Equity / Mid Cap. / Construction Alarko Holding Bloomberg: ALARK TI Reuters: ALARK IS Favorable combination of energy and contracting New contracts to be added to the backlog in 2013. The total backlog of Alsim, a fully owned subsidiary, reached ca.us$1.61bn as of March 31, 2013. Moreover, Alsim is following several contracting opportunities in Russia, Kazakhstan, Morocco and Kuwait in abroad, and Besiktas - Mahmut Bey and Bakirkoy - Beylikduzu metro projects in Turkey. The tenders for both metro projects are expected to be held in the middle of 2013. The Group is closely monitoring privatization process of railway transportation following the draft law presented to the Parliament. The Group is eyeing the tender for 3rd airport of Istanbul and privatization of electricity generation assets. The Holding will possibly team up with one or two local or international partners to bid in the 3rd airport tender as the total size of the project is estimated at US$6 10bn. Besides that, Alarko Holding is also interested in upcoming privatization tenders for electricity generation assets. The Group is investing US$1.5bn in energy. The construction of 1,320MW coal fired power plant, Karabiga, is planned to start in 2013 and to be completed in 3.5 years. The license for the plant is expected to be obtained from EMRA in 2Q13 and the financing will be completed in the beginning of 2014. We expect the total annual generation of the plant to be around 9,500 GWh, and EBITDA to be roughly at US$400mn. Positive news flow on the Maslak land may unlock the hidden value. Alarko REIT has a 19,000sqm land in Maslak, which is a prime location in Istanbul. The company plans to invest US$150mn for a mixed real estate project by 2014. Recent transactions imply US$300mn value for the project. Positive news flow may unlock the hidden value of Maslak land, which may be a trigger for the share prices of both ALGYO and ALARK. Increasing exposure to Kazakhstan. Following the Aktogay project, the share of Kazakhstan in total backlog of Alsim reached 78%, increasing the risk of dependency on a single country, which may be regarded as a long term risk. Alsim holds 42% share in total NAV of the Group. Hike in natural gas prices may hurt bottom line after 2012. The rise in natural gas prices affects Alarko s energy generation segment severely since 93% of the capacity comes from natural gas fired plants. Cumulative price hikes on natural gas totaling 52% since October 2011 have only been partially compensated by the electricity price, which increased by 23%. Limited financial transparency. The Company s listed subsidiaries, Alarko REIT and Alarko Carrier, comprises 16% of Holding s NAV. There is limited information available particularly on the contracting and energy segments, which may create some transparency discounts on NAV. 12-month target price raised to TL6.81 per share. We raised our target price to TL6.81, from TL6.19 per share offering a 17% upside potential to the current price. We maintain OUTPERFORM recommendation for the shares. The major revision came from the contracting segment as we have added the recently signed contracts to the backlog. We have also updated peer group multiples. Please refer to important disclaimer at the end of this report. 1 Company Update OUTPERFORM Upside Potential* 17% Stock Data TRY US$ Price at 09 04 2013 5.82 3.25 12-Month Target Price 6.81 3.82 Mcap (mn) 1,301 728 Float Mcap (mn) 364 204 No. of Shares Outstanding 223 mn Free Float (%) 27.96 Avg.Daily Volume (3M, mn) 1.9 1.1 Market Data TRY ISE 100 82,770 US$ Spot Rate 1.7862 US$ 12-Month Forw ard 1.8654 Price Performance (%) 1 Mn 3 Mn 12 Mn TRY 8 11 41 US$ 9 10 41 Relative to ISE-100 9 8 3 Price / Relative Price 7.0 6.0 5.0 4.0 3.0 2.0 TRY 09/04/2013 * Including dividend yield Relative 140 120 100 80 60 40 1.0 ALARK 20 0.0 Relative to ISE 100 0 02-11 08-11 03-12 10-12 05-13 52 Week Range (Close TRY) 2.85 5.82 Mustafa Kucukmeral mkucukmeral@isyatirim.com.tr +90 212 350 25 16 Basak Dinckoc bdinckoc@isyatirim.com.tr +90 212 350 25 92
