21 January 2015 Most- and Least-Preferred Stocks AK Investment Research [email protected] Most-Preferred Stocks (MPS): We are adding to our MPS list. The announcement of tender offer process for Halkbank’s stakes in non- life insurance and private pension fund companies will improve optimism on the Bank's 2015 outlook and may bring an upside risk to our earnings forecasts for 2015. The Bank’s relatively more optimistic guidance on asset quality metrics at its 2015 budget plan may provide another upside risk to our forecasts. We admit that its TRY1bn rights issue (potentially in 2Q15) may lead to a pressure on share price. Yet given Halkbank's current 15% discount on 1Y fwd P/B of 1.0x (including the impact of one-off and capital injection) relative to the peer banks’ average P/B, negative factors must have been oversold in our view especially under the light of management’s recent optimistic guidance on 2015.

Least-Preferred Stocks (LPS): No changes have been made in the LPS list.

Most-Preferred Stocks Least-Preferred Stocks Company Ticker Share Price Company Ticker Share Price Aselsan ASELS 11.75 Akenerji AKENR 1.27 Emlak REIC EKGYO 3.16 BIMAS 50.85 Halkbank HALKB 15.85 Hurriyet HURGZ 0.83 Is REIC ISGYO 1.71 D KRDMD 2.05 PGSUS 32.25 Vakifbank VAKBN 5.83 Yapi Kredi Bank YKBNK 5.15

Source: Ak Investment Share prices as of January 21, 2015, first session close

Performance of the Most-Preferred Stocks Portfolio Total nominal return of our MPS list since December 29, 2014 is 8.3% and the relative gain versus the benchmark index (BIST-100 Total Return Index) is 1.2%. Total nominal and relative returns of our MPS list since inception (January 6, 2014) are 47.6% and 9.5% respectively.

Performance since latest update in portfolio Performance since inclusion Share Price * Return Date of MPS Ticker 29/12/14 21/01/15 Nominal Relative** inclusion Nominal Relative* Aselsan ASELS 11.85 11.75 -0.8% -7.4% 12/09/2014 24.3% 7.4% Emlak REIC EKGYO 2.73 3.16 15.8% 8.1% 03/11/2014 24.9% 11.0% Is REIC ISGYO 1.43 1.71 19.6% 11.7% 23/12/2014 23.0% 15.4% Kardemir D KRDMD 2.10 2.05 -2.4% -8.8% 03/11/2014 -17.0% -26.3% Pegasus Airlines PGSUS 32.65 32.25 -1.2% -7.8% 02/12/2014 0.8% -5.0% Vakifbank VAKBN 4.85 5.83 20.2% 12.2% 02/12/2014 16.1% 9.5% Yapi Kredi Bank YKBNK 4.80 5.15 7.3% 0.2% 02/12/2014 -1.5% -7.2% Portfolio Return 8.3% 1.2% BIST-100 Total Return Index 122,436 131,124 7.1% Source: Ak Investment * as of January 21 first session close **Relative to BIST-100 Total Return Index (BIST-100 TRI)

Most-preferred-stocks performance: Nominal and Relative to BIST-100 Total Return Index 10.0% 1.5%

8.0% 1.0% 6.0%

4.0% 0.5%

2.0%

0.0% 0.0%

MPS XU100 TRI MPS relative to XU100 TRI

Source: Ak Investment Source: Ak Investment Most-Preferred Stocks

ASELSAN ASELS TI EMLAK REIC EKGYO TI Current Price (TL) 12M Target (TL) Upside Current Price (TL) 12M Target (TL) Upside 11.75 14.00 19% 3.16 3.70 17% 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F EV/EBITDA 13.2 10.8 PE 15.2 12.3 EV/EBITDA 13.1 9.8 PE 13.2 10.2 - Aselsan is a defensive play as there are no cut-backs in military - We maintain our positive stance towards Emlak REIC shares with a 12M spending in and the region. Aselsan trades at premiums to its TP of TL3.70/share, while the c.3% dividend yield is also supportive of peers that we believe are deserved as it is growing faster than the peers. the investment theme. Besides, we think that the stock offers an attractive upside potential as it is trading at a 11% discount to its latest - Note that Aselsan’s backlog reached US$3.9bn with a backlog-to-sales NAV (3Q14) vs. its historical discount of 10%. ratio of 3.3x. Projects from the Defense Undersecratary in the pipeline - 2015 pre-sales target of 12,000 homes. We expect Emlak’s pre-sales such as Milgem marine vessels, tanks and a new anti-missile performance to gradually gain momentum in the coming months with system ensure that the backlog will remain at least at around current new project launches. Moreover, residential unit pre-sales in Turkey levels. The anti-missile system contract looks likely to go forward now started to pick up in 2H14 driven by declining mortgage rates. that negotiations have shifted from the Chinese to the French. Majority Accordingly, the Company plans a pre-sales amount of 12K units (vs. 10K of financing (advances on orders and R&D funding) is US$-based. units in 2014) and to generate TRY6.8bn pre-sales revenues in 2015.

