Initiation of Coverage Outperform Current/ 2008-end Target Price: YTL 2.39/3.88 YTL 3.5 3.1 2.7 2.3 1.9 1.5 01.07 02.07 03.07 04.07 STOCK MARKET DATA (24 March 2008) Bloomberg/Reuters 05.07 Relative Performance (2007-2008) 06.07 AYEN 07.07 08.07 AYEN.TI/AYEN.IS 1 mth 3 mth 12mths -1.2% 12.2% 41.3% 52 Week Range (YTL): 1.8-3.4 Market Cap (US$mn): 231 Average Daily Vol (US$mn) 3 mth: 2.56 YTD US$ Return (%): -28.5% Shares Outstanding (mn): 119.6 Free Float: 15% Shareholding Structure 09.07 10.07 11.07 ISE-100 Ayen Enerji engages in the installation, production, trade and transmission of electricity. The Company is the energy company of Aydiner Group, also active in construction, tourism and infrastructure. Shareholding Structure Stake (%) Aydiner Insaat 85.00 Free Float 15.00 12.07 01.08 02.08 03.08 Subsidiaries Stake (%) Ayen Ostim 76.00 Demir Enerji 99.99 Kayseri Elektrik* 96.12 Ayen Elektrik 99.99 * Kayseri Elektrik is a subsidiary of Demir Enerji New horizons in generation... We re-initiate our energy sector coverage with Ayen Energy, the energy company of the Aydiner Group. We believe Ayen is one of the untapped assets in the energy industry, presenting solid prospects for growth. The current market cap suggests 49% dollar upside potential according to our DCF based valuation of US$345mn. Growth prospects at a discount. Based on our 2008 forecasts, Ayen Enerji trades at an EV/EBITDA of 7.6x and a P/E of 20x, at a discount to its global peers. Our current valuation includes three wind farms and two hydroelectric power plant (HEPP) projects, which have already been declared to the ISE. Accordingly, we expect the Company to attain an installed generation capacity of 400MW by 2012, compared to the current capacity of 235MW. Step by step, towards a liberalised electricity market. The automatic pricing mechanism is expected to be established in the second half of 2008. The mechanism will allow electricity prices to mimic fluctuations in natural gas prices, mitigating negative repurcussions of input cost volatility. Ayen currently benefits from high prices through its Ostim plant. The company s first wind farm (AKBUK) which will fully benefit from DUY prices, is expected to be operational in the second half of 2008. We are expecting to see the full outcome of this plant in 2009. Positive impact of new investments in 2010. Renewable energy investments appear attractive in the wake of incentives provided by the Government. To benefit from that, Ayen is focusing on new capacity investments both in hydroelectric and wind power generation, which will carry the EBITDA levels from US$38mn to US$80mn in 2012. From a BOT operator to a generation company. As the revenue portfolio changes in line with the new projects, we expect Ayen Enerji s sales to the spot market (currently DUY) is expected to rise from a current 7% to 71% by 2014 benefiting from higher market prices. FIGURES & FORECASTS Net Sales (US$mn) EBITDA (US$mn) Net Profit (US$mn) EBITDA Margin P/E (US$,x) EV/ Sales (US$,x) 2006 94 53-11 56.4% (21.1) 3.6 2007 E 78 38 13 48.6% 18.2 4.3 2008 E 95 44 11 46.8% 20.2 3.6 2009 E 117 72 29 61.3% 7.9 2.9 EV/EBITDA (US$,x) 6.3 8.9 7.6 4.7 Research: +90 (212) 318 2730 Sales: +90 (212) 318 2741
Investment Case Diversification will bring revenue and EBITDA growth. The company has started work on three wind farms and two river type HEPPs, in which administrative preparations are in progress. With the completion of HEPPs and wind farm investments, the company s installed capacity will nearly double to 400MW by 2012, from the current installed capacity of 235MW. By then, Ayen will be able to generate 22% of its total generation from relatively more profitable wind farms. Meanwhile, sales to the DUY system will amount to 71% of total revenues, underpinning the overall income growth. The capacity increase will also enable the company to exploit the opportunity provided by the chronic electricity shortages caused by surging electricity demand in Turkey, driven by the growing economy, rapid industrialization, an increasing population and a high pace of urbanization. We expect the sales and EBITDA of the company to reach US$139mn and US$80mn with a CAGR of 12% and 16%, respectively in 2012. With privatisations on the agenda, energy will be the hottest sector in 2008 with a demand CAGR of 7%. Low per capita consumption coupled with high demand spells high growth potential for the Turkish energy markets. The imbalance between the supply and demand has increased the interest towards the sector, initiating green field investments especially on the wind farm projects. Spreads to approach European average. The automatic pricing system which will be installed in the second half of 2008, will mark a second step towards a liberal market. We expect the high price environment to continue until the market becomes saturated. With the establishment of a full liberalised electricity market, the spreads will