Equity / Small Cap. / Tourism 01 November 2010 Marti Otel Bloomberg: MARTI TI Reuters: MARTI IS Equity / Small Cap. / Real Estate Investment Trust Martı REIT Bloomberg: MRGYO TI REIT IPO unlocks the value Following the IPO of one of its main assets, we have paid a visit to Martı Otel and revised our valuation for the company in light of the new guidance. Accordingly we came up with a new 12-month target share price of TL1.57, which offers 38% upside potential from current levels. We find the current price levels groundless for the company and support our positive view with the growth story with the upcoming hotel projects under Marti REIT portfolio namely, Sarigerme and Giova. We maintain our OUTPERFORM recommendation for Marti Hotel. Separately, we initiate our coverage for the recently IPO ed Marti REIT with an MARKETPERFORM recommendation. At its current Mcap the stock offers 6% upside potential to our target share price of TL1.22/ share, which is derived via SOTP method, in which we value each asset through DCF modelling. IPO of the REIT unlocks the hidden value in Marti Otel... 49% shares of Marti REIT, subsidiary of Marti Hotel, was opened to public in the second half of September which we believe will increase the transparency of the company and unlock a significant hidden value. After the IPO Marti Hotel s share in Marti REIT decreased to 48%. Marti REIT trades at a deep discount to its NAV. The REIT trades at a high discount of 45% to its latest announced NAV versus sector s average discount of 25%. Note that, among all other REIT companies Marti REIT offers the highest discount in the sector. Since the first trading day Marti REIT has significantly underperformed both the REIT index and ISE-100 by 15% and 19%, respectively. Reuters: MRGYO IS Company Report OUTPERFORM Upside Potential* 38% MARKETPERFORM Upside Potential* 6% Stock Data MARTI TRY US$ Price at 28 10 2010 1.14 0.79 12-Month Target Price 1.57 1.11 Mcap (mn) 99 69 Float Mcap (mn) 94 66 No. of Shares Outstanding 87 mn Free Float (%) 95.00 Avg.Daily Volume (3M, mn) 3.1 1.2 Price Performance (%) 1 Mn 3 Mn 12 Mn TRY -8-10 39 US$ -6-6 44 Relative to ISE-100-12 -22-1 Stock Data MRGYO TRY US$ Price at 28 10 2010 1.15 0.80 12-Month Target Price 1.22 0.86 Mcap (mn) 127 88 Float Mcap (mn) 62 43 No. of Shares Outstanding 110 mn Free Float (%) 49.00 Avg.Daily Volume (3M, mn) 3.0 2.1 Price Performance (%) 1 Mn 3 Mn 12 Mn TRY -12-17 n.a US$ -10-14 n.a Relative to ISE-100-16 -22 n.a Significant portion of the debt has been closed with IPO proceeds The company raised TL76.7mn proceeds from the IPO of Marti REIT and paid off its US$27.6mn short debt. Remaining portion of the IPO proceeds will be used to finance the second and third phases of Narinpark residential project and upcoming hotel projects. Projects in the pipeline Under REIT umbrella, Martı Hotel plans to commence 3 new hotel projects, namely Sarigerme, Hemitea and Giova. We have added these three projects to our SOTP valuation, as well. Among these three hotels biggest hotel in terms of bed capacity will be Sarıgerme that will be done via US$29.8mn investment and expected to start generating revenues by 2012. Construction of the second hotel Hemitea, that will be small boutique hotel began in the fourth quarter of 2009 and first visitors will accommodate in 2011. We projected a total cap-ex of US$2.5mn for Hemitea. Third hotel project, Giova, will be a small hotel, 35 rooms/70 beds, in Marmarisor which the company plans to invest US$3.8mn. Please refer to important disclaimer at the end of this report. Market Data TRY ISE 100 68,760 US$ Spot Rate 1.437 US$ 12-Month Forw ard 1.6054 Burak Berki bberki@isyatirim.com.tr +90 212 350 25 80 1
