2 recommendations for Turk Traktor (Farm machinery)
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Export sales would boost top-line despite the weakness in domestic market
We expect TRKCM to continue increasing its revenue in 2H19 mostly with the help of exports from Turkey & revenue generated from foreign operations which already constituted 64% of its total revenue in 1H19. In parallel with its strategy to shift its domestic sales to export, TRKCM would be able to lessen the negative impact of contraction in the domestic construction sector. Having completed the cold repair in Bulgaria at the beginning of July, we expect TRKCM to record a FY revenue of TL7bn in 2019 (+20.0% y/y vs 18.2% y/y in previous TP update report). On the other hand, transportation related costs, especially from Turkey, and higher production costs would trim down company’s operating margin. Therefore, we expect TRKCM to generate a lower EBITDA margin of 17.9% in 2019E vs 20.3% in FY18 which is almost in line with our previous estimation.
We lowered our target price to TL3.46/share, still offering upside potential of 31%
We downgrade our TP from 4.00TL/share to 3.46TL/share mainly due to the slowdown in pace of global economies, in which TRKCM operates. Other important modifications to our model were the decline in risk free rate from 18% to 16%, the rise in our 2019-2023 average capex/sales estimation from 8% to 9.5%, the revision of our 2020E EBITDA level to TL1.4bn from TL1.5bn as the domestic construction market would continue limiting company’s operational performance. Moreover, we lowered our average revenue growth and EBITDA margin for 2020-2025 period from 15.4% and 17.5% to 14.9% and 16.2% respectively. In our DCF analysis, we use 5.0% equity risk premium, 0.87x beta, 20% cost of debt and 6% terminal growth rate. The new TP at TL3.46/share still indicates an upside potential of 31%. All in all, we maintain our recommendation as “Outperform”. The stock continues to be traded at an undemanding multiples: 2019E EV/EBITDA of 3.3x (51% discount to the peers) and 2019E P/E of 4.2x (55% discount).
Lower EBITDA margin for 2019E and beyond
We expect TRKCM to pencil a 2.4pp decrease in its 2019E EBITDA margin (17.9% vs 2018: 20.3%). In 2020E, the downward trend in EBITDA margin would continue (YFe: 17.6%). On contrary, focusing on profitability, we expect automotive glass branch to continue recovering its margins and the dilutive effect on company’s consolidated EBITDA would weaken over time. TRKCM’s pricing power in the domestic market as well as its relatively strong international positioning would help company to sustain its margins.
Moderate recovery in domestic market & slowdown in global growth
The normalization process in domestic construction sector would take some time for TRKCM. There could be some pressure on margin levels as profitability of exports seems to remain lower than profitability of domestic sales mainly due to higher transportation cost. Additionally, slowdown in global economy had forced us to reduce our future growth projection. We expect TRKCM’s consolidated revenue to grow at an avg. of 15.4% during 2020-2023, which was 15.8% in our previous report.
The key downside risks to our valuation are i) hikes in COGS related energy prices which couldn’t be reflected into the pricing, ii) macroeconomic instabilities, affecting production & sales, and iii) unexpected fluctuations in exchange rates influencing COGS, transportation costs and unit sales prices.
ALP NASIR, Research Analyst, YF Securities
İs Yatirim analyst interviews the management
Following the release of August sales volume data indicating 39% Y/Y growth in domestic volumes and 33% Y/Y decline in export volume, we talked to Turk Traktor IR about its 2019YE guidance of 11.500-14.000 for domestic sales and 14.250 – 15.250 for export sales.
- Strong Y/Y domestic sales volume growth in August was due to weak base of 2018, 6% M/M decline was due to shorter working days.
- The Company sees September sales performance crucial for reaching its 2019YE guidance, as September is the harvest month. The Company has started new sales campaigns – attractive loan rates through Turk Traktor Finance – to stimulate the sales in September. The Company believes that if September domestic sales volume will exceed 1.000 units, promising a better outlook for October, they can reach low end of their 2019YE guidance of 11.500. If September domestic sales volume will be below 1.000 units, the company says that a downward revision in company’s 2019YE domestic sales volume guidance will be on cards.
- Ziraat Bank interest rate for tractor purchases is currently 9% together with 50% subsidy. Company says Turk Traktor has started to offer more attractive loans with its recent campaigns in September.
- The Company also mentioned that despite higher tractor demand on yearly basis, the consumers are more price sensitive and therefore consumer preferences has shifted to low HP tractors which are relatively less profitable compared to high HP ones. Indeed, the profitability in 3Q19 is expected to be lower than 2Q19. There will be also remarkable decline in margins on yearly basis due to very strong profitability in 3Q18.
- Our domestic sales volume estimate for 2019 is 10,147 units below company guidance of 11.500-14.000. Please note that, excluding 2018 as due to economic turmoil after August, Turk Traktor’s 8M cumulative domestic sales volume accounts for ca65% of its 12M full year domestic sales volume based on company’s historic volume data between 2013 and 2017. Historic data implies domestic volume of 9,000 tractors for 2019. Currently, we don’t change our volume estimates for 2019.
- Relatively weaker export volumes in August was due to some normalization after robust export performance in July. Considering YTD export volume of 10.004 units, we don’t see any risk to reach company export target of 14.250 – 15.250. Indeed, our export volume estimate of 14.865 is at mid-range of company guidance.
By Esra Sirinel, Equity Analyst
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