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COMPANY UPDATE: OTOKAR  (Automotive)

Market likely to look for new orders for further performance

COMPANY UPDATE: OTOKAR  (Automotive)

2Q results beat estimates

Otokar reported TL206mn net income in 2Q19, beating consensus estimate of TL164mn and our estimate of TL153.0mn. Otokar had reported a loss both in previous quarter (TL-11mn) and same quarter last year (TL-51mn). Improved performance is mainly driven by deliveries to UAE (8×8 armored vehicle project) which started in final quarter of 2018. Bus deliveries to Romania as part of a €98mn tender is also completed by this quarter. Thanks to these, net sales jumped to TL865mn from TL236mn last year and TL419mn in 1Q’19. 2Q sales was 8% above consensus estimate, whereas EBITDA margin of 25.9% was broadly in line with consensus. Income from equity pickup also supported net income performance. Looking at the breakdown of revenues, 39% of total sales was armored vehicles in 1H’19, whereas exports share in revenues increased to 81% (from 32% a year earlier).

Expect EBITDA margin to normalize in 2H’19

Otokar recorded a solid EBITDA margin of 18.2% in 1H’19, but we expect this to normalize in the remainder of the year and see FY’19 margin at 14.7% (still above 13.5% of last year). Reason for lower margins in the second half-year would be increasing trend in opex and our estimate of lower turnover compared to first 6M. Despite this, our EBITDA estimate for this year is revised up by 8% vs. previous estimate. Upward revision in our net income estimate is much larger (from TL155mn to TL286mn) due to lower effective tax rate and contribution of equity pick-up.

Market likely to look for new orders for further performance

Otokar recently introduced an all-electric 4×4 armored combat vehicle (Akrep II), which reflect intensive R&D investments of the company. While there has been no fresh news flow about prospective tenders, the company remains committed to grow its armored vehicle exports and possible new deals would be major catalyst for the stock, looking forward. Our longer term estimates remain solid as we estimate Otokar will increase its defense segment revenue up to ~USD350mn by 2023E vs. average of USD175mn over the last 5 years.

Valuation

We increase our TP to TL130/share based on DCF valuation (vs. TL125/share before). As our new TP now offers a limited upside potential of 4%, we downgrade our recommendation to Marketperform for OTKAR shares. Based on our estimates, Otokar now trades at EV/EBITDA (adjusted for equity pick-up) multiples of 10.2x/8.0x in 2019E/20E, whereas P/E multiples for 2019E-20E are 10.5x and 8.9x, respectively.

 

 

SERHAT KAYA

RESEARCH, YF Securities

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