approach the European averages. A strong financial structure. The hydroelectric power plants have protected Ayen s financials during the last five years while the natural gas fired power generating companies were caught between the rock of fixed electricity prices and the hard place of rising natural gas prices leading to operational losses. However, we believe the diversification in generation would add further value to the Company, helping Ayen to catch up with developments in the industry. Ankara Elektrik Uretim Company Privatization is realized. The Privatization Administration realized the privatization of 7 HEPP, one geothermal and one fuel fired power plants in March 2008. Zorlu Enerji submitted the highest bid of US$510mn in the privatization of the power plants exceeding our estimates. The total installed generation capacity of the privatized energy assets stands at 141MW with a combined annual production amount of 450MWh. The deal valued 1kWh of annual production at US$1.13mn. We, are initiating coverage for AYEN with an Outperform recommendation. We calculate a further 49% upside potential. 2
VALUATION DCF Valuation We took account of the potential increase in the electricity prices in valuing Ayen Enerji. We also added the impact of the projects already declared in our DCF valuation in conservative approach. Accordingly, our DCF valuation implies a target value of US$345mn for Ayen Enerji, indicating 49% upside potential over its current Mcap of US$231mn. AYEN - Free Cash Flow Projections (US$ mn) 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Sales 78 95 117 114 133 139 136 126 120 COGS -52-66 -66-64 -70-72 -70-65 -61 Gross Profit 26 28 51 50 63 67 66 62 59 Operating expenses -2-3 -4-3 -4-4 -4-4 -4 Operating Profit 22 25 47 46 59 63 62 58 55 EBITDA 38 44 72 68 79 80 76 70 67 EBIT 22 25 47 46 59 63 62 58 55 Taxes on EBIT -4-5 -9-9 -12-13 -12-12 -11 NOPLAT 18 20 38 37 47 50 49 46 44 Depreciation 16 19 24 22 20 17 14 13 11 Gross cash flow 34 39 62 59 67 67 64 59 55 Working Capital Need (-) 7-4 -3-1 -4-1 -1 5 2 Capex (-) -2-61 -146-36 -16-1 -1-1 -1 Free Cash Flow 38.6-25.3-86.3 22.1 47.5 65.4 61.6 63.4 56.3 Margin Assumptions Gross margin 33.1% 29.8% 43.6% 43.6% 47.3% 48.3% 48.3% 48.8% 49.2% Operating margin 28.2% 26.7% 40.5% 40.6% 44.3% 45.3% 45.3% 45.8% 46.2% EBITDA margin 48.6% 46.8% 61.3% 59.8% 59.5% 57.5% 55.9% 55.7% 55.6% FCF/Sales 49.4% -26.7% -73.6% 19.4% 35.8% 47.2% 45.2% 50.1% 47.0% Valuation Weight of equity 45.0% 45.0% 45.0% 50.0% 55.0% 55.0% 55.0% 65.0% Cost of Equity 12.0% 11.8% 11.8% 11.7% 11.6% 11.4% 11.3% 11.2% Beta 0.88 0.88 0.88 0.88 0.88 0.88 0.88 0.88 Risk free rate 6.7% 6.5% 6.5% 6.4% 6.3% 6.1% 6.0% 5.9% Market Risk Premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Cost of Debt after tax 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% Tax rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% WACC 8.3% 8.2% 8.2% 8.4% 8.7% 8.6% 8.5% 9.1% Terminal Growth 0% Present Value 110 Terminal Value 598 Present Value of Terminal Value 337 Adjusted net cash position (9M07) -103 Net Value 345 Current Market Cap (US$mn) 231 Upside potential % (US$) 49% Target Share Price (YTL) 3.88 Current Share Price (YTL) 2.39 Upside potential % (YTL) 63% Source :Garanti Securities, 2007E is for display puposes and not included in DCF analysis. 3
We believe the spot market (DUY market) will continue to be operational in the upcoming period. Recall that DUY (Electricity Market Balancing and Settlement Regulation) is a clearing house system which creates a competitive environment through price settings. The DUY prices are currently 10% higher than regular tariffs. Accordingly, the total generation from wind farms and newly built hydropower plants will be sold to the DUY market. The situation regarding BOT type generation will continue at their contract prices until the end of their license. We have assumed that industrial electricity tariffs would increase by 12% in 2008, as declared by the Government. We have assumed that the automatic pricing mechanism will be introduced in the second half of 2008. In 2009 we have further forecasted an 8% increase in electricity prices in YTL terms. DUY prices, on the other hand, average at around US$110/MWh, at 10-15% higher than current regulated prices. The Company gave guidance on the production capacities of its new hydroelectric power plants and wind farms. Accordingly: New Production Capacities HEPPs (MWh) 282.195 Pasalar 151.309 Buyukduz 130.886 Windfarms (MWh) 205.467 Akbuk 122.462 Korkmaz 83.005 Mordogan 99.409 Total Generation (MWh) 487.662 Source Ayen We also estimate that the current projects which are already declared, will be completed on time by 2012. By then, it is assumed that the company would be operating at a total installed capacity of 400MW. It should be noted that the licencing of KISIK HEPP terminates in 2008. Camlica HEPP s license, on the other hand, will terminate at the end of 2013. Therefore following 2013, we predict that the total generation capacity will fall by 84MW from 400MW to 316MW in our model. Our DCF model assumes a zero terminal growth rate, as the license term of its KISIK and Camlica-1HEPP ends by 2008 and 2016 respectively. Although we believe the Company would continue investing we prefer to be on the conservative side. We also used an equity risk premium of 6% and a cost of debt of 6% in calculating the discount rate. We applied a 6.7% risk-free rate for the year 2008, gradually decreasing to 5.9% by 2015. 4
