Investment Thesis Nov. 5, 2003 TL Cents Nov. 5, 03 Price: 4,025 0.27 Shares (mn): 19,200 ISE-100: 16,408 1.12 Mcap (mn): $52.5 TL/US$: 1,471,056 Mcap Rank: 92 52 Week High: 5,375 0.33 52 Week Low: 2,938 0.17 EV(mn): $78.6 Return 1 Month 3 Month YTD YoY TL Return: -9.0% 15.8% 19.3% -19.5% US$ Return: -15.8% 9.8% 32.9% -10.6% ISE-100 Rel.: -12.9% -20.2% -24.6% -41.3% Avg. D. Vol.: 46,018 lots 3.5 2.8 2.1 1.4 0.7 0.0 2.1 1.8 1.5 1.2 0.9 0.6 00 Karsan's ISE Rel. Performance/IPO to Date Feb 00 May 00 Aug 00 Nov 00 Feb 01 May 01 Aug 01 Nov 01 Feb 02 May 02 Aug 02 Nov 02 Feb 03 May 03 Aug 03 $EV/Sales (x) 01 02 max. avg. min. Current Karsan is expected to achieve 2003 revenue target of $90 million... High growth is projected for 2004 with new contracts... 03E We highly recommend Karsan under the light of future growth prospects and attractive valuation... As Karsan ( the Company ) has left a major transition period behind, we recommend the shares as a high potential long-term play, because: Karsan has changed its co-operation with Peugeot significantly with favorable terms in 2002. Under the new structure, the Company is able to manufacture third party vehicles for other automotive brands, while the licenses for the Partner and J9 models of Peugeot are renewed. Following the signing of the agreement in December 2002, the Company had to undertake investments in new production lines and technical preperations for a five-month period, during which it stopped production of Peugeot Partner, and could not respond to the market demand for this model. This resulted in significant decline in sales for the period. Therefore, the stock has substantially underperformed the ISE-100 index. The Company started manufacturing the new Peugeot Partner model as of May 2003, as soon as the technical preparations were complete, and three of the six Partner models as of September 2003. By May 2003, this progress started being reflected in the monthly statistics of Automotive Manufacturers Association ( AMA ). Vehicle sales of Karsan has increased from 125 vehicles per month for the first five months of 2003 to 852 vehicles per month for the third quarter, with 1,070 vehicles produced in September alone. Company s production reached 1,330 in October. Karsan has successfully upgraded it s Peugeot J9 model in line with the needs of the domestic market and was able to achieve a significant leap in J9 model sales starting from June 2003, increasing monthly sales of this highmargin model to 400 vehicles per month. As a result, the market share of J9 minibuses has increased from 40% in May 2003 to 54% in September 2003. In addition, the Company started providing technical services and products like; mold manufacturing, automotive parts pressing, and electro coating to automotive manufacturers including Renault, Ford, Toyota, and Tofaş Oto. Reactivation of Peugeot Partner sales by May 2003 and increase in J9 sales thanks to upgrading, as well as the additional revenues coming from automotive parts production and other services, will play an important role in achieving 2003 year-end sales target of $105 million. Furthermore, the Company has signed several new contracts in 2003, mainly targeting export markets. New contracts are expected to bring 42 million in additional revenues annually. The effects of those additional sales will be reflected to the financials of the Company mainly in 2004: Under the agreement signed in July 2003 between Karsan and SEVEL, the joint manufacturing center of Peugeot and Fiat, the Company will start transformation of the commercial vehicles Peugeot Boxer, Fiat Ducato and Citroen Jumper to special purpose niche models for the European market. Karsan expects 12 million in additional revenues anually with the agreement. Karsan also signed an agreement with Autokraz of Ukranie in August 2003, and will start exporting an average of 1,500 J9 SKD vehicles and their spare parts annually, starting from December 2003. 20 million in additional revenues is targeted anually with this agreement. Starting from October 2003, Karsan has undertaken the pressing business of certain Fiat Doblo parts. The Company is expecting an additional annual sales revenue of 10 million from this. Karsan targets $105mn in annual sales in 2003 and has revised 2004 estimate to $250mn, thanks to the completion of Peugeot Partner product portfolio, recent upgrade of J9 model, spare parts & other technical service sales, and the agreements to become effective in 2004. We recommend Karsan, based on the 38% discount to our target price calculated w.r.t. the domestic peer group, and 14% discount appearing at international comparison. Current MCAP of $53 million is also well below the IPO value, and $70 million worth of investments the company undertook.
