing average DUY prices thanks to its market player status. Revisions in sales breakdown Relatively less profitable DUY prices necessitate a change in Akenerji s sales breakdown target for 2010. In line with the management guidance, we expect the company to sell 60% of its electricity generation to DUY market instead of our previous forecast of 77%, while direct and indirect customers will have 40% stake in total electricity sold in 2010. Capacity additions on track Akenerji completed the financing of 3 new hydro power plants with a total capacity of 64MW in line with the 3,000MW capacity target in the upcoming 5 years. We have included these projects into our DCF model accordingly. However, we have slightly lowered our 2010E production figure due to the minor delays in ongoing investments. Recent Developments Reuters: AKENR IS Akenerji applied to the CMB to get approval for a 475% (TL310.5mn) rights issue to fund new investments. We expect the capital increase to be completed in 1Q10. Also, its major shareholders will use their pre-emptive rights as advanced payment in the capital increase as a commitment on company s long term growth plans. Maintaining our OUTPERFORM recommendation and TP The changes in our tariff assumptions resulted in a downward revision in 2010 forecasts but the newly added hydro capacity elevated the long term estimates. Hence our 12-month target price for Akenerji remained almost intact at TL21.6 (previous TL21.5). OUTPERFORM rating maintained. 20.0 15.0 10.0 5.0 0.0 Company Update OUTPERFORM (M) TL Upside Potential 28% * Excluding dividend yield Stock Data TRY US$ Price at 10 02 2010 16.90 11.19 12-Month Target Price 21.63 13.95 Mcap (mn) 1,104 732 Float Mcap (mn) 585 388 No. of Shares Outstanding Price / Relative Price AKENR Relative Relative to ISE 100 11-07 05-08 11-08 05-09 11-09 05-10 65 mn Free Float (%) 53.00 Avg.Daily Volume (3M, mn) 10.5 7.1 Market Data TRY ISE 100 50,568 US$ Spot Rate 1.5092 US$ 12-Month Forw ard 1.6254 Price Performance (%) 1 Mn 3 Mn 12 Mn TRY 1 22 201 US$ -3 20 223 Relative to ISE-100 9 18 55 250 200 150 100 50 52 Week Range (Close TRY) 8.45 18.50 0 Key Estimates (TRY mn) 2007 2008 2009 2010 2011 AKENR 2007 2008 2009E 2010E 2011E Sales 452 607 458 502 648 EBITDA -4 96 62 86 181 Net Income -40 89 47 50 106 P/E (x) a.d 7.1 13.8 22.3 10.4 EV/EBITDA (x) a.d 6.2 25.3 20.3 9.6 EPS -0.61 1.36 0.72 0.76 1.63 Dividend Yield (%) 0.0 0.0 3.23 0.6 0.9 Please refer to important disclaimer at the end of this report. Asli Ozata Kumbaraci akumbaraci@isyatirim.com.tr +90 212 350 25 26 Basak Dinckoc bdinckoc@isyatirim.com.tr +90 212 350 25 92 1
Summary of Key Financials (TL mn) 10.02.2010 AKENR ######## 01.01.2007 01.01.2008 01.01.2009 01.01.2010 01.01.2011 Income Statement (TRY mn) 2007A 2008A 2009E 2010E 2011E Revenues 452 607 458 502 648 EBITDA (5) 96 62 86 181 Depreciation & Amortisation 51 32 28 35 60 EBIT (56) 64 33 51 121 Other income (expense), net 4 3 (17) 3 3 Financial expenses, net 1 32 0 (1) (10) Minority Interests 0 0 0 1 2 Income before tax (55) 99 53 63 135 Taxation on Income 15 (10) (6) (13) (27) Net income (40) 89 47 50 106 Cash Flow Statement (TRY mn) Net Income (40) 89 47 50 106 Depreciation & Amortisation 51 32 28 35 60 Indemnity Provisions 0 0 0 0 0 Change in Working Capital (14) (23) 12 (15) (17) Cash Flow from Operations (3) 98 87 70 150 Capital Expenditure 12 168 317 262 116 Free Cash Flow (14) (71) (231) (192) 34 Rights Issue 0 0 0 0 0 Dividends Paid 0 0 18 6 9 Other Cash Inflow (Outflow ) (53) (55) (231) 191 48 Change in net cash (67) (126) (480) (6) 72 Net Cash (68) (194) (674) (680) (608) Balance Sheet (TRY mn) Tangible Fixed Assets 328 466 755 981 1,037 Other Long Term Assets 0 86 56 65 95 Intangibles 33 32 32 32 32 Goodw ill 36 37 37 37 37 Long-term financial