TURKEY [email protected] +90 212 317 2727

May 6, 2016

DAILY BULLETIN

Equit y Market MARKET OUTLOOK BIST-100 (TRL) 78,699 BIST-100 (US$) 26,951 TURKEY – Sweep it up... Oil’s advance for a second day stimulated developed market equities yesterday. The S&P closed flat, ending a two- Daily Change (T RL) -0.9% day sell -off, while European stocks rose for the first time in a week, led Daily V olume (BIST -100) US$2,051 mn Daily V olume (BIST -ALL) US$2,202 mn by energy shares. Yet, emerging market equities declined for a fifth day, amid concerns of a Fed rate hike as early as next month. Your less Total Market Cap US$199.5 bn favourite market and the Lira, however, managed to recover most of Free Float 30.5% their earlier losses, despite a political turmoil that resulted in PM Avg. Daily V ol. (3m) US$1,629 mn

Davutoglu calling an extraordinary AKP congress to step down and elect Valuation Data (TRL) P/E (2016E) 9.1 the new leader and PM. Has the dust settled that quickly? Not that easy. We will have to begin sweeping it up for a while… EV/EBITDA (2016E) 7.1

TRL 0.20% weaker at 2.9325 vs. US$ and 0.20% weaker at 3.1380 Returns (TRL) 1w / 1m -7.8% / -5.1% against the basket. Index resistance +1% at 79,700; support -1.5% at 3m / 12m 6.1% / -5.6% 77,500. Top Volumes US$mn ∆ HIGHLIGHTS GARAN 676 36.9% THYAO 222 -23.2% AKP to hold extraordinary congress on May 22 to elect the new . AKBNK 118 -15.5%

party leader HALKB 117 -8.4% Presidential advisor Cemil Ertem does not expect an early election ISCTR 87 4.0% . Moody’s says any renewing political uncertainty in Turkey is credit Best Performers TRL ∆ . AKENR 1.23 8.8% negative VESTL 6.38 3.7%

. “On the cusp of a new era in Turkish politics” (Please see our TAVHL 15.19 3.3% EGEEN 287.20 3.3% Update on recent political developments) TRKCM 2.02 3.1% Vakifbank posts TRL517mn NI for 1Q16 (BurSec: TRL447mn; Cons: . Worst Performers TRL ∆ TRL501mn) (Please see our Earnings Review) AEFES 19.27 -4.2%

Tekfen Holding posts TRL149mn NI for 1Q16 (BurSec: TRL102mn; YKBNK 3.90 -4.2% . GARAN 7.60 -4.2% Cons: TRL114mn) (Please see our Earnings Review) BJKAS 4.94 -2.8% . Tupras posts TRL79mn NI for 1Q16 (BurSec: TRL650mn; Cons: HALKB 9.66 -2.5% TRL468mn); cut to MP from OP (Please see our Earnings Review) FX Market (5:30pm) Last ∆ . BIM posts TRL162mn NI for 1Q16 (BurSec: TRL143mn; Cons: USD/TRY 2.922 1.6% TRL150mn) (Please see our Earnings Review) Basket/TRY 3.127 1.1% Money Market Rate Last Prev. Koc Holding posts TRL515mn NI for 1Q16 (Cons: TRL758mn) . CBT Weighted Funding 8.58% 8.58% CBT 1w Repo 7.50% 7.50% . Top Picks: BIM and Tekfen Holding added; Migros dropped; Least Preferred Stocks: Enka Insaat excluded (Please see our CBT O/N Lending 10.00% 10.00% Interbank O/N 10.00% 10.00% Top Picks Interim Update) BIST O/N Repo 9.57% 9.57%

AGENDA Local Bond Market (5:00 pm) Today - Apr’16 Cash Balance at 5:30 pm Last Prev. . 2yr 9.70% 9.51%

. Today - S&P to release review on Turkey’s sovereign rating 5yr 9.73% 9.48% 10yr 9.81% 9.63% Today - ENKAI 1Q16 NI; BurSec: TRL376mn; Cons: TRL372mn; . CDS Last ∆ DOAS 1Q16 NI; BurSec: TRL38mn; Cons: TRL48mn; SAHOL 1Q16 NI; 5yr 265 16 Cons: TRL692mn