Automotive Industry in Turkey Turkish Automotive Production Sep '03 Jan-Sep '03 Passenger Cars 27,902 194,337 Change (%) 30% 35% Commercial Vehicles 22,797 160,636 Change (%) 60% 78% M. Truck 1,631 8,857 L. Truck 457 2,957 Pickup 17,648 133,433 Bus 493 3,201 Minibus 1,720 7,963 Midibus 848 4,225 F. Tractor 2,950 21,254 Grand Total 53,649 376,227 Change (%) 45% 55% Source: Automotive Manufacturers Association The recent years of the automotive industry in Turkey has been marked by economic crises, shrinking domestic demand, as well as intense domestic competition, while export projects continued to support the sector, starting with the devaluation of Lira. However, starting from August and September 2003, we see a significant surge in domestic demand. Manufacturing -- According to the January-September 2003 production figures disclosed by AMA, the increase in vehicle production within the first nine months of 2003 was mainly driven by the commercial vehicle segment. Total automotive (passenger cars + commercial vehicles) production has increased by 55% YoY in January-September 2003 period, while commercial vehicle production increased by 78% and passenger car production increased by 35% in unit terms YoY. Domestic Vehicle Sales -- With stabilizing macro indicators and political stability, consumer confidence started to recover in 2003. Domestic sales increased by 104% YoY during January-September 2003. Within the ninemonth period, a total of 220,400 vehicles were sold, corresponding to 82% of 267,400 vehicles, the average of last ten years for the same period. From February on, the gap between monthly sales and average monthly sales of last ten years started to narrow, and reached 103% of last ten year monthly average in August 2003, and 111% in September 2003. Those figures suggest a serious recovery trend in the domestic market, which we believe will continue through 2004. 50 45 Total Domestic Market Analysis Last 10 Year Average 2002 2003 46.3 Vehicle Sales (thousands) 40 35 30 25 20 15 10 5 0 28.7 24.6 17.4 19.2 12.7 11.7 8.2 2.4 4.5 34.8 29.7 27.5 39.6 39.6 33.6 33.2 36.8 28.7 35.8 30.1 32.3 30.2 27.8 16.9 16.7 20.3 18.3 18.2 16.0 16.1 14.9 12.3 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Strong growth in exports, led by the production of new commercial vehicles for European markets by Ford Otosan and Tofaş Oto Fabrika... Good competitive power vis-a-vis imports... Exports -- Vehicle exports showed significant increase during January- September YoY. Total vehicle exports increased by 46%, passenger car exports increased by 28% and commercial vehicle exports increased by 77%, on a unit basis. Imports -- Share of import vehicle sales within the domestic market was 53% during January-September 2003. Imports accounted for a mere 42% in commercial vehicles segment, and 66% for passenger car sales. The significant difference in share of imports between segments suggests that the domestic commercial vehicle manufacturers enjoy relatively higher competitive advantages, and that the increase in imports might continue to be less of a threat for this segment, another factor favoring Karsan.