assets 2 2 263 369 474 Inventories 8 6 4 5 6 Trade receivables 56 106 109 119 154 Cash & equivalents 88 101 50 41 40 Other current assets 44 13 19 21 27 Total assets 595 861 1,325 1,670 1,902 Long-term debt 147 260 289 407 442 Other long-term liabilities 1 9 10 10 10 Short-term debt 8 35 434 313 205 Trade payables 41 66 79 75 94 Other short-term liabilities 7 6 5 5 5 Total liabilities 206 382 818 811 757 Minority Interest 1 1 2 3 4 Total equity 388 479 505 856 1,140 Paid-in capital 65 65 102 102 102 Total liabilities & equity 595 861 1,325 1,670 1,902 Ratios ROE (%) -9.9 20.5 9.5 7.3 10.6 ROIC (%) -11.7 11.1 3.9 4.3 8.8 Invested Capital 384 543 821 1,062 1,134 Net debt/equity (%) 17.5 40.5 133.3 79.4 53.3 Capex/Sales (%) 2.6 27.7 69.2 52.2 17.9 Capex/Depreciation (x) 0.2 5.3 11.3 7.4 1.9 EBITDA Margin -1.0 15.8 13.4 17.2 28.0 EBIT Margin -12.4 10.6 7.3 10.2 18.7 Net Margin -8.9 14.7 10.2 9.9 16.4 Valuation Metrics EV/Sales (x) 1.7x 1.0x 3.4x 3.5x 2.7x EV/EBITDA (x) -188.0x 6.2x 25.3x 20.3x 9.6x EV/IC (x) 2.0x 1.1x 1.9x 1.6x 1.5x P/E (x) -11.6x 7.1x 13.8x 22.3x 10.4x FCF yield (%) (3.1) (11.2) (35.5) (17.3) 3.1 Dividend yield (%) 0% 0% 3% 0.6% 0.9% 2
We have revised our forecasts and TP for Akenerji to incorporate i) 3 hydro power plants (Himmetli, Gokkaya and Bulam) whose financing has been secured, ii) the changes in the company s guidance regarding the start-up date of Uluabat and Akocak hydro power plants, (iii) changes in our assumptions regarding the kick-off of Burc and Bulam hydro power plants, (iv) the changes in the company s guidance regarding its sales breakdown and finally (iv) the changes in our natural gas prices and electricity tariffs expectations, especially in DUY prices. New additional capacity Egemer natural gas power plant is still on the planning stage... Akenerji completed the financing of 3 hydro (Himmetli, Gokkaya, and Bulam) power plants with a total capacity of 64MW in December 09. Total cost of the investments will be 120 mn and the company will borrow 84 mn from Turk Sinai Kalkinma Bankasi with 8 years maturity, while the remaining 36 mn will be financed via equity. This recent action is in line with company s plans to increase its capacity to 3,000MW in the upcoming 5 years. We expect that Akenerji s current installed capacity (375MW) will increase to 746MW with those ongoing investments, financing of which have been completed. Since Egemer natural gas power plant with a total capacity of 900MW is on the development stage, we did not include it into our valuation. We have also included the changes in the start-up date of Uluabat and Akocak hydro power plants into our valuation. We had already assumed one quarter delay in our forecasts for these power plants. However, we revised our forecasts on the back of the company s new guidance and expect that Uluabat and Akocak hydro power plants with a total capacity of 181MW will be operational by the end of 1H10. Thus, we project semi contribution from these power plants into 2010. We also assume some delay for Burc (28MW) and Bulam (7MW) hydro power plants kick-off date and forecast that these will be fully operational in 1Q2011. Accordingly, our new electricity generation estimate decreased from 2,685 mn kwh to 2,468 mn kwh for 2010. Revisions in the sales breakdown We expect the share of DUY sales to decline to 60% from 77% in 2010... Akenerji changed its sales breakdown target for 2010. The company has 3 main types of customers: direct customers, indirect customers and DUY system. Accordingly, the company targets to sell 60% (previously 77%) of its electricity generation to DUY market, 10% to its direct customers and 30% ( previously 13%) to indirect customers. We kept this breakdown constant until 2015, later we increased indirect customers share gradually and kept the direct customers share constant for our forecast period. Note that direct customers have a physical direct line to the power plant, whereas the indirect customers are supplied through the national grid. The company applies average discount rate over the regulated tariffs for its direct and indirect customers. We assume 4% average discount rate for both type of customers based on TEDAS electricity tariff in the sake of simplicity. Figure 1: 2009 vs 2010 Akenerji Sales Breakdown 2009E 2010E Estimates 3