Investment Positives New contracts to be added to the backlog in 2013. Alarko Holding s contracting arm Alsim has been awarded Aktogay Copper Plant Projects in Kazakhstan with US$633mn contract size and the US$132mn extension of Levent Ayazaga Subway Project, 50% of which will be Alarko s share. The total backlog of Alsim reached ca.us$1.61bn as of March 31, 2013. The Group is also following several contracting opportunities in Russia, Kazakhstan, Morocco and Kuwait abroad, while closely following Besiktas - Mahmut Bey and Bakirkoy - Beylikduzu metro projects in Turkey. The tenders for both metro projects are expected to be held in the middle of the 2013. Besides that the Group is closely monitoring privatization process of railway transportation following the draft law presented to the Parliament to privatize railway transportation. All in all, they target to add a total consideration of ca.us$2bn worth of projects to their current backlog in upcoming periods. We do not assign any probability to those projects and do not calculate any additional value yet. Therefore, possible additions to the backlog will lead to a revision in the target price. The Group is eyeing the 3rd airport of Istanbul and privatization of electricity generation assets. The Holding will possibly team up with one or two local or international partners to bid in the tender as the total size of the project is estimated at US$6 10bn. Other than Alarko, international players like Fraport, GMR UEM Berhad Group, and local players like Sabanci Holding, TAV, Limak and IC Ictas have announced their interest in the tender. Besides the airport project, Alarko Holding is also interested in upcoming privatization tenders for electricity generation assets. The Group is investing US$1.5bn in energy. The construction of Karakuz HEPP project is ongoing, while the construction of 1,320MW coal fired power plant, Karabiga, is planned to start in 2013 and to be completed in 3.5 years. The license is expected to be obtained from EMRA in 2Q13. The project is estimated to be financed via 25%/75% equity/debt combination. Half of the external debt is planned to come from China Development Bank, while the financing is expected to be completed by the beginning of 2014. The Group has 50% share in the project. The project includes a port investment, which is estimated to cost approximately US$80-90mn. The major part of the investment will be undertaken in 2014 and afterwards and the construction will be completed in 3.5 years. The plant will be using imported coal, as stated by the company, the price in Australia and South Africa can be used as reference price for the cost of the imported coal. We expect the total annual production to be around 9,500 GWh. Our revenue expectation stand roughly at US$800mn, while we expect the EBITDA margin to be at ca.50%. Our valuation for Alarko Holding does not include the Karakuz HEPP project since the financing has not been closed yet. Positive news flow on the Maslak land may unlock the hidden value. Alarko REIT (listed subsidiary under the ticker ALGYO) has a 19Ksqm land in Maslak, which is a prime location in Istanbul. Alarko is planning to increase the floor-to-area ratio to 2.9x from current 1.0x. As soon as the Company receives approval, it will invest US$150-200mn for a mixed real estate asset project including a hotel and residential area and retail space by 2014. Recent transactions imply US$300mn value for the project. Therefore, positive news flow regarding the project will most likely unlock the hidden value in Maslak land, which in turns may trigger the share price both for ALGYO and ALARK shares. 2
Investment Negatives Increasing exposure to Kazakhstan. Following the Aktogay project, the share of Kazakhstan in total backlog of Alsim reached 78%, increasing the risk of dependency on a single country, which may be regarded as a long term risk. Note that Alsim holds 37% share in total NAV of the Group. Yet, at least in the short term, we do not see any country related risk as Kazakhstan has a settled political system. Hike in natural gas prices may hurt bottom line after 2012. The rise in natural gas prices affects Alarko s energy generation segment severely since 93% of the generation capacity is composed of natural gas fired plants. Cumulative price hikes on natural gas totaling 52% since October 2011 have only been partially compensated by the electricity price, which increased by 23% since then. Limited financial transparency. The Company s listed subsidiaries, Alarko REIT and Alarko Carrier, comprises 16% of Holding s NAV. There is limited information available particularly on the contracting and energy segments, which may create some transparency discounts on the NAV. Stake sale by family members. Dalia Garih, a Board member of Alarko Holding, has registered 447k shares with a total value of ca.tl 2.6mn with