A Closer Look at Karsan Otomotiv Shareholder Structure of Karsan (%) Kıraça Otomotiv San. 73.93% Diniz Group 12.52% Others 1.55% Float 12.00% Foreign Holding/as percentage of float 6.00% 100.00% Karsan holds exclusive rights to manufacture and export Peugeot branded vehicles... Karsan recently gained the flexibility to manufacture models of Peugeot s competitors... Karsan continues negotiations with Europe s leading producers... New contracts will bring in handsome additional sales revenues starting from 2004... Karsan has completed a $70 million investment in November 1999, and moved its production facilities with 20,000 sqm. closed area and 10,500 annual vehicle production capacity to a new facility with 60,000 sqm closed area, increasing annual production capacity to 25,000 vehicles. In line with the new strategy of the Company, the new facilities were designed so that different types of vehicles can easily be manufactured with minor adjustments. In addition, it will be possible to increase the production capacity to 40,000 vehicles annually with a relatively small amount of investment. The Company has revised its co-operation with Peugeot in November 2002. Accordingly, Kıraça Otomotiv Sanayi, the major shareholder of Karsan, sold its 40% stake at Peugeot Otomotiv Pazarlama A.Ş. (the marketing & sales company) to Peugeot, and the proceeds were paid to the shareholder Kıraça Otomotiv, in return for which Karsan renewed its license agreements with Peugeot for Peugeot Partner and Peugeot J9 under competitive terms. Consequently, the exclusive rights to manufacture and export Peugeot branded vehicles, as well as sales to government institutions in Turkey are retained by Karsan. In addition to gaining the exclusive rights to manufacture Peugeot branded vehicles in Turkey, the revised agreement also provided Karsan the freedom to manufacture brands of Peugeot s competitors. Therefore, the agreement has become an important step towards Karsan s strategy of becoming a flexible manufacturing center. Karsan differentiates itself from other automotive manufacturers through its strategy of serving various brands under the same roof. Having the founders of the Turkish automotive industry as shareholders along with established relationships with other automotive manufacturers, Karsan has major advantages in the sector. Thanks to the agreement signed between Karsan and Peugeot in December 2002, the Company also has gained the flexibility to manufacture models of Peugeot s competitors. Therefore, Karsan will be able to manufacture various models that are similar to Peugeot Partner, like Berlingo of Citroen and Kangoo of Renault etc., if an agreement can be reached with the manufacturers of such brands. Karsan management has announced that negotiations for various third party manufacturing projects are ongoing, that some of the projects were agreed upon as previously announced, and in some other projects, the negotiations are close to being finalized. According to the agreement recently singed between the Company and Sevel, the joint manufacturing center of Fiat and Peugeot, Karsan will act as the sole manufacturer of the transformation for Peugeot Boxer, Fiat Ducato, and Citroen Jumper van models to minibuses for the European and domestic markets. Karsan will be able to increase its sales by 12 million starting in 2004 by means of this agreement. Fiat, Peugeot and Citroen will obtain significant cost advantages for these special purpose niche models that have an estimated market demand of 3,000 vehicles annually in Turkey and Europe. The Company will also start exporting an average of 1,000 J9 SKD vehicles annual and their spare parts to Autokraz of Ukraine, starting from December 2003. As the Ukrainian production content of these vehicles increase, the annual sales volume is also expected to reach 1,500 2,000 vehicles. This agreement will enable Karsan to export with its own brand for the first time, and the Company is expecting 20 million in additional revenues. Finally, Karsan has taken the pressing business of some important Fiat Doblo parts, which will require no additional investment. The Company is expecting additional annual sales revenues of 10 million from this business. 2004 is expected to be a golden year for Karsan... Karsan management also has ongoing negotiations with various automotive manufacturers, which are close to the final decision making phase, as the Company aims to conclude those strategic agreements by the end of this year. Taking these recent steps into consideration, the management emphasizes that 2004 will be a golden year for Karsan.
