COMPANY INITIATION REPORT: OZKGY
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Well positioned to benefit from real estate sector recovery
The Company owns TL1bn worth of projects that are near completion, rent yielding assets with balanced exposure to different sectors (TL1.9bn), as well as promising land plots (TL0.5bn) earmarked for development. Ozak’s balance sheet is healthier compared to its peers with relatively low net debt to EBITDA of below 1.5x (exlc. Buyukyali deliveries) offers to easily kick start new projects.
Buyukyali revenue sharing project nearing cash cow phase
Ozak holds a 60% stake in the consortium that develops one of the biggest projects of Emlak Konut (EKGYO) in Istanbul with 283K sqm sellable and 33K sqm leasable area and a project size of TL5.4bn. The project was launched in 2016 and the vast majority of the deliveries would be made in 1Q20. This would boost financials with revenue ramp up of TL484m in 2019 TL1.7bn next year. Furthermore, start of occupancy on the residential side and launch of other mix use parts of the project would attract more homebuyers during this low rate environment era. Although we are more conservative than the company in timing of future sales, the project is still the most valuable asset of Ozak, valued at TL1bn and 38% of Target NAV.
Rent yielding assets
Ela Quality Resort Hotel (33% of TNAV) and others. The biggest rent yielding asset of the company is the 583-room five star holiday resort in Belek Antalya. Ozak is both the owner and the operator of the property and enjoys the ongoing boom in tourist flow. The hotel would generate a total revenue of TL190mn in 2019 and we conservatively pencil in a 5% revenue CAGR in EUR terms for 2019-2025 period. Additionally, the company has four other rent yielding assets in Istanbul, which are dealing with vacancy issues. Nevertheless, with two office buildings, serving as headquarters of some industrial companies and two commercial real estate, render other rent yielding assets as a balanced portfolio. These four assets would generate a rental income of around TL55mn in 2019 and constitute around 30% of the target real estate value.
Land plots and future potential
OZKGY has four different plots in Turkey, as well as some unsold units from a previous project, Hayattepe. We are not incorporating any value stemming from new projects, as delays are common in real estate projects. That said, the company plans to launch a project on its Gokturk land as early as 1H20, which may be an upside potential for our valuation to the tune of 4% of Target NAV.
We used DCF valuation for Buyukyali project and average rent yields for other assets, reaching a real estate value of TL3.59bn and an NAV of TL2.58bn. After adding a 50% discount to our target NAV (vs. historic discount of 55%), we calculate target price of TL3.55, implying 54% upside potential. Ozak REIT currently trades at 60% discount vs. the average 42% discount of listed REITs. We think distribution of dividends (planned in 2021) at healthy pay-out ratio is essential to help narrow Ozak’s discount to its NAV.
The main risk for our valuation would be the further slowdown in the real estate market and slower than expected sales in Buyukyali. The company also has a sizable short foreign currency position and despite natural and financial hedges, sharp fluctuations may hurt the balance sheet. Finally any geopolitical risk for tourism may disturb the revenue flow of the hotel.
RESEARCH, YF Invest, brokerage house