In calculating the net debt position we have deducted the expenditures incurred for the expropriation of the land during the construction of Yamula Dam. Meanwhile, we have included the receivables due to electricity production deficit in 2000, 2001 and 2003 for Camlica-1 HEPP. Hence the total long-term financial receivables that will be included in the cash calculation is YTL77mn (US$63mn). The total net debt figure therefore, plunges from US$166mn to US$103mn. We believe that sales to the DUY system will increase substantially with the completion of the current projects, capturing a 70% share of total revenues. The change is expected to bring in additional revenue. Change in the Share of DUY sales 2006 2014E * Direct Sales Share 93% DUY Sales Share 7% * Direct Sales Share 30% Share of DUY (%) 70% Source: Ayen, Garanti Securities Estimates * Direct Sales include BOT and 25% Ostim sales We forecast a CAGR of 10% in revenues in dollar terms, bringing the total revenues up to US$139mn in 2012. We also expect this strong pricing environment to keep EBITDA margins high at an average of 55% levels. Ayen Enerji is expected to spend a total of almost US$260mn on the construction of three wind farms (Akbuk, Korkmaz and Mordogan) and two river type hydroelectric power plants (Buyukduz and Pasalar HEPP) until 2011 end. Following these investments, we project around US$1mn in annual maintenance capex. Heavy Investment Period 2008-2010 146 61 36 16 1 2008 2009 2010 2011 2012 Source: Ayen, Garanti Securities Estimates 5
Our Assumptions Installed Power Capacities by Energy Sources (MW) 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E Total Installed Power Capacity (MW) 235 235 266 257 311 380 400 400 316 316 Effective Capacity (GWh) 1061 946 957 1451 1451 1657 1733 1733 1304 1304 1. Hydro Electric Power Plant (MW) 193.6 193.6 193.6 184 184 252.8 272.8 272.8 188.8 188.8 Effective Capacity (GWh) 789 694 632 851 851 1058 1134 1134 705 705 Existing Plants 193.6 193.6 193.6 184 184 184 184 184 100 100 KISIK HEPP 9.6 9.6 9.6 CAMLICA-1 HEPP 84 84 84 84 84 84 84 84 YAMULA 100 100 100 100 100 100 100 100 100 100 New Plants 68.8 88.8 88.8 88.8 88.8 BUYUKDUZ 48.8 48.8 48.8 48.8 48.8 PASALAR 20.0 40.0 40.0 40.0 40.0 2. Natural Gas Plants Power Capacity (MW) 41 41 41 41 41 41 41 41 41 41 Effective Capacity (GWh) 271 251 295 295 295 295 295 295 295 295 Ostim (MW) 41 41 41 41 41 41 41 41 41 41 3. Wind Power Plant (MW) 31.5 31.5 86 86 86 86 86 86 Effective Capacity (GWh) 31 305 305 305 305 305 305 305 AKBUK 31.5 31.5 31.5 31.5 31.5 31.5 31.5 31.5 KORKMAZ 24.0 24.0 24.0 24.0 24.0 24.0 MORDOGAN 30.75 30.75 30.75 30.75 30.75 30.75 Sales Projections (GWh) 2006 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E BOTs 789 694 632 851 851 851 851 851 422 422 Kısık 33 33 33 0 0 0 0 0 0 0 Camlıca-1 HEPP 429 429 429 429 429 429 429 429 0 0 Yamula 327 232 170 422 422 422 422 422 422 422 Natural Gas Fired 271 251 295 295 295 295 295 295 295 295 Ostim 271 251 295 295 295 295 295 295 295 295 HEPPs 207 282 282 282 282 Buyukduz 131 131 131 131 131 Pasalar 76 151 151 151 151 Wind Farms 30.6 304.9 304.9 304.9 304.9 304.9 304.9 304.9 Akbuk 30.6 122.5 122.5 122.5 122.5 122.5 122.5 122.5 Korkmaz 83.0 83.0 83.0 83.0 83.0 83.0 83.0 Mordogan 99.4 99.4 99.4 99.4 99.4 99.4 99.4 Total 1061 946 957 1451 1451 1657 1733 1733 1304 1304 Share in total capacity (%) 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E HEPP 83% 83% 73% 72% 59% 67% 68% 68% 60% 60% Natural Gas Plants 17% 17% 15% 16% 13% 11% 10% 10% 13% 13% Wind 0% 0% 12% 12% 28% 23% 22% 22% 27% 27% 6
Sales (GWh) 2006 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E BOT Sales 789 694 632 851 851 851 851 851 422 422 Direct Sales 68 63 74 74 74 74 74 74 74 74 DUY Sales 203 151 251 526 526 732 808 808 808 808 Total Sales (GWh) 1,061 908 957 1,451 1,451 1,657 1,733 1,733 1,304 1,304 Electricity Prices Assumptions 2006 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Regulated Prices(TRY/MWh) 120 113 135 145 153 160 165 170 175 179 Increase in Prices -5.9% 12.0% 8.0% 5% 5% 3% 3% 3% 2% Regulated US$/MWh 92 93 111 111 111 111 108 106 105 102 DUY Prices (US$/MWh) 102 102 118 117 117 117 115 113 111 110 Natural Gas Prices (Usc/m3) 30 39 43 45 46 47 47 48 48 49 2006 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Total Revenues 94 78 95 117 114 133 139 136 126 120 BOT Revenues (US$ mn) 87 57 57 48 45 39 38 37 29 23 