Revisions in our natural gas price and electricity tariffs estimates We were expecting a rise on the current natural gas prices, effective as of February 1 st, mainly due to the increase in crude oil prices. Remember that there is an automatic pricing system for natural gas. Accordingly, natural gas prices are being adjusted in three month intervals and changes in utility prices are being reflected on end-user tariffs. Albeit, there was no change in the natural gas prices, thus we revised down our natural gas price estimate for 2010 and envisage an average natural gas price of TL0.62/m 3 (previously TL0.68/m 3 ). Parallel to this, our electricity tariff estimate slightly declined to TLkr 19.3/kWh (previous: TLkr19.6/kWh). We expect lower DUY prices in 2010... We made the major overhaul on our DUY price estimates. Recall that the National Load Dispatch Center (NLDC), which works under the body of TEIAS, is responsible from realtime balancing of electricity demand and supply. The market participants notify NLDC about their price offers on a monthly basis. TEIAS lines the offers from the lowest to highest, and dictate the companies about their electricity generation. Since December 2009, the DUY market is changed into a new system, in which the market participants notify NLDC about their prices on a hourly basis. This new system lowered DUY prices, for example: the average DUY price was TLkr 13.26/kWh in November 09 and it was TLkr 11.98/kWh in December 09. The realized average DUY prices was TLkr 14.54/kWh in 2009. The company s management stated that they expect DUY prices stay at their low levels for 4-5 months but normalize afterwards since it is a transition period into the new system. It is also important to note that Akenerji is a market player in the DUY market and can sell its generated electricity to the DUY market at a premium to the announced DUY prices. Just to be on the conservative side, we lowered our DUY price estimates throughout our forecast period. We revised down our DUY price estimate for Akenerji from TLkr 22.54/kWh to TLkr 21.24/kWh for 2010. Figure 2: Revised Electricity and Natural Gas Price Estimates Price Estimates 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E TEDAS Electricity Prices (kr/kwh) 17.82 19.31 21.26 22.89 24.52 25.90 27.12 28.39 29.65 30.68 29.15 TEDAS Electricity Prices (Usc/kWh) 11.47 12.68 13.22 13.22 13.22 13.22 13.22 13.22 13.22 13.22 12.56 Natural Gas Prices (TL/m 3 ) 0.56 0.62 0.69 0.75 0.80 0.84 0.88 0.92 0.97 1.00 0.95 Natural Gas Prices (US$/m 3 ) 0.36 0.41 0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.43 0.41 Higher net income in 2009 but lower estimates in 2010... The table below summarizes our revised forecasts for Akenerji. Our FY09 net income estimate surged by 11% mainly due to increase in AkCEZ s bottomline, thanks to the appreciation of TL against other currencies in 2009. The bottomline expectation in FY10 decreased by 29% due to lower DUY price estimates and higher FX losses of AkCEZ. Also, the company targets to sell 60% of its generated electricity to DUY market in 2010, compared to 77% in 2009. We estimate that TL will depreciate against other currencies in 2010 which will increase AkCEZ FX losses related to SEDAS