Corporate News Vakifbank reported TRL517mn net income in its 1Q16 financials, notably better than our estimate of TRL447mn, and slightly above consensus forecast of TRL501mn. Net income increased 19% yoy (28% adjusted for dividends) and RoE reached 12.1% in 1Q16. Higher- than-expected NII and TRL38mn worth dividend income, which was not included in our estimates, led to the estimate-topping bottom line. The Bank is the main beneficiary of lower TRL deposit rates; and considering the strong spread evolution in 1Q16, we believe there is an upside risk to the NIM guidance. On the asset quality side, CoR was above guidance, though we expect a recovery in 2Q16 with the help of a TRL150mn collection on sale of Sekerbank shares. One weak element of the financials is fee income, though the TRL2bn net income guidance for 2016 looks attainable even with softer-than-forecast fee income growth. We maintain our BUY (L/T) and OUTPERFORM (S/T) ratings for the stock.

VAKBN (L/T: BUY, S/T: OP, TPrice: TRL5.40)

Tekfen Holding posted TRL149mn net profit for 1Q16, significantly above our TRL102mn estimate, as well as consensus forecast of TRL114mn. The earnings beat was driven by a robust operating performance in both of the main operating segments, but most notably fertilisers. EBITDA excluding equity participations in contracting segment was TRL176mn, above our TRL134mn estimate. The results should send a reassuring signal to the investor community regarding the attainability of an ambitious guidance by management (TRL440mn net profit; TRL550mn EBITDA) for 2016. We slightly adjust our net earnings estimate to TRL390mn from TRL360mn, after much better 1Q16 results. The stock trades at 5.7x P/E and 4.3x EV/EBITDA even on our relatively conservative estimates. We continue to think Tekfen offers decent value at current price levels. We maintain our TP, as well as ratings for the stock.

TKFEN (L/T: BUY, S/T: OP, TPrice: TRL7.00)

Tupras posted TRL79mn net profit for 1Q16, much weaker than both consensus (TRL468mn) and our estimate (TRL650mn). The earnings miss was attributable to a very weak operating performance, along with higher financial expenses. EBITDA of TRL398mn remained way short of both consensus (TRL669mn) and our estimate (TRL920mn). Factors underlying a softer operating margin were a lower-than-forecast diesel and jet fuel crack margin; minor inventory losses (vs. our slight gain estimate); and slightly lower sales volumes. Deeper financial losses led by hedging expenses and FX losses also contributed to the earnings miss. 1Q16 results have been disappointing for the most part, driven primarily by very weak diesel cracks. Management has made only a slight revision to its margin outlook, on expectation that diesel cracks will recover as the high season gets under way. While maintaining our L/T BUY rating, we revise our TP down from TRL95 to TRL90/share and downgrade our S/T rating to MARKETPERFORM, as the results could weigh on sentiment in the short term. Our revised estimates imply 9.0x P/E and 6.5x EV/EBITDA, which we think are still attractive.

TUPRS (L/T: BUY, S/T: MP, TPrice: TRL90.00)

BIM reported TRL162mn net income for the quarter, up a strong 31% yoy and well ahead of consensus of TRL150mn. Revenue growth was 18% yoy, 2% below consensus. A 110bp surge in gross profit margin (30bp higher than our estimate) helped profitability, despite a 24% yoy rise in personnel expenses. As a result, EBITDA margin increased 40bp yoy to

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5.0%, beating consensus of 4.7%. There was a TRL6mn financial income vs. our estimate of a TRL13mn expense that also helped the bottom line. Positive share price reaction expected. BIMAS (L/T: BUY, S/T: OP, TPrice: TRL67.00)

Koc Holding reported TRL515mn net income for the quarter, up 12% yoy, though well below consensus of TRL758mn. The bottom line was negatively affected mainly by the miss in Tupras’s earnings. Note, though, that Koc Holding’s quarterly financials do not affect the share price too much. Slightly negative.