HALKBANK HALKB TI IS REIC ISGYO TI Current Price (TL) 12M Target (TL) Upside Current Price (TL) 12M Target (TL) Upside 15.85 18.50 17% 1.71 2.06 20% 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F PB 1.2 1.0 PE 8.5 8.3 EV/EBITDA 12.3 13.9 PE 11.9 12.5 - The announcement of tender offer process for Halkbank’s stakes in non- - Is REIC offers an impressive 2015F gross rental yield of 14%, compared life insurance and private pension fund companies will improve with the 2Y government bond yield of ~8%. We deem the 40% reported optimism on the Bank's 2015 outlook and may bring an upside to our NAV discount unjustified, which we believe should narrow with the earnings forecasts for 2015. The Bank’s relatively more optimistic delivery of projects and the better outlook for the real estate sector guidance on asset quality metrics at its 2015 budget plan may also provide another upside risk to our forecasts. supported by further declines in mortgage rates in 1H15. - We admit that its TRY1bn rights issue (potentially in 2Q15) may bring a pressure on share price. Yet given the current 15% discount on 1Y FW - The Tuzla Operations Centre, which has been fully leased to Isbank for P/B of 1.0x (including the impact of one-off and capital injection) relative 25 years, is set to generate considerable rental income (US$24mn per to the peer banks’ average P/B, negative factors must have been annum) as of 4Q15. Another rent-generating asset - the Tuzla mixed-use oversold in our view especially under the light of management’s recent optimistic guidance on 2015. project (US$8mn per annum) - will be completed in early 2016. Is REIC’s . annual rental income will surge by 68% to US$84mn in 2016F, up from the US$50mn in 2014E.

KARDEMIR D KRDMD TI PEGASUS PGSUS TI Current Price (TL) 12M Target (TL) Upside Current Price (TL) 12M Target (TL) Upside 2.05 2.90 41% 32.25 41.20 28% 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F EV/EBITDA 6.3 6.4 PE 11.0 11.0 EV/EBITDA 9.9 7.3 PE 12.9 10.5 - We have a 12M TP for KRDMD of TRY2.90. A lower-than-expected 3Q14 - With fuel costs making up 44% of the total cash costs, Pegasus stands EBITDA margin of 23.4% has led us to revise down our 4Q14 EBITDA among the major beneficiaries of the decline in oil prices. All else being margin forecast of 24.0% to 20.0%. Our 2014F full year EBITDA margin equal, a 20% decline in fuel costs would lead to a 25-30% improvement fell from 26.0% to 24.1%. We believe 2015 will be more challenging for in Pegasus’s EBITDA. We note that the price of a barrel of Brent crude the Company. We have also lowered our 2015 EBITDA margin forecast to has fallen by over 50% since June 2014, and the recent “no supply cut” 19.8% from 22.2%. decision from OPEC and large build up in 1H15 inventories assure us of the prospect of a substantial oil market surplus in 1H15, putting further - Still, we maintain our 2016F EBITDA margin of 19.7% and then 19.4% in downward pressure on oil prices. the rest of the forecast period. We continue to have a long-term - We expect the recent strength in the share price, triggered by a better- positive outlook on the stock as new investments will bring higher value- than-expected yield performance in the 3Q financials and, in particular, added products into the portfolio keeping profitability high in the the steep decline in oil prices, to extend into the coming days. coming years. Most-Preferred Stocks

VAKIFBANK VAKBN TI YAPI KREDI BANK YKBNK TI Current Price (TL) 12M Target (TL) Upside Current Price (TL) 12M Target (TL) Upside 5.83 6.50 11% 5.15 6.30 22% 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F PB 1.0 0.9 PE 9.7 8.3 PB 1.3 1.2 PE 12.1 9.7 - The management’s decision to divest its Visa and Mastercard shares - After four years in the doldrums, Yapi Kredi is now growing on all (held in its available-for-sale portfolio) is likely to provide c. TL250mn – cylinders to achieve its plan to be Turkey’s top private bank with a 14% 300mn boost to the bottom line and improve the bank’s Tier-1 ratio by market share in loans within 5 years (from the current 9.8%) through 20bps – 25bps. organic growth. Since the end of 2013, the Bank has been able to add a - With potential reduction of the provisioning rate of Group IV loans to modest 0.3pp in market share in loans - still ~1pps less than in March the legal cap of 50% down from 100% (bringing the overall NPL coverage 2009. from 94% at the end of 3Q14 to 88%), the Bank may release around - Yapi Kredi’s plans seem challenging, but the post-sale period at Garanti TRY220mn from its loan loss provision reserves and give a boost to its may ease the competitive conditions, if the future owner, BBVA, opts for earnings. internal restructuring. - The management stated that the transfer of the 58% stake held by the - To achieve this target, the number of employees has risen by 13% YtD, General Directorate of Foundations (GDF) to the Treasury could be vs. +1% in the sector. The Bank plans to reach a network of 1,003 completed by the end of 1H15 and that the main reason for this branches by the end of 2014, up from 978 at end-3Q14. During the 5- transaction was to provide cash to the GDF for its restoration work, thus year investment period, the RoE is expected to be 100bps lower than the bore no relation to an SPO. We do not see any prospect of an SPO in the sector average and beat the sector average by 100–200bps from the next 1 – 2 years. sixth year.

