DOGUS OTOMOTIV: Upgrade to Outperform on improved prospects for 2020 earnings
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We upgrade Dogus Otomotiv from Marketperform to Outperform as we believe multiple tailwinds would drive a strong earnings rebound in 2020. As a result of lower interest burden, higher income from subsidiaries (mainly Tuvturk) and a gradual recovery in auto sales, we project net income of Dogus Otomotiv to increase to TL214mn in 2020E and TL380mn in 2021E. This would put P/E multiples at 6.8x/3.9x, respectively. Our new TP is TL9.40/share (up from TL7.90/share), which offers 41% upside potential.
Rate cuts to lower cost of debt for Dogus Otomotiv
Dogus Otomotiv has faced a substantial headwind from higher interest rates in 2018-2019 as its effective cost of debt soared (26% in 2019E vs. 19% in 2018 and 12% average for 2013-2017). Following a cumulative 750 bps rate cut by CBRT, we expect the company would have more favorable borrowing rates starting from 4Q19. We estimate net financial expense-to-sales ratio to improve from 6.9% in 2019E to 3.9% in 2020E.
Tuvturk to increase earnings contribution
Tuvturk entered its second 10-year of concession period, which means its revenue share out of inspection fees increased to 20% from 7%. As a result of this change, we expect net income margin of Tuvturk to increase to increase to 12.2% in 2019E and 13.6% in 2020E, up from an average of 6.6% during 2015-2018. This would mean Dogus Otomotiv would report TL110mn/TL138mn income from Tuvturk in 2019E/2020E.
Expect gradual recovery in Turkey auto sales
Turkey auto sales is seen around 400K vehicles in 2019E down nearly 60% from cyclical peak levels (~1mn vehicles) and we estimate the market would recover to its 10-year mean (800K units) over the next 5 years.
VW Group considers building a car manufacturing plant in Turkey
According to media reports, VW Group is planning to build a new car manufacturing plant in Eastern Europe as it looks to shifts some capacity to low cost plants during transition to electric vehicles at its existing plants in Germany. Turkey is reportedly front-runner country for the location of new plant, which is expected to produce sedan and/or SUV models for multi-brands (VW/Skoda/Seat) with an initial capacity of 300K vehicles. Should VW Group pick Turkey for its new investment, we believe market share of Dogus Otomotiv would have more upside potential in the long term. Currently, we estimate Dogus Otomotiv would keep its market share in the range of 16-17% over the next 5 years.
SERHAT KAYA, RESEARCH, YF Securities