latest closing price. Since the value of registered shares is just ca.2.4 times of its 3-month average daily volume of ALARK shares, we do not expect a major downside pressure on the price of ALARK shares. Outlook and Valuation 12-month target price raised to TL6.81 per share. We raised our target price to TL6.81, from TL6.19 per share offering a 17% upside potential to the current price. We maintain OUTPERFORM recommendation for the shares. The major revision came from the contracting segment as we have added the recently signed extension contracts of Ankara Subway Project and Bozshakol copper ore plant to the backlog together with the updated peer group multiples with a conservative EBITDA margin assumption of 8.3% for the next 2 years, which is distinctly lower than both company s last 3 year s average of 12% and company s target EBITDA margin of 9-12%. Accordingly, we raised our target value for Alsim to US$484mn from US$379mn. Trades at a deep discount to its current NAV. Although Alarko Holding shares outperformed the ISE 100 by 7% YtD, the Holding still trades at a 36% discount to its target NAV, which is higher than average holding universe discount of 22%. The discount has narrowed by 6pp YtD, though it is still 14pp above its peers. At our PT, ALARK would be trading at a 25% discount to its target NAV. Possible SPO of Alarko Holding and IPO of Altek on the agenda. The CEO of the Group, Ayhan Yavrucu, has recently signaled that the Group might increase the free float of the Company to 40-45% level from the current 28%, though there is no Board decision taken yet. Despite the fact that we do not know whether the possible SPO would be through capital increase or possible stake sell of existing owners, the move will increase the trading volume of the Company in a longer term perspective. Mr. Yavrucu also added that the IPO of Altek, the energy generation arm of the Group, may come to the agenda once the ongoing investments will be completed, signaling 2016 for the possible IPO date. The new IFRS reporting standards will significantly change the reporting methodology. It should be noted that 1Q13 financials will be prepared according to the new IFRS standards, which will significantly change the financial tables of Holding companies. Accordingly, Alarko Holding will not be partially consolidating its JVs, but will consolidate them under equity pick up methodology, disturbing the like for like comparison with the historic figures older than 2012, while the bottom line figure will not be affected by new standards. 3
PROJECTS ON HAND (US$ mn) IN TURKEY Segmental Analysis Contracting segment to be the best performing segment in 2013 again. Alarko s contracting subsidiary Alsim mainly focuses on large scale infrastructure projects in Turkey and MENA region. It has a strong track record in local and international projects such as subways, railroads, airports, highways, pipelines and refineries. Alsim s total projects under execution reached US$2.2bn and the backlog touched US$1.6bn level as of end March, 2013. We believe 2013 to be another bright year for contracting business thanks to the follow up projects with potentially higher margins. Alarko Holding is following several contracting opportunities in Turkey and abroad. The Group targets to add a total of ca.us$2bn worth of projects with an annual contracting digestion capacity of US$500mn. We did not assign any probability to those projects and did not calculate any additional value yet. Taksim - Yenikapi Subw ay 280 53 58 2007 2013 62 Levent - Hisarüstü 132 50 0 2012 2014 66 Levent - Ayazaga Subw ay 447 50 98 2008 2013 4 Ankara Subw ay 300 47 33 2011 2014 94 Subtotal 1,160 579 227 ABROAD Contract Size (US$ mn) Aktogay Copper Ore Plant Preoject (Kazakhstan) 633 100 1 2013 2016 627 Bozshakol Copper Ore Plant Project (Kazakhstan) 518 100 36 2011 2014 329 Taldykol Sew er Pond 2nd stage (Kazakhstan) 30 100 88 2011 2013 4 Taldykol Sew er Pond 3rd stage (Kazakhstan) 98 100 0 2012 2014 98 Taldykol Sew er Pond 4rd stage (Kazakhstan) 48 99 2 2012 2015 47 Tanger-Kenitra Railw ay Connection (Morocco) 128 100 0 2012 2014 127 Aktau-Manasha Highw ay Rehab. Lot1 (Kazakhstan) 40 100 0 2012 2014 40 Aktau-Manasha Highw ay Rehab. Lot2 (Kazakhstan) 40 100 0 2012 2014 40 Aktau-Manasha Highw ay Rehab. Lot3 (Kazakhstan) 35 100 0 2012 2014 35 Aktau-Manasha Highw ay Rehab. Lot4 (Kazakhstan) 39 100 2 2012 2014 38 Subtotal 1,610 1,609 1,386 Total Projects under Execution 