Direct Revenues (US$ mn) 6 8 8 8 8 8 8 8 8 DUY Revenues (US$ mn) 7 15 30 61 61 86 93 91 90 89 Share of BOT (%) 93% 73% 60% 41% 39% 29% 27% 27% 23% 19% Share of Direct Sales (%) 7% 9% 7% 7% 6% 6% 6% 6% 6% Share of DUY (%) 7% 20% 31% 52% 54% 65% 67% 67% 71% 74% Operational Costs assumption for HEPPs Operational Costs assumption for Wind Power 2.0 $cent/kwh 3.0 $cent/kwh (US$ mn) 2006 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E EBIT 32.5 22.0 25.3 47.5 46.4 58.7 62.8 61.7 57.9 55.3 BOT 32.2 21.0 21.0 17.6 16.5 14.4 14.1 13.8 10.7 8.6 Natural Gas fired 0.3 1.0 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3 Hydraulic 0.0 0.0 0.0 0.0 0.0 14.5 19.4 19.1 18.8 18.6 Wind 0.0 0.0 2.9 28.5 28.5 28.5 28.0 27.5 27.1 26.8 Source: TEIAS, Ayen, Garanti Securities Estimates 7
THE COMPANY Business Overview Ayen Enerji was founded by Aydiner Insaat in 1990, to operate in the electricity generation, transmission, distribution and trade. The company has constructed three hydroelectric power plants (HEPP), and one natural gas power plant. Ayen currently has 1.5% share in the existing installed hydroelectric power in Turkey. Plants Installed Power (MW) Annual Production (mn kwh) Plant Location KISIK HEPP 9.6 33 Tekir River (Ceyhan) CAMLICA-1 HEPP 84 429 Zamanti River YAMULA HEPP 100 422.3 Kizilirmak River AYEN OSTIM (Natural Gas) 41 280 Ostim Total Installed Power (MW) 234.6 Total Annual Prod. Cap (mwh) 1164.3 Source: Ayen Enerji Production Distribution by Plants Yam ula 36% Ayen Ostim 30% Kisik 3% Camlica 31% Source: Ayen Enerji Production Distribution by Resources Hydroelectric 70% Natural Gas 30% Source: Ayen Enerji 8
KISIK HEPP: Ayen Enerji realized its first project in 1994 under the Build-Operate- Transfer model (BOT). Kisik HEPP, located at Dongel Village of Kahramanmaras province on one of the branches of Ceyhan river. The plant has a 9.9MW (3x3.2) installed power generating 33mn kwh power annually. Kisik was the third BOT model type project constructed in Turkey. The licensing term will end in 2008. Plant Type: Weir with overfall spillway and silting tank Capacity Utilization :83% Pricing: Electricity sales price is determined annually with a contract. Accordingly, price can not be changed during the period. If the production realized is below the anticipated amount, the difference is not compensated by the Ministry of Energy, yet an exceeding production amount will be sold at the current year s exact prices. CAMLICA-1 HEPP: Camlica HEPP was put into operation in 1998. Located in Kayseri on Zamanti river, Camlica HEPP has a total installed capacity of 84MW generating 429kWh power per annum. Camlica is a river type power plant. The capacity utilization is lower due to the drought that has been continuing for the last 8 years. The revenues for each year are guaranteed by The Ministry of Energy and Natural Resources (MENR), not depending on the energy generated. However, due to the lesser production in 2000, 2001 and 2003 Ayen was not paid for the contracted amount. The repayment schedule of the liability determined between the Ministry and Ayen on August 28 2007. The total amount is US$33mn according to 9M07 financial results and it will be repaid in 76 months. We therefore extracted this aount in our net debt calculation as well. The licensing term of Camlica-1 will end in 2013. Plant Type: Gated weir with overfall spillway and silting tank Capacity Utilization :67% Pricing: Electricity sales price is determined annually with a contract. 9
Yamula HEPP: The Yamula Dam and hydroelectric power plant located 30km northwest of Kayseri on Kizilirmak river is one of the most important BOT type power and irrigation projects in Turkey. The production at Yamula was realized according to the program that the Directorate of State Hydraulic Works has prepared for the Kizilirmak basin. The over capacity flow is kept in the facility s dam. For the expropriation expenses related to the flooded land during the construction of the Yamula Dam is being repaid annually by the Ministry via tariff adjustment. The current figure is US$30mn in the 9M07 results. WE have extracted this figure from our net debt calculation. Yamula Dam is going to be operational for another 20 years. Capacity Utilization :79% Pricing: Electricity sales price is determined annually with a contract. From the date of operation the sales price is determined by escalating the operation costs according to the increase in the previous years CPI in USA. According to the contract, during the loan repayment period, if the production realized is below the anticipated amount, the difference will be compensated by the Ministry of Energy Ayen Ostim Natural Gas Plant: Ayen Ostim Natural Gas Plant is a 41MW Natural Gas plant project, realized through the Ayen Ostim Energy Production Co subsidiary. The plant became operational in the second half of 2004. OSTIM currently consumes one quarter of the total production (26% in 2006) with the remainder sold to private customers. Plant Type: Natural Gas fired Pricing: Electricity sales price is determined annually with a contract. Accordingly, price can not be changed during the period. If the production realized is below the anticipated amount, the difference is not compensated by the Ministry of Energy, yet an exceeding production amount will be sold at the current year s exact prices. 10