From competition to cooperation... Export prospects... Peugeot Partner manufactured by Karsan competes with Connect of Ford Otosan, Doblo of Fiat, Berlingo of Citroen, and Kangoo of Renault, in the commercial vehicles segment. High level of competition, decline in purchasing power and shrinking market size as a result of the economic crisis and fall in economic activity has limited Karsan s performance over recent years. However, with its new strategy, Karsan will be able to increase its capacity utilization rate as well as its market share starting from 2004. Karsan has positioned itself to benefit from the overall growth in the segment, by not only manufacturing Peugeot vehicles, but also executing pressing business of Doblo, and electro coating services for Renault. The ability of the Company management to turn the existing competition into cooperation will positively affect Karsan s revenue prospects. Total export volume of Karsan, including Peugeot Partner exports, stood at $40 million in 2002. The management has announced that the Company will start manufacturing different versions of Partner for the domestic market in 2003, may export Partner starting from second half of 2004. Based on the positive feedback from the export of 4,500 Peugeot Partner s to France in 2002, and J9 exports to Algeria, Ukraine, Bulgaria and Egypt, Karsan projects $12mn in exports for 2003, which is estimated to reach $70 million in 2004. However, exports to European countries have been adversely affected from the appreciation of Euro against the USD, as well as the slowdown of European economies. Unless the economic conjuncture in Europe changes in 2004, it might become harder for the Company to reach its export goals. On the other hand, the economic contraction may well force the European manufacturers to shift the production of some of their models to manufacturers like Karsan, with flexible production facilities, and cost advantages. This view is also supported by the recent announcement that Renault has chosen Turkey as the base for the manufacturing of its Megane model, and Ford is shifting major production from Genk/Belgium to Turkey. 3Q03 Results The 1H03 revenue of Karsan does not reflect the potential of the Company... The profitability of Karsan increased as a result of increased share of J9 sales... The Turkish market saw significant growth in commercial vehicle sales during first nine months of 2003. However, Karsan could not take advantage of that growth due to the transition and technical preparation period following the new partnership agreement with Peugeot. As the Company started manufacturing Peugeot Partner in May 2003, nine-month figures of Karsan do not reflect the positive developments in the sector. In the nine-month period, Karsan did not produce any Peugeot Boxer model vehicles, while Peugeot Partner production declined by 76.7% to 1,992, however Peugeot J9 production increased by 12.1% to 1,677 units, thanks to an upgrade in the model. In line with the production decline, Karsan s overall sales declined substantially by 63.6%, from 10,181 vehicles to 3,708 vehicles, upon which net sales revenues also fell by 41.7% to $48.3 million. Considering that the decline in net sales revenues stood at 73% in 1H03, signs of recovery become visible in the third quarter. Despite the rise in production capacity by more than two-folds and low capacity utilization rate, gross margin of Karsan increased from 9.1% in 3Q02 to 15.7% in 3Q03, mainly stemming from a rise in the share of higher-margin J9 model in overall sales (which has a higher domestic contribution of 77% in production), along with higher spare part sales and services offered under the new contracts (like molding business for Fiat, electro coating business for Renault, and pressing of Doblo parts for Tofaş, which are relatively higher profit margin businesses). Due to the dramatic but temporary reduction in production, the rate of decline for operational costs were low compared to the decline in revenues however, Karsan s EBITDA margin increased from 6.1% to 15.6% in the nine-month period.