2,770 1,613 Alarko's Portion 2,188 Alarko's Portion (%) Completion (%) Construction Period Backlog Possible additions of Besiktas - Mahmut Bey and Bakirkoy - Beylikduzu metro projects may increase the share of Turkey significantly, considering the size of the projects. The tenders for both metro projects are expected to be held in the middle of the 2013. On the other hand, Alarko Holding is also following several contracting opportunities in Russia, Kazakhstan, Morocco and Kuwait. POTENTIAL PROJECTS (US$ mn) Total Size (US$ mn) Alarko's Share Backlog Tender Date Bozshakol Copper Ore Plant Project-Kazakhstan 120 100% 120 2013 Kabataş-Mahmutbey Metro Line 1500 n.a. n.a. 2013 Aktogay Copper Ore Plant Preoject-Kazakhstan 70 100% 70 2013 Taldykol Treatment Plant-Kazakhstan 60 100% 60 2013 Astana Water Treatment Project-Kazakhstan 50 100% 50 2013 Bakırköy - Beylikdüzü Metro Line n.a n.a. n.a 2013 Göztepe Training & Research Hospital n.a 50% n.a 2013 May, Is Investment 4
The share of projects in Turkey fell to 14%, as projects abroad now accounts for 86%, of which 78% comes from the projects in Kazakhstan. The two major projects; Aktogay and Bozshakol copper ore plants, comprise 60% of current backlog. Backlog Breakdown by Countries and Project Category Current Backlog Breakdown by Country Morocco; 8% Turkey; 14% Current Backlog Breakdown by Project Category Railway ; 8% Waste water treatment plant; 9% Motorway; 9% Kazakhstan ; 78% Subway; 14% Copper ore plant; 60% The contribution of the contracting segment to the P&L was eye-catching in 9M12. While consolidated EBITDA reached TL48mn, up by 63% YoY, the top line increased to TL286mn, up by 54%. The additions to the backlog helped the conglomerate to go beyond the previous years margins edging up to 17%, which is a record in recent years. Revenue Bridge (TL mn) and Breakdown Revenue Breakdown 9M2012 Tourism; 5% Industry & Trade; 9% Seafood; 2% 1,300 1,200 1,100 130 Revenue Bridge 100 9 7 2-0 1,182 1,000 934 900 Contracting & Land D.; 24% Energy; 59% 800 700 9M11 Energy Contracting Industry & & Land D. Trade Tourism Seafood Elimination 9M12 Energy has the highest contribution to consolidated revenues. The electricity generation company, ALTEK, which is a fully owned subsidiary of Alarko Holding, operates 1 hydroelectric and 2 natural gas power plants, with a total 177 MW generation capacity. The generation portfolio had produced 846mn KWh of electricity in 2011, which we expect to tap 940mn KWh in 2012. Alarko Holding also started the investment for a 76 MW hydroelectric power plant in Adana, Karakuz, which will be completed towards the end of 2014 following a US$100mn investment. The Holding also has plans to build a 1,320 MW coal fired power plant (under 50%-50% partnership with Cengiz Insaat) in the coming years, which we do not include into our valuation yet. The Holding is currently active in electricity distribution segment with ALCEN, which owns the operating rights of Meram Electricity distribution region until 2036. Alarko has 50% stake in Alcen, whereas the remaining 50% belongs to Cengiz Insaat. Meram distribution region has ca.1.7mn subscribers and net electricity consumption of 7bn KWh of per annum with an loss theft ratio of 8.5%. The retail sales margin is 3.49%, from the beginning of 2013 until 2015, and the expected annual revenue of Meram for 2012 and 2013 is ca.us$800mn. 5
The top-line of the Alarko Holding s energy segment increased by 23% YoY in 9M12 reaching to TL703mn. Distribution segment recorded TL611mn revenues in 9M12, comprising 87% of segments revenue. We saw EBITDA falling to TL21mn in 9M12 from TL62mn due to rising natural gas costs. In 2013, we expect margins to recover to some extent yet we will see margins to be depressed until the start of operations of hydro and coal fired plants. Both segments contribution to the EBITDA displayed YoY contraction in 9M12. EBITDA Bridge (TL mn) and Breakdown Seafood; 2% Tourism; 7% Industry & Trade; 8% Elimination; -20% EBITDA Breakdown 9M2012 Energy; 32% 130 120 110 100 90 80 70 60 106 18 EBITDA Bridge -41-13 -3-1 -0 67 Contracting & Land D.; 71% 50 40 9M11 Contracting & Land D. Energy Elimination Industry & Trade Tourism Seafood 9M12 Alarko REIT trades at a 27% discount to its NAV. The company s NAV stands at TL315mn indicating a 27% discount to its NAV based on the latest closing price. Mind that a possible positive development regarding the Maslak land should have a significant contribution