Deliveries of Narinpark residential project commenced in 2010 Apart from the steady rental stream of hotels, Marti REIT, indirectly Marti Otel has begun the delivery of the completed residential units in 2010 and will be able to record revenues from them starting from the third quarter of 2010. This way the company diversified revenue stream in its income statement. Operational relation between Marti Otel and Marti REIT Contracts between Marti Otel and Marti REIT are renewed every five years. Based on the current revenue sharing contracts between the two, the former will pay 27% of the total revenues it generates/will generate from Marti Myra Hotel, Sarıgerme and Giova Hotels to the latter as rents. Revenue sharing for Marina, on the other hand, is set as 32%. 2
Summary of Key Financials (TL mn) 28/10/2010 MARTI ######## 01/01/2009 01/01/2010 01/01/2011 01/01/2012 Income Statement (TRY mn) 2009A* 2010E 2011E 2012E Revenues 46 71 77 130 EBITDA 13 14 25 37 Depreciation & Amortisation 5 5 6 6 EBIT 8 9 19 31 Other income (expense), net (3) (1) 0 0 Financial expenses, net 1 0 2 3 Minority Interests 0 2 9 17 Income before tax 5 8 21 34 Taxation on Income (2) 2 5 8 Net income 3 5 8 9 Cash Flow Statement (TRY mn) Net Income 3 5 8 9 Depreciation & Amortisation 5 5 6 6 Indemnity Provisions 0 1 1 1 Change in Working Capital 4 (29) (25) (12) Cash Flow from Operations 13 (18) (11) 4 Capital Expenditure 0 2 1 1 Free Cash Flow 13 (20) (12) 3 Rights Issue 0 0 0 0 Dividends Paid 0 0 0 0 Other Cash Inflow (Outflow ) 1 84 (38) 6 Change in net cash 13 63 (50) 9 Net Cash (85) (22) (71) (62) Balance Sheet (TRY mn) Tangible Fixed Assets 139 135 130 125 Other Long Term Assets 26 4 4 4 Intangibles 0 0 0 0 Goodw ill 15 15 15 15 Long-term financial assets 0 0 0 0 Inventories 17 34 58 52 Trade receivables 20 32 34 58 Cash & equivalents 0 38 27 18 Other current assets 25 27 29 35 Total assets 241 285 298 307 Long-term debt 57 29 19 10 Other long-term liabilities 0 1 1 1 Short-term debt 28 31 79 71 Trade payables 6 6 7 13 Other short-term liabilities 3 40 63 57 Total liabilities 145 106 169 151 Minority Interest 4 7 15 32 Total equity 96 109 128 156 Paid-in capital 87 87 87 87 Total liabilities & equity 241 215 298 307 Ratios ROE (%) 3.6 4.7 6.4 6.4 ROIC (%) 3.6 3.8 7.6 11.4 Invested Capital 169 195 215 222 Net debt/ebitda (x) 6.47 1.55 2.82 1.67 Net debt/equity (%) 88.66 19.94 55.80 39.80 Capex/Sales (%) 0.21 2.88 0.77 0.49 Capex/Depreciation (x) 0.0 0.4 0.1 0.1 EBITDA Margin 28.9 19.6 32.7 28.5 EBIT Margin 17.1 12.1 25.1 24.0 Net Margin 7.4 6.7 9.8 7.0 Valuation Metrics EV/Sales (x) 3.5x 2.7x 2.5x 1.5x EV/EBITDA (x) 12.0x 13.8x 7.6x 5.2x EV/IC (x) 0.9x 1.0x 0.9x 0.9x P/E (x) 15.8x 20.8x 13.0x 10.9x FCF yield (%) 23.7 (20.4) (11.9) 3.0 Dividend yield (%) 0% 0.0% 0.0% 0% *based on average Mcap during the year 3
Valuation & Recommendation We have reached our target Mcap for Marti Hotel through SOTP method, in which we have valued each asset via a separate DCF model. Our target share price for the stock is TL1.57/share, implying 38% upside potential from current levels, hence we preserve our rating for Martı Hotel as OUTPERFORM. We are initiating our recommendation for Marti REIT as MARKETPERFORM. Our 12-month target price for the stock is TL1.22/share, corresponding to 6% upside potential. Marti REIT collects rents from assets under its portfolio from Marti Hotel, namely Marti Myra, Marina, Sarıgerme and Giova. We have valued each asset via separate DCF model and reached to the fair value of Marti REIT by the rents collected from every asset. Operational Projects Marti Resort and Marti La Perla: Our DCF- driven target value for Martı Resort and La Perla stands at US$41mn. Basic assumptions of our model are as follows: Our forecast horizon is four years between 2010 and 2013. We have increased