KCHOL (L/T: HOLD, S/T: MP, TPrice: TRL16.00) Top Picks - Interim Update - In this interim update of our Top Picks model portfolio with the first-quarter 2016 earnings season in full swing, BIM and Tekfen Holding are added, while Migros is excluded. Meanwhile, Enka Insaat is excluded from our Least Preferred Stocks list.

BIM - Company Update - BIM shares have lost 11% in value over the past few weeks, and now offer a good buying opportunity at 24x 2016E P/E, in our view. We expect BIM's 1Q16 results, due out on May 6, to be solid, and FY16 to prove another strong year for the Company. We have revised our forecasts and increased our target price to TRL67.0 from TRL62.0. Hence, we upgrade BIM to BUY/OUTPERFORM from HOLD/MARKETPERFORM. BIMAS (L/T: BUY, S/T: OP, TPrice: TRL67.00)

Aygaz (“AYGAZ”) posted TRL65mn net earnings for 1Q16, below consensus estimate of TRL92mn. Despite a strong operating performance, a lower-than-expected profit contribution from Tupras resulted in the earnings miss. EBITDA of TRL86mn was well above the TRL75mn consensus estimate. Robust operating results notwithstanding, substantially lower net earnings could have a negative impact on the shares.

Cimsa (“CIMSA”) posted TRL47mn net profit for 1Q16, up from TRL43mn last year and right in line with consensus. Sales increased 8% yoy to TRL254mn, also consistent with consensus. Sales growth was driven by domestic sales (up 17%), while export slid 12% yoy. Despite higher revenues, costs remained stable on the back of reduced energy costs. As a result, EBITDA increased by 42% yoy to TRL82mn and exceeded consensus estimate of TRL73mn. EBITDA margin of 32% surged 7.7pp yoy. Were it not for higher financial expenses, net earnings would be even higher. Overall the strong operating performance could have a slightly positive effect on the stock.

Yapi Kredi Bank signed a US$1,480mn 1-year syndicated loan deal, comprising two tranches worth US$381mn and EUR959mn, at an all-in cost of Libor+85bp and Euribor+75bp. The roll-over ratio is 101%, while the spread is in line with recent syndication deals of large cap banks. Neutral. YKBNK (L/T: BUY, S/T: OP, TPrice: TRL4.80)

Isbank’s BoD authorised the Head Office to carry out works for US$400mn of subordinated notes that had been issued in 2013 to become compliant with the requirements of Basel III and hence be eligible for inclusion in Tier II capital. Those notes have ceased to be included in calculation of equity with the BRSA’s recent changes to CAR regulations. Should they become fully compliant with Basel III, they might add around 45bp to the Bank’s CAR, according to our calculations. Neutral.

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ISCTR (L/T: BUY, S/T: OP, TPrice: TRL7.30)

Kardemir (“KRDMD”) management’s 2016 projections include 2.1mn tonnes of sales volumes and 15-17% EBITDA margin, implying c.10% volume growth and 5-7pp EBITDA margin expansion yoy. Positive.

Otokar (“OTKAR”) announced that a EUR65mn order by the Internal Security Forces had been confirmed, with deliveries to be completed until the year-end. Positive.

Turcas (“TRCAS”) agreed to acquire the 46% stake of Turcas Kuyucak Jeotermal Elektrik (TBK) held by its JV partner BM Muhendislik, thereby increasing its stake to 92%, for a total consideration of TRL17mn. Turcas will start to fully consolidate TBK beginning with 2Q16 financials. Slightly positive.

Economic & Political News AKP to hold extraordinary congress on May 22 to elect the new party leader - After almost 2 years in office, PM Ahmet Davutoglu announced yesterday that he would step down from both AKP leadership and prime ministry. He said this was not his decision “but a necessity”, a process that kicked off after the Central Decision and Executive Board (MKYK) meeting last week. PM Davutoglu frequently emphasized the unity of the AKP and his loyalty to President Erdogan, likely insinuating he would not be part of the opposition against the new government or Erdogan. Davutoglu also stated he had worked hard to meet Erdogan’s “strong President, strong PM” motto when he assumed the post in August 2014, implying the upcoming AKP leader and PM may not prove as firm as he has been. Davutoglu will continue to serve as MP and AKP member after his resignation. While there is no official deadline to announce candidates prior to congress, the AKP’s Executive Board is inclined to go with a single candidate, whose identity may be declared roughly a week before congress. Justice Minister Bekir Bozdag, Energy Minister Berat Albayrak and Transportation Minister Binali Yildirim are the strongest candidates. The new PM and government may be in charge within 10 days after the congress.