Despite the sale of Karsan s old factory to Kıraça Holding in 4Q02 for TL12 trillion ($7.3 million), Karsan s net debt position almost remained unchanged at $26.1mn in 3Q03, with ongoing investments. Thanks to the appreciation of Lira against USD, Karsan s financial expenses declined in 2003, reducing net nonoperating losses from $7.4 million to $1.2 million. However, slowdown of production within the scope of the restructuring process led to $6 million in extraordinary losses related with the unused capacity, hence, Karsan ended the period with a loss of $4.6mn, slightly better when compared to a loss of $7.9mn in the same period of previous year SUMMARY BALANCE SHEET (TL MN) SUMMARY INCOME STATEMENT (TL MN) 2002/09 2003/09 $ 2002/09 2003/09 $ CURRENT ASSETS 29,911,582 30,516,746 21.6% Gross Sales 121,818,737 74,286,025-40.6% Cash & Banks 6,337,022 771,279-85.5% Domestic Sales 63,600,021 70,012,479 7.3% Marketable Securities 0 0 - Exports 58,218,716 4,238,602-92.9% Trade Receivables 14,308,185 14,684,613 22.4% Other Sales 0 34,944 n.m. Other Receivables 14,945 22,503 79.5% Sales Discounts ( - ) -27,143-1,406,436 n.m. Inventories 8,600,069 14,159,408 96.3% Net Sales 121,791,594 72,879,589-41.7% Others 651,361 878,943 60.9% COGS ( - ) 110,659,220 61,463,961-45.9% FIXED ASSETS 66,805,535 84,022,097 49.9% Gross Profit (Loss) 11,132,374 11,415,628-0.1% Receivables 101 101 19.2% Operating Expenses ( - ) 8,836,845 7,106,261-21.6% Financial Assets 64,050 755,600 1306.4% Sales, Market. & Dist.( - ) 3,612,173 1,995,726-46.1% Net Tangible Assets 66,558,184 82,354,464 47.5% General & Admin.( - ) 5,224,672 5,110,535-4.7% Intangible Assets 162,690 173,647 27.2% Research & Dev. ( - ) 0 0 n.m. Others 20,510 738,285 4191.5% Operating Profit (Loss) 2,295,529 4,309,367 83.0% TOTAL ASSETS 96,717,117 114,538,843 41.2% Other Profit 8,017,177 2,383,986-71.0% Other Losses ( - ) 1,886,953 2,634,031 36.1% SHORT-TERM LIABILITIES 41,128,123 40,825,836 18.3% Financial Expenses ( - ) 16,944,716 1,686,758-90.3% Financial Debt 31,174,920 22,924,572-12.3% Extraordinary Profit (Loss) (3,063,951) (9,294,259) n.m. Trade Payables 6,364,110 15,158,755 184.0% Earnings (Loss) Before Tax -11,582,914-6,921,695 n.m. Other Liabilities 2,023,536 1,362,595-19.7% Taxes ( - ) 0 0 n.m. Advances Received 223,070 517,262 176.5% Net Income -11,582,914-6,921,695 n.m. Provisions 1,342,487 862,652-23.4% LONG-TERM LIABILITIES 24,346,666 18,218,585-10.8% SUMMARY OF FINANCIAL RATIOS Financial Debt 21,272,228 13,953,969-21.8% 2002/09 2003/09 Other Liabilities 0 0 - Net Cash ($mn) -27.9-26.1 Severance Provisions 3,074,438 4,264,616 65.4% Net Working Capital ($mn) 10.0 9.9 OWNER'S EQUITY 31,242,328 55,494,422 111.8% Capex ($mn--non financial) 1.3 10.9 Paid-in Capital 4,800,000 19,200,000 376.9% Gross Margin % 9.1 15.7 Capital Surplus 5,400,000 5,400,000 19.2% Operating Margin % 1.9 5.9 Revaluation Fund 38,240,248 56,704,640 76.8% EBITDA Margin % 6.1 15.6 Reserves 8,919,667 9,033,769 20.7% PBT Margin % -9.5-9.5 Current Year Profit (Loss) -11,582,914-6,921,695 - Net Margin % -9.5-9.5 Prior Year Profit (Loss) -14,534,673-27,922,292 - $ Fin. Debt / Equity 1.68 0.66 TOTAL LIABILITIES 96,717,117 114,538,843 41.2% $ Fin. Debt / Sales 0.38 0.55 Expectations for 2003 & 2004 Considering the adverse impact of the first five months, the Company management states that the total sales of Peugeot Partner for 2003 is expected to reach 8,000 vehicles (including the sale of domestically produced and imported vehicles), as Karsan starts to increase the number of new versions of Partner that it manufactures, whereas this figure was 9,961 for the last year. In order not to lose market share in the commercial vehicles segment, Peugeot Otomotiv Pazarlama imported Peugeot Partner models in 2003 until May, when Karsan started the domestic manufacturing of the new Peugeot Partner. Hence starting from 2004, almost all of the models will be manufactured domestically, resulting in all the domestic demand being met by Karsan. For 2003, Karsan expects $105 million in revenues, as opposed to $102 million in 2002. Bulk of the targeted revenues will be realized in the second half of the year. Important new export contracts Karsan management expressed that the Company targets an export volume of $12 million in 2003 (in 2002 the cumulative export figure for Peugeot Partner and J9 was $40 million). Since Karsan will be able to meet both domestic and foreign demand by early next year, company management targets to sign new export contracts for the European market, as in 2002 for the previous Partner model. 2004 export target stands at $70mn, while the company expects revenues to reach $250mn in 2004.