income per bed and cost per bed in line with the annual TL inflation. This yielded US$12.6mn revenues for 2010 and US$13.9mn revenues for 2011 with US$5.3mn and US$5.8mn EBITDA, respectively. Accordingly EBITDA margin stands at 42% in 2010, 2011 and in the remainder of our forecast horizon. We have assumed US$2.1mn cap-ex for 2010 and US$0.6mn for 2011. We presume a US$2.1mn capital expenditure for the renovation of 160 hotel rooms which will end in 2010. Apart from that we have assumed cap-ex to be 3% of the revenues annually. We assumed 2% terminal growth in our DCF-driven US$ model, reflecting the growth potential of tourism sector and kept 20% corporate tax rate constant till the end of forecast horizon just for Marti Resort and Marti La Perla Hotel which are not included within the REIT. Marti Myra: We have valued Marti Myra separately, as it is an asset of Marti REIT. Basic assumptions of our model are as follows: Our forecast horizon is four years between 2010 and 2013. We increased average rate per person and average cost by the inflation rate till the end of forecast horizon. Accordingly our revenue assumption for 2010 is US$14.7mn and US$16.2mn for 2011, with US$5.9mn and US$6.5mn EBITDA, respectively, yielding a margin of 40% in 2010 and 2011. a WACC of 13.6%. We assumed 2% terminal growth in our DCF-driven US$ model, which we think thoroughly reflects the growth potential of the tourism sector. 4
Narin Park We have run a DCF model to calculate a value for the first three phases of Narin Park residential project. First three phases of the projects is composed of various types and sizes of units ranging between 45 and 149 sqm. Basic assumptions of our model are as follows: As the last phase of the project, the third phase will be completed in 2014, we have cash flow projections until 2014. The company plans to invest US$7.4mn for the project in 2010, US$10.6mn for 2011 and US$8.6mn for 2012. Accordingly the project starts to generate positive cash flows starting from 2010. Marti Marina Basic assumptions of our DCF are: We assumed the current occupancy rate of 100% to continue in forecast horizon between 2010-2014. We assumed revenues from marina to increase in line with the TL inflation throughout the forecast period. Accordingly, we estimate TL4.3mn revenues for 2010, increasing 6% YoY to reach at TL4.7mn in 2011 and 8% YoY in 2012 to TL5.0mn. Our EBITDA margin is constant at 21% between 2010 and 2014 We assumed 2% terminal growth in our DCF-driven US$ model, which we think thoroughly reflects the growth potential of the tourism sector. Upcoming projects... Sarigerme Hotel: The site is located in Sarıgerme, an international tourism center of Turkey, between Dalaman and Sarısu rivers and only 15 minutes drive from Dalaman International Airport. The project will be deployed on 104K sqm of land with a construction area of 30K sqm and the hotel is planned to be opened in April 2012 with approximately 1000 beds. Martı has the leasehold from the state until 2051. Sarıgerme project will contribute to the financials starting from 2011 with an estimated total turnover (including accommodation revenue, F&B, rent revenue and other revenues) of US$16mn in 2012, US$17mn in 2013 and US$18.2mn in 2014. We have valued Sarigerme Hotel separately, as it is an asset of Marti REIT. On the back of company guidance, our assumptions of the model are as follows: Our forecast horizon is five years between 2012 and 2016. EBITDA margin emerges at 40% in 2012 and 42% in 2013, increasing to 44% in 2015, with higher price per-bed as the hotel matures. We have assumed US$29.8mn cap-ex in three years period ending in 2012 as construction cost We assumed 2% terminal growth in our DCF-driven US$ model. 5
