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Turkey small cap tour: Energy and utilities

 Odak Elektrik:  Tax expenses pressures  bottom line Odas Elektrik posted TL20mn net profit for 4Q18, worse than our estimate of…

Turkey small cap tour: Energy and utilities

 Odak Elektrik:  Tax expenses pressures  bottom line

Odas Elektrik posted TL20mn net profit for 4Q18, worse than our estimate of TRL131mn due to deferred tax expenses. No consensus is available. EBITDA of TRL37mn was close to our estimate of TL41mn. Net debt fell by 6% q/q to TL1.55bn on strong EBITDA generation, bringing the net debt/EBITDA to 23x from 33x. The company closed the year with TL67mn EBITDA (up by 23% y/y) and TL252mn net loss (vs TL100mn net profit in 2017).

EBITDA almost doubled y/y

Gross profit rose only by 3% y/y to TL26mn as the rise in the profitability of natural gas power plant as well as positive contribution from Can PP which started operations in August 2018 were partially offset by weaker antimony, coal and electricity wholesale operations. The like-for-like gross profit (excluding Can PP sales) declined by 26% y/y. Depreciation expense rose from TL2.6mn in 4Q17 to TL21.9mn in 4Q18 mainly due to the Can plant investment. EBITDA improved by 93% y/y and 216% q/q thanks to a TL38mn worth contribution from Can according to the company disclosure.

High FX gains were offset by taxes

Odas recorded TL269mn worth net financial income on significant FX gains. However, those were offset by TL265mn deferred tax expenses and therefore there was almost no impact on the bottom line.

TP maintained at TL2.38, Outperform rating maintained

Odas strengthened its financial structure with a 117% rights issue and postponed the start of capital payments regarding Can PP related debt from 2019 to 2020. It also recently announced that 45% of Can’s electricity sales were indexed to USD currency and will be priced as USD51.5/MWh-USD56.65/MWh including a 3% subsidy. As Can began to contribute positively to profitability, we believe that the worst might have been left behind for Odas unless another major volatility in FX rates takes place. We keep our Outperform rating as our unchanged target price points to 46% upside potential.


Umut Ozturk / Research Director, OYAK Invest



Ulusoy Elektrik:  Net profit fell short of our estimate


Ulusoy Elektrik posted TL32mn net profit for 4Q18, up by 3% y/y, worse than our estimate of TL39mn due to TL15mn worth net non-operating expenses, possibly related with some reclassifications. No consensus is available. EBITDA of TL61mn surpassed our forecast of TL53mn slightly on a 7.5pp better than expected gross margin, which grew by 11.7pp y/y to 41.6%. EBITDA and net profit reached TL170mn and TL126mn in 2018, up by 52% and 45% y/y, respectively. Despite some rise in working capital net cash position rose by 11% q/q to TL83mn.

Exports drive the top line and EBITDA growth

Revenues grew by 7% y/y thanks to exports although domestic revenues were weaker due to the slowdown in power distribution, generation and infrastructure investments. EBITDA margin increased by 12pp y/y to 38.3% which resulted in a 56% y/y EBITDA growth. On the other hand, net profit growth was limited at 3% due to higher taxes and non-operating expenses. On a q/q basis, net profit declined by 38% due to non-operating expenses although EBITDA was 17% higher.

Downgrading to Marketperform

The US based Eaton Corporation reached an agreement with Ulusoy Elektrik last month to acquire 82.275% controlling shares in the latter for USD214mn on a cash and debt free basis. Closing is expected to be finished by August 2019 while the transaction price corresponds to around USD260mn for the whole company. Although we have raised our target price slightly to TL17.5/share (from TL16.0 previously), we downgraded our rating to Marketperform due to the limited 2% upside potential. As there is low seasonality in 1Q and 2Q, we think that the company shares could remain under pressure unless TL depreciates materially against USD which would imply higher transaction price in TL terms. The shares trade at 7.0x EV/EBITDA and 9.1x P/E on our 2019 estimates.


OYAK Invest  Research




Zorlu Enerji:  Bottom line improved despite missing estimates


Zorlu Enerji posted TRL64mn (vs –TL8mn in 4Q17 and –TL107mn in 3Q18) net profit for 4Q18, lower than our estimate of TL138mn and consensus (3 estimates) of TL261mn mainly due to TL92mn worth deferred tax expense. EBITDA of TL471mn surpassed our forecast by 12% and consensus by 2%. Despite the 108% y/y growth in EBITDA, higher depreciation and tax expenses prevented a larger improvement in the net profit.

Operating performance was very strong

Sales revenues rose by 25% y/y to TL2.1bn mainly thanks to higher contribution from regulated electricity sales, full operation of Kizildere III GPP and the positive impact of strong USD/TL on YEKDEM revenues. On the other hand, EBITDA growth was much higher at 108% thanks to the weak TL, increased contribution from Kizildere III GPP and improving profitability in retail and wholesale business. EBITDA was down by 20% q/q due to the stronger TL.

Net debt/EBITDA fell to 6.2x

Net debt fell by 14% q/q to TL10.7bn with the net debt/EBITDA retreating from 9.4x to 6.2x level on robust EBITDA generation. We expect this ratio to continue falling in the upcoming years thanks to strong cash generation.

Talks continue for the sale of WPPs and gas distribution assets

Zorlu Enerji is currently holding talks with prospective buyers for its wind power plants and gas distribution assets. The process is expected to be completed this year. A possible sale would help the company to decrease its leverage further since according to our back-of-the-envelope calculation sales proceeds could be more than TL1.5bn.

Outperform rating maintained, TP at TL2.01/share

We raise our target price by 11% to TL2.01/share on net debt adjustments and keep Outperform rating with 31% upside potential. We estimate Zorlu Enerji’s EBITDA to reach TL2.8bn by 2020, showing a CAGR of 27% between 2018 and 2020. The growth will be primarily driven by the renewables portfolio, which benefits from a highly profitable USD-based feed-in tariff.



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