In addition, the export contract for the sale of 1,500 J9 (SKD) minibuses and their spare parts to Autokraz of Ukraine under Karsan brand starting in November 2003 will bring in 20mn in additional revenues. The agreement signed between the Company and Sevel, for transformation of Peugeot Boxer, Fiat Ducato, and Citroen Jumper Van commercial vehicle models to minibuses for the European and domestic markets will enable the Company sales to increase by 12 million annually, starting 2004. Finally, the pressing business of some important Fiat Doblo body components will bring additional annual revenue of 10 million to Karsan. Thus, these recently signed agreements will bring 42 million in additional revenues, on top of the increasing sales volumes for the existing businesses next year. Despite Karsan s net sales target of $105mn for 2003 and $250mn for 2004, we stay on the conservative side in making our forecasts. (US$mn) 2000 2001 2002 2003E 2004F Net Sales 195.8 62.3 102.0 90.0 200.0 YoYD 63.8% -68.2% 63.8% -11.8% 122.2% Opt. Profit 18.1 (1.6) 3.0 5.4 9.0 YoYD 29.0% n.m. n.m. 79.7% 66.7% Net Profit 11.4 (11.8) (0.9) (4.7) 3.0 YoYD 21.9% n.m. n.m. n.m. n.m. EPS (cents) 0.473 (0.246) (0.019) (0.024) 0.016 Net Cash (Debt) (13.0) (20.9) (17.6) (23.5) (15.0) International Peer Group Trading Multiple Analysis Trading Ratios Sector Average* Implied MCAP ($m) EV/Sales (2003E) 0.86 49.8 EV/EBITDA (2003E) 9.87 61.6 EV/BV (2003E) 2.92 70.2 Average 60.6 * Sector data includes; Volkswagen, Fiat, Renault, BMW, and Daimler Chrysler. Domestic Peer Group Trading Multiple Analysis Trading Ratios Sector Average* Implied MCAP ($m) EV/Sales (2003E) 1.06 68.3 EV/EBITDA (2003E) 11.47 76.0 EV/BV (2003E) 4.23 113.7 Average 86.0 * Sector data includes; Anadolu Isuzu, Ford Otosan, Otokar, and Tofaş. Valuation We reach a target MCAP of $85.9 million for Karsan, based on domestic peer group market multiple comparables analysis, which includes Anadolu Isuzu, Ford Otosan, Otokar, and Tofaş Fabrika as domestic peers. This implied value suggests that with a current MCAP of $52.5 million, Karsan is trading at 38% discount. Based on international peer group market multiple comparables analysis including Volkswagen, Fiat, Renault, BMW, and Daimler Chrysler, we reach a target MCAP of $60.6 million for Karsan, suggesting a 14% discount for Karsan. One should also consider that due to the restructuring process that took place, the first half of 2003 was a particularly bad period for Karsan, depressing 2003 figures significantly. Based on 2004 forecasts, multiple analyses suggest an implied MCAP of $110 million and $81 million for domestic and international peer groups, suggesting respective discounts of 52% and 35%. The average EV/Sales (2003E) ratio of the Company is at 13% discount to it s average for 2000, and at 43% discount to the average for 2001. Also, the average EV/EBITDA (2003E) ratio of the company is at 61% discount to the average for 2001. The post-money IPO MCAP of Karsan was $207 million in February 2000. Considering the fact that the shares of the Company has underperformed ISE-100 Index by 33% since the offering and 24.6% yearto-date, Karsan s current MCAP of $52.5 million suggests significant potential for over-performing the index. The information and interpretations included in this report are compiled from non-exclusive and public eras believed to be reliable. Notwithstanding the foregoing, neither T. Dış Ticaret Bankası A.Ş. nor Dış Yatırım Menkul Değerler A.Ş. nor any of its members or employees with any rank and responsibility and/or authority whatsoever and bind with any contract can be held liable for any direct and/or indirect losses or any unfavorable consequences, loss of profit, moral losses and third party damages or any unfavorable consequence that investors may suffer because of the wrong or missing points in this report or the sources of this report. This report was prepared with the purpose of providing information to the investors and under no conditions should be it be interpreted as an advice for the purchase or sales of securities, the earnings of portfolios of funds in the past may not be the indicator of earnings to be gained in future periods. The value of Investment Trust Shares can always fluctuate according to the conditions of the security markets. This information gathered in an extremely volatile and professional market can not bind and/or hold responsible its senders. The users will only act with their own knowledge, initiative and assessment.