Hemitea Hotel: The project will be developed in the land of marina in Marmaris and the project is not included in the REIT portfolio. The project will be located in the existing marina and is planned as a 29 rooms/58 beds capacity boutique hotel in order to add value to the Marmaris marina. Construction will commence in the fourth quarter of 2009 and first visitors will accommodate in 2011. We expect Hemitea to generate revenues of US$1mn in 2011, US$1.4mn in 2012 and US$1.6mn in 2013. Our DCF-driven fair value for the project is US$3.6mn. On the back of company guidance, our assumptions of the model are as follows: Our forecast horizon is five years between 2011 and 2015. EBITDA margin emerges at 42% in 2011 and 46% in 2012, increasing to 47% in 2015, with higher price per-bed and higher occupancy rates. We have assumed US$1mn cap-ex for both 2010 as build-up investment. We assumed 2% terminal growth in our DCF-driven US$ model. Giova Hotel: Giova will be deployed on a 99K sqm of land with a relatively small, 35 rooms/70 beds hotel. Construction will start in 2011 and hotel opening is planned to be in the forthcoming year. We have valued Hemitea Hotel separately, as it is an asset of Marti REIT. On the back of company guidance, our assumptions of the model are as follows: Our forecast horizon is five years between 2012 and 2016. EBITDA margin is 38% in 2012 and 46% in 2013, increasing to 47% in 2016, with higher price per-bed and occupancy rates. We have assumed US$3.4mn capex for 2011 as start-up cost. We assumed 2% terminal growth in our DCF-driven US$ model. 6
MARTI REIT DCF SUMMARY 2010 2011 2012 2013 2014 Rental Revenues $ 4.0 5.9 13.1 14.5 15.4 Residential revenues $ 15.92 36.4 28.2 27.0 5.2 Total Income 19.9 42.3 41.2 41.5 20.6 Opex 2.1 2.2 2.6 2.8 3.0 Capex 14.8 19.0 10.4 24.6 5.0 FCF (US$mn) 3.0 21.1 28.2 14.1 12.6 PV of FCF 3.0 18.6 21.9 9.6 7.6 PV of TV 59 Lands 12 Total 132 Net Cash 8 EV (US$mn) 94.9 Current Share Price (TL) 1.15 Target Share Price (TL) (w/ 25% discount) 1.22 Upside potential (Marti REIT) 6% Fair Value Stake Value attributable to SOTP of Marti Hotel (US$mn) Marti Hotel Marti REIT 95 48% 46 La Perla & Resort 41 41 Hemetia 4 4 Sarıgerme 11 11 Giova 2 2 Marina 1 1 Myra 13 13 Total 116.8 Net Cash (Debt) US$mn, 2010YE, stand alone -20 Target EV US$mn 96.8 Current Mcap US$mn 70 Current Share Price (TL) 1.14 Target Share Price (TL) 1.57 Upside Potential 38% Source: IS Investment Recent Developments: 1H10 Tax results of Marti REIT Martı REIT posted TL8.1mn net income in first half tax results of its fiscal year beginning from March 2010 and ending September 2010, corresponding to a 353% YoY increase from the TL1.8mn in 1H09 recorded in the same period last year, due to the better operational profitability coupled with a one off gain of TL6.5mn from the sale of the hotel part of marina in Marmaris. As there is a strong seasonality in financials due to high summer season quarterly comparison does not make sense. Revenues were significantly up by 204% YoY to reach at TL13.96mn in 1H10 from TL4.6mn in 1H09. Increase in the top-line is stemmed from the revenue recognition of Narinpark residential project. Note that according to the accounting standards companies are able to reflect their pre-sales to income statement after the delivery of the units are realized. At its current share price of TL1.15/share, the stock trades at 45% discount to its 2Q10 NAV/share of TL2.10, which is significantly higher than the 25% sector discount. Marti REIT (mntl) 1H09 1H10 % Change Revenues 4.60 13.96 204% Gross M argin 100% 49% Operating Profit 2.12 2.36 11% Operating M argin 46% 17% Financial Expenses (net) -0.68-0.84-24% Net Profit 1.80 8.17 353% Net M argin 39% 58% 7
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. 8