Presidential advisor Cemil Ertem does not expect an early election - In an interview yesterday, presidential adviser Cemil Ertem said that Turkey was not expected to hold snap elections after the election of the AKP leader and would continue “securely” until the current government’s mandate expired in 2019. Nor did he expect any changes in monetary and fiscal policies or in current economy management, he noted.

S&P to release review on Turkey’s sovereign rating today - Turkey’s sovereign rating by S&P stands at BB+ (one notch below investment grade) with negative outlook since February 2014. We do not expect any changes to the rating or outlook at this review. Even if the S&P downgrades Turkey’s rating to BB, the impact would be limited, as the current rating is already non-investment grade.

Moody’s says any renewing political uncertainty in Turkey is credit negative – Rating Agency Moody’s stated yesterday that any renewing political uncertainty in Turkey was credit negative, as it could diminish investor confidence at a time when the country remains highly dependent on external capital to finance its sizable current account deficit. Moody’s added that political uncertainty could also delay the implementation of the announced reform process to enhance growth prospects and reduce Turkey’s external

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vulnerability. Moody’s comments on Turkey are critical, as Turkey’s sovereign rating stands at Ba3 (one notch above investment grade) with negative outlook. Portfolio Monitor as of Apr 29: Foreign flows swing to negative - Following the waning inflows of a week ago, flows to Turkish assets flipped to negative territory last week. Within April 22-29 week, non-resident investors lowered their positions in Turkish assets by US$73.5mn. Non-resident investors upped their positions in equities by just US$8mn within April 22-29 week, implying US$1.7bn inflow ytd vs. US$2.4bn outflow in 2015. Foreign investors pared their positions in local government bonds by US$82mn in the same week, bringing ytd inflows to US$2.4bn as of April 29 vs. US$7.2bn outflow in 2015. Foreign investors' share (excluding domestic banks' branches abroad) of total domestic debt securities remained flat at 21.0% as of April 29.

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Our 12-month rating system comprises the following designations: BUY (B), HOLD (H), SELL (S). The absolute upside to target value implied by the current market capitalisation is the main determinant of our rating system. Valuation tools employed most frequently are Discounted Cash Flow (DCF) and international peer group comparison, though other metrics such as historical relative valuation, price to book, return on equity, replacement value are also used wherever appropriate. Our analysts set the fair/target values with a 12-month investment horizon. Comparing the upside in a specific stock with the market’s upside (determined through the aggregate upside of our coverage based on free float Mcaps), in addition to taking other yardsticks into consideration, analysts recommend BUY (B), HOLD (H), SELL (S) based on their 12-month total return views.

Sector Rating

Our investment horizon for industry ratings is again 12 months. This rating gives an indication as to how the analyst sees that particular industry for the next 12-month period in terms of growth, profitability, pricing power, competitive dynamics etc. The rating in this category thus reflects our analyst’s assessment of the conjunctural outlook for the industry, without involving any specific benchmarks. The ratings employed are Overweight (OW), Neutral (N), Underweight (UW).

Overweight (OW): Due to improving sector related fundamentals and/or attractive valuations, the sector index is expected to perform better than the BIST-100 in the next 12-months

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To have a more balanced distribution of ratings, Burgan Securities has requested that analysts maintain at least 20% of their ratings as Underperform and no more than 25% as Outperform, subject to change depending on market conditions.

Other Qualifiers Utilised:

NR: Not Rated

NC: Not Covered

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Our equity market call has an investment horizon of 3-12 months. Our market calls are BUY, NEUTRAL, SELL.

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