to company s NAV. Portfolio Value of ALARKO REIT (US$ mn) 31.12.2012 Cash & Marketable Securities 74.30 Real Estate Portfolio 96.93 Land in Maslak, Istanbul 19.79 Land in Eskice Village, Buyukcekmece - Istanbul 6.68 Alkent Istanbul 2000 Investments 6.82 Alarko Business Center (Karakoy) 1.02 Alarko Business Center (Ankara) 1.60 Alarko Business Center (Sishane) 1.14 Hillside Beach Club Holiday Village - Fethiye 38.79 Factory Building - Eyup - Istanbul 16.35 Shops in Etiler - Alkent - Istanbul 4.74 Other 5.32 Receivables 5.75 Liabilities -2.29 Other Assets 1.85 Total Net Assets 176.54 Total Net Assets (TL mn) 314.71 The Group is focusing to increase the share of the tourism segment in consolidated revenues. The Group s flagship company in tourism segment Attas owns and operates city clubs and hotels in Turkey, under the brand name Hillside, and targets to grow in leisure sector. The Group will focus on tourism sector and plans to increase the share of the segment in consolidated revenues. Accordingly, Attas has initiated talks to acquire a resort in the southern coast of Turkey. Attas comprises a mere 2% share in Alarko Holding s NAV. 6
Summary of Key Financials (TL mn) 2 3 4 5 Income Statement (TL mn) 2010A* 2011A* 2012E 2013E Revenues 1,206 1,323 1,600 1,702 EBITDA 25 141 158 173 Net income 43 114 103 105 Cash Flow Statement (TL mn) Net Income 43 114 103 105 Depreciation & Amortisation 31 38 47 53 Change in Working Capital 198 (73) (84) 64 Cash Flow from Operations 270 78 66 222 Capital Expenditure 164 14 159 99 Free Cash Flow 106 64 (93) 123 Balance Sheet (TL mn) Tangible Fixed Assets 360 347 429 442 Cash & equivalents 424 612 737 692 Total assets 1,779 2,059 2,254 2,319 Short-term debt 65 58 107 76 Total Debt 281 263 463 328 Total equity 818 1,044 1,120 1,184 Ratios Net debt/ebitda (x) -5.6-2.5-1.7-2.1 EBITDA Margin 2.1 10.7 9.9 10.2 Net Margin 3.6 8.6 6.4 6.2 Valuation Metrics EV/Sales (x) 0.6x 0.3x 0.5x 0.4x EV/EBITDA (x) 27.1x 2.4x 4.8x 4.4x EV/IC (x) 0.7x 0.3x 0.7x 0.7x P/E (x) 18.6x 6.5x 10.4x 10.2x FCF yield (%) 13% 9% -9% 11% Dividend yield (%) 0% 1% 1% 1% *based on average Mcap during the year Historical Premium / (Discount) to Target NAV 0% -10% -20% -30% -40% Company Overview Alarko Holding AS is a Turkey-based holding company comprised of companies operating under follow ing divisions: Contracting, Industry and Trade, Energy, Tourism, Seafood and Property Development. Shareholder Structure 16.1% Other Izzet Garih Ishak Alaton 14.4% 17.7% 3.3% Foreign Ownership (%) 30.9% 17.7% Vedat Aksel Alaton Dalia Garih Leyla Alaton 31/12/2012 08/04/2013 YTD change 70.98 68.21-4% -50% Premium / (Discount) Target NAV Historical Average -60% 02.10 06.10 10.10 02.11 06.11 10.11 02.12 06.12 10.12 02.13 Alarko Holding NAV Breakdown (US$mn) Business Segment/Company ALARK's Current Current ALARK's Weight Target Ticker Stake Valuation Method Value Stake in NAV Valuation Method Alsim 100.0% Peer Multiple Comparison 484 484 42% Peer Multiple Comparison 484 484 47% Alcen 49.9% DCF 436 218 19% DCF 436 218 21% Altek 100.0% DCF 129 129 11% DCF 129 129 12% Alarko Carrier ALCAR 43.0% Current Mcap 262 113 10% Multiple Comparison 237 102 10% Alarko REIT ALGYO 51.0% Current Mcap 128 66 6% Current Mcap * (1+CoE) 144 73 7% Attas 100.0% Multiple Comparison 20 20 2% Multiple Comparison 20 20 2% Alfarm 50.0% Global Peer Group Multiples 7 4 0% Global Peer Group Multiples 7 4 0% Others 100.0% Book Value 3 3 0% Book Value 3 3 0% Target Value ALARK's Stake Weight in NAV Total Value from Participations 1,036 100% Total Value From Participations 1,033 100% Listed 178 17% Listed 175 17% Unlisted 858 83% Unlisted 858 83% Holding Only Net Cash (Debt) 105 9% Holding Only Net Cash (Debt) 105 9% Current NAV 1,141 Target NAV 1,138 Prem / (Disc) to Current NAV -36.2% Prem / (Disc) to Target NAV -36.0% Historical Average Discount n.a. Historical Average Discount -38.8% Current Mcap 728 Target Mcap* 854 all figures are in US$ mn terms Target Share Price (US$) 3.82 net cash (debt) is as of 9M12 Target Share Price (TRY) 6.81 * after applying 25% conglomerate discount Upside Potential 16.9%, Is Investment 7
This report has been prepared by İş Yatırım Menkul Değerler A.Ş. (İş Investment) solely for the information of clients of İş 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 İş 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 İş Investment. (www.isinvestment.com) This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. 8