Least-Preferred Stocks

Performance of the Least-Preferred Stocks Our LPS list underperformed the benchmark index (BIST-100 Total Return index) by 6.9% since December 29, 2014 and by 4.6% since the inception on January 20,2014.

Performance since latest update in portfolio Performance since inclusion Share price * Return Date of LPS 29/12/14 21/01/15 Nominal Relative** inclusion Nominal Relative AKENR 1.28 1.27 -0.8% -7.4% 12/09/2014 12.4% -3.0% BIMAS 49.15 50.85 3.5% -3.4% 21/11/2014 2.0% -5.7% HURGZ 0.86 0.83 -3.5% -9.9% 12/09/2014 33.9% 15.6% Average return -0.3% -6.9% BIST-100 TRI 122,436 131,124 7.1% Source: Ak Investment * as of January 21 first session close **Relative to BIST-100 Total Return Index (BIST-100 TRI)

AKENERJI AKENR TI BIM BIMAS TI Current Price (TL) 12M Target (TL) Upside Current Price (TL) 12M Target (TL) Upside 1.27 1.25 -2% 50.85 50.00 -2% 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F EV/EBITDA 54.7 10.0 PE n.m. n.m. EV/EBITDA 23.2 17.1 PE 36.5 26.6 - The market appears to have overestimated the potential contribution of - We see downside risk to the consensus FY14 estimates. Our 2014 and the Egemer natural-gas-fired power plant (900MW). With the new power 2015 EPS forecasts are 3% and 6% lower than the consensus. After the generation portfolio, we estimate a 2015 EV/EBITDA of 10.0x for Ak vs. 4.5% realized in 9M14, the consensus still expects a 4.7% EBITDA margin 8.7x of EM peers (Bloomberg) and 9.6x for Enerji, a comparable local in 2014 vs. our 4.5% forecast for 2014. peer. - We expect food inflation to decline in the coming quarters (our economist forecasts a 9% rate of food inflation in 2015, down from 13% - Although the equal rate hike in natural gas and electricity prices effective in 2014), driven by a more stable exchange rate, the mean reversion October is a positive for natural-gas-fired power plants, Akenerji’s 2015 characteristics of food inflation and - hopefully - a better harvest season multiples are not sufficiently attractive to warrant much optimism. than this year, which was affected by drought. This could pressure Bim’s . LfL growth and slow the rate of sales growth to more modest levels (medium-term target of 15-20%).

HURRIYET HURGZ TI Current Price (TL) 12M Target (TL) Upside 0.83 0.61 -27% 2014F 2015F 2014F 2015F EV/EBITDA 11.6 10.5 PE n.m. n.m. - We had revised our forecasts for 2014 and 2015 downwards leading to a lower 12M TP of TRY0.61. The very weak 3Q14 results confirm our outlook for Hurriyet’s operations as 1H14 was also weak. The newspaper print business is shrinking as digital media becomes more pervasive with the proliferation of mobile devices with broadband capabilities.

- We have revised our 2014 full year revenue figure to TRY732mn from TRY828mn and 2015 from TRY845mn to TRY805mn. EBITDA margin is revised down to 8.1% for 2014 from 10.7% and to 10.8% in 2015. Our net loss forecasts become larger at TRY35mn for 2014 (prev. TRY15mn) and TRY36mn for 2015 (from TRY10mn).

AK Investment - Research

This report has been prepared by Ak Investment (Ak Yatırım Menkul Değerler A.Ş.) by using the information and data obtained from sources, which are reasonably believed to be trustworthy. The statements indicated in the report should not be assumed to be sales or purchase offers under any circumstances. Ak Investment does not guarantee that the information contained is true, accurate and unchangeable. Thus, the readers are advised to have the accuracy of the information contained confirmed before acting by relying on such information and the readers shall bear the responsibility of the decisions taken by relying thereon. Ak Investment shall not in any case be responsible for incompleteness and inaccuracy of the information. Furthermore, the personnel and consultants of Ak Investment and shall not have any responsibility in any case for direct or indirect damage caused by such information. Moreover, Ak Investment shall not be held liable for any damage to the hardware or software of the receiver caused by a virus, detected transfer or any other technical reason in case of the receipt of the reports via internet or through e-mail. © 2014 AK Investment Inc.