Ayen Enerji s new investments. Ayen Enerji has been one of the first movers in power generation constructing Turkey s third BOT project, KISIK HEPP on one of the branches of Ceyhan river. The Company has given priority to diversifying its electricity sources while expanding the total generation. Diversification in Generation 2006 2011 E Natural Gas Plants 17% Natural Gas Plants % 10% Wind 0% HEPP 83% HEPP % 68% Wind % 22% New Projects Source: Ayen, Garanti Securities Estimates In line with this strategy, Ayen is investing in wind farms and hydroelectric power plant projects. The Company has applied to EMRA for the production licenses for 3 wind farms in the Marmara and Aegean region with a total installed capacity of 86MW. We expect the share of wind power to reach 22% in 2011. The total capacity of the two river type HEPPs on the other hand, is 88.8MW and administrative works still continue. The five plants will bring an additional 175MW with a lower cost base. Location Region Power Plant Type Installed Capacity Operation Period Licensed Water Usage Right Environment Report AYDIN Didim-Akbuk Wind Farm 31.5 MW 25 Years - GUMUSHANE Tasoba Elmali Dam and Buyukduz HEPP River Type HEPP 48.8MW EMRA gave its approval* RIZE Pasalar River Type HEPP 40.0MW 49 years On-going IZMIR Seferihisar-Sigacik Wind Farm 24.0MW EMRA gave its approval* - IZMIR Karaburun - Degirmendagi Mordogan Wind Farm 30.75MW EMRA gave its approval* - * License works have not been completed yet Source: Ayen, ISE 11
9M07 FINANCIAL RESULTS... Ayen posted a net profit of US$4mn in is 3Q07 results bringing the nine month profit to US$13mn. Production, on the other hand decreased by a significant 25% in the 9M07 period due to the drought, especially during the summer. As the company s current production plants are built according to BOT models, the company maintained its margins at relatively high levels when compared to its peers. However, the drought effect is highly apparent on margins on a quarterly comparison. Yet as most of the plants are BOT type the company prepares invoice at year-end for the contracted amount. The Company posted an EBITDA of US$9mn in the third quarter, with an EBITDA margin of 57.8%, marking a premium to its local peers. The company is burdened by a net debt position of US$166mn. The adjusted net position is however US$103mn. A period of heavy investment lies ahead, and we therefore expect the company to remain burdened by its net debt position in the coming years. Sales (GWh) 3Q06 1Q07 2Q07 Change Change 3Q07 2006/09 2007/09 3Q07/3Q06 9M07/9M06 Kısık 2.3 6.2 7.1 1.2-47.3% 22.5 14.5-35.4% Camlıca HES 29.8 64.5 74.9 20.6-30.9% 211.5 160.1-24.3% Yamula 94.8 29.9 64.0 63.9-32.5% 279.6 158.0-43.5% Ostim 49.4 85.6 76.3 55.3 12.0% 218.9 217.1-0.8% Total 176.3 186.3 222.3 141.1-20.0% 732.5 549.7-25.0% AYEN Summary Financials % Change US$ mn 3Q06 4Q06 1Q07 2Q07 3Q07 9M06 9M07 3Q07/ 3Q06 3Q07/ 2Q07 9M06/ 9M07 Revenues 22 22.2 13.8 24.6 15.6 100.2 53.9-29% -36% -46% Gross Profit 6 9.2 2.9 13.1 3.8 29.3 19.7-41% -71% -33% Op. Expenses 0-0.9-0.6-0.6-0.7-1.8-1.9 54% 22% 7% Operating Profit 6 8.3 2.3 12.5 3.0 27.5 17.8-49% -76% -35% EBITDA 10 13.6 6.9 17.6 9.0 40.1 33.4-14% -49% -17% Net Profit 10 10.3-0.8 10.1 4.0-21.5 13.0-60% -61% -161% Net Cash -169-176.1-160.2-148.8-166. -168.6-166 -22% -12% -22% Ratios Gross Margin 29.0% 41.2% 21.2% 53.4% 24.0% 29.3% 36.6% -5 pp -29.4 pp 7.3 pp Operating Margin 26.9% 37.4% 16.8% 50.9% 19.3% 27.5% 33.0% -7.5 pp -31.6 pp 5.5 pp EBITDA Margin 47.7% 61.1% 49.7% 71.5% 57.8% 40.0% 62.0% 10.1 pp -13.7 pp 22 pp Net Profit Margin 46.0% 46.4% -5.9% 41.1% 25.5% -21.4% 24.2% -20.5 pp -15.7 pp 45.6 pp 12
Electricity Market More resources needed to meet the capacity The electricity industry is a large, high-growth sector in the Turkish economy. The industry contributes significantly to the country s GDP and boasts a size of US$12 billion at current end-user prices. The more the timing of capacity increase investments overhang, the more urgent it will be to meet the increase in the demand. Turkey s power demand is expected to post a CAGR of 9% in a high demand scenario where as in a low case scenario the demand is expected to post a 7% CAGR, according to the studies prepared by Electricity Production Directorate. The completion of investments will take two to three years and Turkey is likely to experience energy shortage even during the base demand in 2009. According to the State Planning Organization, at least 55,000MW of installed capacity is needed until 2020 implying an annual investment spending of US$5bn, which is apart from the 7.4K MW projects under construction. Turkish Electricity Demand Scenarios (MW) 70,000 60,000 50,000 CAGR : 9% 40,000 30,000 CAGR : 7% 20,000 10,000 Scenario 1- High Demand Scenario 2- Low Demand 0 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Source :TEIAS, Garanti Securities At the lower-end in terms of per capita consumption... Comparing the net per capita electricity consumptions, Turkey stands at the lower-end of both neighboring and EU-15 countries with its 1.99 MWh/yr net per capita electricity consumption. However, Turkey is expected to display the fastest CAGR in the electricity consumption until the year 2015. 13
