Sabanci Holding (SAHOL TI): Healthy growth in non-bank profits warrants a lower NAV discount
We think that good progress has been achieved to balance the group profits between the bank and the rest, addressing a criticism (by investors) that dependence on banking profits was too much
Non-bank profits improving
Sabanci’s profits from non-bank operations (adjusted for one-off items) were up 57% y-o-y in 9M19, following a 61% increase in FY18.
Accordingly, non-bank share in total group profits has reached 42% in 9M19 from 27% in 2017 and average 29% in the 2014-17 period. We expect Sabanci to sustain this ratio above c40% in coming years. We think that good progress has been achieved to balance the group profits between the bank and the rest, addressing a criticism (by investors) that dependence on banking profits was too much.
Drivers are energy, followed by insurance
We see that Sabanci’s investments in energy (power generation/distribution) are finally paying off. In 9M19, energy segment profits (up almost 8x y-o-y) represent c30% of total group profits, vs 15% in 2018 and 6% in 2017. Energy is also the main driver of the deleveraging and free cash generation in the non-bank portfolio. Following energy, insurance operations are also showing solid growth rates; profits up 47% in FY18 and up 38% in 9M19. Sabanci should benefit from rising economic activity in Turkey in 2020.
Sabanci’s heavy Turkey exposure (c90% revenue generated in Turkey as we estimate), is rewarding in times of economic upcycles, as we expect in 2020e. While we deem the recent actions positive in terms of improving portfolio diversification outside Turkey (i.e. acquisitions in cement in Europe and in composite materials in the US), we see 2020 as a year of improving profitability in the Turkish cement and tyres operations, that remained under pressure in 2018-19.
Factors to watch – regulation in energy, execution in retail
Given energy operations are highly regulated, we see regulatory changes as key to watch for Sabanci’s operations, in both generation and distribution. 2020 is a critical year, specifically for power distribution/retail, given the operating parameters for the new regulatory period, 2021-25e, will be set. We also view the strategy in retailing (food and non-food) important, as this segment remains loss-making in the portfolio.
Raise TP to TRY14.6, maintain Buy
With changes in HSBC TPs for the listed parts incorporated, our NAV model for Sabanci yields a new TP of TRY14.6 (from TRY9.8).
We now assume a 20% target NAV discount (40% previously) which puts its non bank portfolio on 2020e PE of 8.4x (previously 7.9x); this is in line with the 2020e PE multiple of our Turkish Industrials coverage. Our new TP implies 41% upside and we maintain our Buy rating.
Excerpt from HSBC Global Research Report