acquisition and will bring down our 2010 year end net income estimate for AkCEZ, which will lower our 2010 year end net income estimate for Akenerji. Please note that Akenerji consolidates Ak- CEZ via equity pick-up method. EBITDA decreases by 40%, owing to the lower production estimate and lower DUY prices. Figure 3: Revised forecasts for Akenerji 2009-Old 2009-New Change 2010-Old 2010-New Change Net Sales (TL mn) 482 458-5% 587 502-15% EBITDA (TL mn) 62 62-1% 145 86-40% Net Income (TL mn) 42 47 11% 69 49-29% Target Share (TL/share)- Old 21.55 Target Share (TL/share)- New 21.63 4
The changes in our tariff assumptions resulted in a downward revision in 2010 forecasts but the newly added hydro capacity carried the long term estimates to a higher level. Hence our 12-month target price for Akenerji remained almost unchanged at TL21.6 (previous TL21.5). We maintain our OUTPERFORM rating for the stock. Figure 4: DCF Summary of Akenerji s Generation Assets DCF Summary of Akenerji's Generation Assets US$mn 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Revenue 295 329 403 453 453 453 448 444 444 444 422 Growth -37% 12% 22% 12% 0% 0% -1% -1% 0% 0% -5% Gross Profit 26 34 65 85 97 105 106 112 121 124 114 Gross Margin 9% 10% 16% 19% 21% 23% 24% 25% 27% 28% 27% Operating Profit 3 10 38 58 70 78 79 85 94 97 87 Operating Margin 1% 3% 9% 13% 16% 17% 18% 19% 21% 22% 21% Depreciation 18 23 37 52 48 45 42 37 32 31 31 EBITDA 40 57 113 162 166 169 163 159 159 158 148 EBITDA Margin 13% 17% 28% 36% 37% 37% 36% 36% 36% 36% 35% (-) Capex 210 199 107 15 15 15 15 15 15 15 15 (-) Taxes on Income 4 7 15 22 24 25 24 24 25 26 23 Net Working Capital (-) Change in WC 0 4 8-24 0 0 0 0 0 0-1 Free Cash Flow (FCF) -174-153 -17 149 128 129 124 120 118 118 111 WACC 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% PV of FCF 1.02 1.11 1.20 1.30 1.40 1.52 1.65 1.78 1.93 2.09 2.26 Firm Value 1084 Net Cash/ Debt -434 12M Target Mcap 726 Figure 5: DCF Summary of AkCEZ DCF Summary of AkCEZ US$mn 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E...2036E Revenue 1,127 1,250 1,308 1,311 1,315 1,319 1,323 1,327 1,331 1,335 1,409 Gross Margin 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Theft & Loss Ratio target 9% 9% 8% 8% 7% 7% 7% 6% 6% 6% 6% Theft & Loss Ratio Real 7% 6% 5% 5% 5% 5% 5% 5% 5% 5% 5% EBITDA Margin 3% 4% 4% 5% 4% 4% 4% 3% 3% 3% 3% Depreciation 6 7 6 6 5 5 5 5 4 4 4 EBITDA 30 50 51 62 56 56 49 43 43 43 46 (-) Capex 10 10 10 10 10 10 10 10 10 10 10 (-) Taxes on Income 5 9 9 11 10 10 9 8 8 8 8 Net Working Capital (-) Change in WC -31-35 -36-36 -37-37 -37-37 -37-37 -39 Free Cash Flow (FCF) 47 66 69 77 72 72 67 62 62 62 66 WACC 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% PV of FCF 682 Net Cash/ Debt -300 12M Target Mcap 426 Akenerji's share (45%) 192 Akenerji - Sum of the Parts US$mn Generation Assets Distribution Assets Figure 6: Akenerji Sum of the Parts Akenerji's Stake Valuation (US$mn) Akenerji's Stake (US$mn) 100% 726 726 45% 426 192 TOTAL 12M Target Share Price (TL)-excluding expected dividends 918 22 5
Figure 7: 2009 Financial Results Preview TL(mn) 3Q09 4Q09E Q-o-Q 4Q08 Y-o-Y 2008 2009E Y-o-Y Revenues 91 82-10% 158-48% 607 458-24% EBITDA 11 7-33% 5 42% 96 62-36% EBITDA Margin 12% 9% -0.03pp 3% 0.06pp 16% 13% -0.02pp Net Income 15 16 7% 21-23% 89 47-47% Net Income Margin 17% 20% 0.03pp 13% 0.06pp 15% 10% -0.04pp & Company This report has been prepared by Yatırım Menkul Deerler A.. ( Investment) solely for the information of clients of Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary. The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of Investment. (www.isinvestment.com) This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. For more information, please visit Capital IQ's web site at www.capitaliq.com. 6