Electricity consumption growth has historically been less volatile than the overall economic growth in Turkey. Turkey s electritiy demand growth when compared to the GDP growth, has proven more resilient and positive even in the economic crisis periods when the GDP growth marked a contraction. We now expect an 8% CAGR in the next decade higher than the average 5.5% GDP growth rate. GDP Growth (%) 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% 2000 2001 2002 2003 2004 2005 2006 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E -20.0% -30.0% Source :TURKSTAT, Garanti Securities Electricity Demand Growth (%) 12% 10% 8% 6% 4% 2% 0% 2016 E 2015 E 2014 E 2013 E 2012 E 2011 E 2010 E 2009 E 2008 E 2007 E 2006 2005 2004 2003 2002 2001 2000 Source :TEIAS, Garanti Securities Despite Turkey s rich water resources, natural gas comprises the largest share in energy resources (45% share) followed by water (24%), lignite (18%), coal (8%) and fuel-oil (3%), respectively. The share of wind power, on the other hand remains insignificant The continuous increase in the input prices such as oil and gas, and dependency for imported gas, have been creating a compelling case for increased renewable energy investments. Hence, Turkey is encouraging the use of renewable energy to reduce the energy imports and carbondioxide and other emissions. 14
The hydropower potential of Turkey is about 128 billion kwh per year. About 35% of the hydropower potential is utilized and generating electricity. Hydropower plants with an installed capacity of 11 billion kwh/year are under construction. Many private companies are developing small and midsize hydropower projects. Since 2003, demand increased at a CAGR of 7%, versus a capacity increase of only 4%. The Turkish Electricity Transmission Company foresees a production increase from 42,053MW to 48,254MW indicating a CAGR of 1.5;%, still not sufficient to cope with the demand scenarios. Production Growth (MW) 50,000 48,000 46,000 Licensed 44,000 42,000 40,000 Under construction 38,000 36,000 34,000 Turkey Production 32,000 30,000 2007 E 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E Source: Turkish Electricity Transmission Company In 2006, the Turkish electricity sector recorded approximately 162 billion kwh of gross consumption and 121 billion kwh of net consumption (excluding loss/theft and internal consumption). Distribution losses of the system, which amounted to 19.2 billion kwh in 2006, are high compared to international benchmarks. Accordingly, one of the primary objectives of the electricity sector reform has been defined as reducing the loss/theft ratio to OECD level of 6.8%. Transmission and Distribution Losses 17.1 15.6 11.2 Average: 6.8% 4.5 3.9 3.7 3.5 4.8 5.2 5.5 6.2 6.5 6.6 6.8 7.2 7.3 7.8 8.0 8.1 8.2 8.3 9.5 9.5 9.9 1.6 MEXICO TURKEY POLAND HUNGARY GREECE SPAIN UNITED KINGDOM PORTUGAL SWEDEN NORWAY CANADA AUSTRALIA NEW ZEALAND SWITZERLAND FRANCE USA ITALY AUSTRIA GERMANY BELGIUM DENMARK NETHERLANDS KOREA FINLAND LUXEMBOURG Source :IEA Statistics, Electricity Information 2007 15
Automatic Pricing The Government is preparing for automatic pricing system, however, the deadline is extended from end of March to July 1st. The Government still negotiates on a draft text of the reform, which aims to remove political interference in energy price decisions and leave it to markets. Officials stated that the Government plans to liberalise the price mechanism for state energy companies before privatisation of electricity distribution and production facilities. After steady prices for five years, the Government raised electricity prices by 20% for households and 12% for industry on Jan 1, 2008. As a preparation period a Market Settlement and Balancing Regulation (DUY system) was placed on September 2006 in order to relieve the imbalance between supply and demand in the electricity market. Before the introduction of DUY, increase in the natural gas prices had a severe negative impact on the company margins. DUY is a clearing house system aimed at creating a competitive environment for price setting in the electricity market. With the introduction of DUY, generation companies were relieved to a certain extent, from where they were caught between the rock of fixed electricity prices and the hard place of rising natural gas prices. The full liberalization of the sector should ensure that energy prices will be reflecting full costs and eliminate both direct and indirect subsidies and cross-subsidies. Measures will be taken to increase transparency in energy regulation and in price setting. Regulated Electricity prices vs DUY prices (YTL/MWh) 200 175 150 125 100 75 50 25 Day Peak Night Regulated Dec-07 Oct-07 Aug-07 June-07 April-07 Feb-07 Dec-07 Oct-06 Aug -06 Source: Market Financial Settlement Centre (PMUM), TEDAS 16
