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Turk TRAKTOR: Revising down our target price to 40.40TL

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Turk TRAKTOR: Revising down our target price to 40.40TL

2019E: Weak domestic performance partially offset by export sales

After company’s revised guidance following 1Q19 results and May’19 sales figures we expect TTRAK to maintain its new goals on domestic and international side. We think that the company would be able to reach our export sales expectation of 14.8k units (2% y/y increase). On the other hand, we revise down our 2019 domestic sales expectation from 15.9k units to 11.9k units (-31.2% y/y vs 2018) in accordance with company’s new guidance.

Our Target Price is lower at TL40.40/share, still offering upside potential of 33%

We cut our TP from 44.30TL/share to 40.40TL/share mainly due to the muted performance we saw in domestic tractor market. In our DCF analysis which we’ve used to value TTRAK, we use 17.0% risk-free rate, 5.0% equity risk premium, 0.67x beta, 22% cost of debt and 4% terminal growth rate. The new Target Price at TL40.40/share indicates a weaker upside potential of 33% vs our prior TP of 44.30TL/share (46% upside). Nevertheless we maintain our recommendation as “Outperform”. The stock continues to be traded at an undemanding 2019E EV/EBITDA of 6.6x, which implies a remarkable 35% discount to the peer group. TTRAK’s 2019E P/E on the other hand stands at 9.6x.

We expect a dividend yield of 8.3% in 2020

Management’s commitment to its strategy of reducing the net debt/EBITDA level below 2.0x (2018YE: 2.73x, 1Q19: 3.1x) is maintained. We expect the company to restart distributing dividends from 2019 earnings and expect dividend yield to be 8.3%.

Expect gradual recovery in domestic market

Due to the fact that the normalization in domestic tractor sector would take more time than our previous estimation, we have lowered our total unit sales from 30.7k units to 26.7k units in 2019E. That decision would leave us with a y/y drop of 16.1% on company’s consolidated sales in unit terms. Nevertheless, we believe TTRAK would increase its unit sales after 2019 along with the normalization of domestic economy. We expect domestic sales volume to grow at a CAGR of 2.5% during 2020-2023. Possible incentives by government to support farmers (scrap incentives etc.) would pose upside risk to domestic demand.

The key downside risks to our valuation are

  1. i) the extension of Tier 3 model tractor sales on domestic market beyond 2020 and ii) macroeconomic instabilities, which could affect production costs, inventory days and FX denominated financial debt (as of 1Q19, 30% of its long term financial loans are denominated in EUR, 2018YE: 29%), as well as the risk free rate.

 

By Mr. Alp Nasır

RESEARCH

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