Industrial Electricity Prices in European Countries Gross price tax Increase in price Source: Eurostat & TEDAS Electricity prices in Turkey does not stand at the lowest end, yet the prices are below the European average levels. Electricity distribution privatisations... The Privatisation Administration (PA) has re-started the privatisation process, with the simultaneous tender of Baskent (Ankara Elektrik Dagitim A.S., Region 9), Sakarya Elektrik Dagitim A.S.( SEDAS, Region 15), and one region yet to be named from Southeast or East Anatolia. The Baskent region includes Ankara, Kirikkale, Zonguldak, Bartin, Karabuk, Cankiri and Kastamonu, while the Sedas region includes Sakarya, Bolu, Duzce and Kocaeli. The parties that were pre-qualified in 2007, will carry their existing position. For Ankara and Sakarya a total of 54 parties have obtained prequalification in which most of them have applied for the both regions Electricity Distribution Privatizations Source: Market Financial Settlement Centre (PMUM), TEDAS, PMUM Source: TEIAS 17
These privatisations are expected to bring the loss & theft ratio down by about 5 pp on average from a current 16%, bringing in 22bn kwh of additional energy, worth approximately YTL2bn. The announced consortias include Calik-Iberdrola, Alarko-SNET (Endesa), Dogan Holding Kantur-Akdas-Saray Hali, Dogan Holding- Dogus Holding-Anadolu Endüstri-Unit Investment and Enel-Enka. These companies will aim to capture an important share of the energy distribution market, which is defined as a cash cow business. Other international bidders include German E.ON, Enbw, the US based AES, Suez-Tractebel and Edison Spa. Prequalified Parties for the two regions BASKENT SAKARYA 1 AES Amsterdam Holdings X X 2 Ak Enerji X X 3 Aksa Elektrik (note that this is not the listed Aksa!) X 4 Alsim Alarko Sanayi X 5 Asli Insaat & Torunlar Gida JV X 6 Barmek Holding X X 9 Dogan Holding & Saray Hali X 10 E.ON Energie AG X X 11 Edison X 12 Eksim & Kuveyt Turk Katilim Bankasi JV X X 13 EnBW Energie Baden-Württemberg AG X X 14 Enel X X 15 Enerjisa X X 16 Enka X X 17 Eren Holding X X 18 Gama Enerji & General Electric JV X 20 Global Investments Holding & Energaz JV X 21 Gurollar Enerji JV X 22 Habas X 23 Hema Endustri X 24 Iberdrola-Calik JV X 25 Iberdrola-Turcas JV X 26 Ic-Ictas Insaat X X 27 Kantur-Akdas Insaat JV X 28 Karkey Karadeniz Elektricity Production X 29 Limak X X 30 Novosibirskenergo Enerji & Elektrifikasyon JV X X 31 Nurol Holding X X 32 Park Holding X X 33 Prisma Energy X X 34 Suez-Tractebel Enerji. X 35 Turkuaz Petrol & Cukurova Holding JV X UDDA JV (Unit Investment BV.-Dogus Holding- 36 Dogan Holding and Anadolu Endustri Holding) X 37 Yuksel Insaat X X 38 Zorlu Enerji X X 39 Bereket Enerji X 40 Suez-Tractebel Enerji X Source :Privatization Administration 18
Generation Privatizations. Ankara Natural Electricity Production Privatization (Ankara Dogal Elektrik Uretim) The nine energy assets were merged under Ankara Dogal Elektrik ahead of the expected privatization. The energy assets include the Tercan, Kuzgun, Mercan, Ikizdere, Cildir, Beykoy ve Atakoy Hydroelectric Plants, the Denizli geothermal plant and Engil natural gas plant. The total installed generation capacity of the privatized energy assets stands at 141MW with a combined annual production amount of 450kWh. Under the privatization process, the operating rights of the hydroelectric and geothermal power plants is transferred for a period of 30 years and the Engil natural gas fired plant will be sold through a block-sale. Interest in the sale of these energy assets was high and a total of 27 interested parties participated in the bidding process including Turkish conglomerates Zorlu, Calik and Kiler, and construction companies Ozaltin and Turkerler. Zorlu Enerji submitted the highest bid of US$510mn in the privatization of the Ankara Natural Electricity Generation Company, beating our estimates. The share transfer of the power plants is expected to take place in June-July 2008. With this privatization Zorlu intends to grow significantly in the energy segment and the company aims to increase its generation capacity to 3,500 to 4,000MW by 2012. Source :Privatization Administration 19
Nuclear Energy. Turkey is preparing to undertake three nuclear power plants, each rated at 1,500 MW and making up a total nuclear capacity of 4,500 MW, by the year 2020 with the latest technology, which is known as Generation 3.5. It should be recalled that to build a nuclear power plant is a complex, expensive and timely investment, which would also require particular know-how to operate. Yet, to solve the long-term demand problems, nuclear energy would be a good alternative which would reduce the Turkey s dependency on Iranian and Russian natural gas, ensuring a supply security. Nuclear power plant projects present opportunities for private sector companies whom are willing to participate in the tender process. Yet, as the Turkish groups that were interested in the nuclear energy generation do not have the know-how, they are required to team up with international partners. It has been stated that foreign ownership in nuclear power plants will be limited to 40%. We have listed below, the company/groups that are currently in-talks. TEKFEN - KOC - BEREKET: Talks continue with the Canadian AECL company to build a model known as Candu. If the talks succeed in a partnership they will form a consortia to bid in the nuclear plant project. ENKA: Enka agreed to form a strategic partnership agreement with the South Korean electricity generation company KEPCO. KEPCO s nuclear energy plant works with water pressure model and the useful life of the plant is 60 years. ENERJİSA: Enerjisa has finalized its partnership with GE. GE s model which utilizes boiling water technology could work up to 1500MW installed capacity. The effect on prices, although difficult to predict, might not be significant due to long construction time needed when combined with average 7.3% (average of high and low scenarios) Turkish annual peak demand growth rate. Considering a five-year construction period (assuming Turkey starts construction in 2008), three plants with a combined capacity of 4,500MW capacity could be operational by 2013 (which we would regard as the best case), at which time, Turkish peak demand would have increased more than the planned nuclear capacity. Thus, we believe the effect on independent power producers will be minimal. 20
Balance Sheet (US$mn) 2006/09 2007/09 Change 2006 2007 E 2008 E 2009 E Current Assets 50 30-41% 47 32 35 44 Cash and Cash Equivalents 0 1 119% 10 2 5 10 Short-Term Trade Receivables 9 7-29% 6 9 9 10 Other Short-Term Receivables 38 21-46% 22 20 20 23 Inventories 0 0 24% 0 0 0 0 Other Current Assets 2 1-14% 9 2 1 2 Long Term Assets 295 331 12% 313 326 388 510 Other Long-Term Receivables 21 48 126% 27 50 50 50 Tangible Fixed Assets 223 259 16% 233 243 285 407 Intangible Fixed Assets 8 7-7% 8 8 8 8 Other Long-Term Assets 43 17-61% 45 25 45 45 Total Assets 345 361 4% 360 359 423 554 Short Term Liabilities 77 44-43% 62 46 63 60 Short-Term Financial Loans 56 34-39% 57 35 50 50 Short-Term Trade Payables 2 1-70% 1 1 1 1 Other Short-Term Payables 15 0-100% 0 0 1 1 Other Short-Term Liabilities 4 9 124% 4 10 11 8 Long Term Liabilities 147 133-10% 157 132 185 352 Long-Term Financial Loans 139 132-5% 157 132 185 352 Other Long-Term Liabilities 7 0-93% 0 Shareholders' Equity 119 175 47% 138 181 176 142 Total Liabilities and S.holders' Equity 345 361 4% 360 359 424 554 Income Statement 2006/09 2007/09 Change 2006 2007 E 2008 E 2009 E Net Sales 77 54-30% 94 78 93 117 Cost Of Sales -47-34 -28% -59-54 -65-66 GROSS PROFITS/LOSSES 29 20-33% 38 24 28 51 Operating Expenses -2-2 7% -3-2 -3-4 NET OPERATING PROFITS 28 18-35% 36 22 25 47 Income & Exp From Other Oprt. 11-7 n.m. 0-11 -7-7 Financial Expenses -45 11 n.m. -29 6-5 -5 MINORITY INTERESTS 2-1 n.m. 2-1 1 1 INCOME BEFORE TAXES -4 22 n.m. 8 16 14 36 Taxation on Income -17-9 -50% -19-3 -3-7 NET PROFIT AFTER TAXES -21 13 n.m. -11 13 11 29 21
Definition of Stock Ratings Stock Ratings Previous Rating OUTPERFORM (OP) The stock's total return is expected to exceed the return of the ISE-100 by more than 10% by the end of 2008. BUY MARKET PERFORM (MP) The stock's total return is expected to be within 10% of the ISE-100 by the end of 2008. HOLD UNDERPERFORM (UP) The stock's total return is expected to fall below the return of the ISE-100 by more than 10% by the end of 2008. SELL Garanti Securities Garanti Building Nispetiye Mah. Aytar Cad. No.2/8 34340 Levent Istanbul Turkey ICM Contact Information: ICM: +90 212 318 27 32 Facsimile: +90 212 217 84 70 E-mail: research@garanti.com.tr The information in this report has been obtained by Garanti Securities Research Department from sources believed to be reliable. However, Garanti Securities cannot guarantee the accuracy, adequacy, or completeness of such information, and cannot be responsible for the results of investment decisions made on account of this report. This document is not a solicitation to buy or sell any of the securities mentioned. All opinions and estimates included in this report constitute our 22 judgment as of this date and are subject to change without notice. This report is to be distributed to professional emerging markets investors only.