GENEL-PUBLIC Equity Research Tofas Automobiles Coverage Initiation It’s all about earnings
With heavy capex and investment cycle subduing, Tofas should deliver strong earnings 2017 thru 2019. The stock is trading at undemanding multiples. We initiate BUY with Buy and a 12-month TP of TL31.80. Share price: TL27.30 Improved operating outlook still driven by exports. Growing at a massive 61% in 2016, Tofas’ export revenues Target price: TL31.80 contributed more than 70% to total sales. The Egea model, the single largest contributor to growth, made up circa 40% of all Expected Events non-Turkish sales. We expect the export-led growth driven by the success of Egea model to continue both in 2017 and 2018. 1-7 May - Automotıve sector data (ODD) Our model projects 29.6% growth in consolidated sales (+44% 1-7 May - Automotive sector data (OSD) in exports). 4 May - March Q earnings (+)
“Take or Pay agreement” (TOPA) should protect margins. As for margins, we see limited downside risks as long as Tofas’ existing take or pay mandates with its parent Key Data remain in place. Tofas’ export business is fully integrated into Fiat’s world-wide operation; and Italy is the largest destination Ticker TOASO in Europe. The specific TOPA, which governs Egea sales Share price (TL) 27.30 implies almost all Egea sales originated in Turkey are 52W high (TL) 28.52 guaranteed. 52W low (TL) 20.22 Home market remains challenging but Tofas is set to Market Cap (TLm) 13810.0 grow its market share. We expect domestic demand to Market Cap (USDm) 3697.4 remain weak. Our model, indeed, factors in 3.2% decline in Free float (%) 24.56 Turkish revenues. However, Tofas is set to grow its market Consensus TP (TL) 28.89 share in a declining market, on our assumptions. Consensus rating 67% B / 30% H / 3% S Recommendation. The investment cycle should soften. We 3M ADV (USDm) 4.9 factor in a sharp decline in capex in 2017 following the HY EPS (2017 E) 2.33 expansion two years in a row, which should boost earnings Consensus EPS (2017 E) 2.31 next two years. The shares have not yet priced in the outlook we have in this report. The stock is looking attractive on all Price performance investment metrics we have looked at. The recent pull-back is 29,0 an opportunity. We rate the shares Buy with 12-month TP of 31.80. 27,0
Forecasts and Ratios 2013 2014 2015 2016 2017E 2018E 25,0 Revenues (TL mln) 7,038 7,440 9,921 14,236 18,447 20,504 Revenues Growth (%) 5.0 5.7 33.3 43.5 29.6 11.2 23,0 EPS (TL) 0.87 1.15 1.66 1.94 2.33 2.67 21,0 BVPS (TL) 3.80 4.48 5.16 5.91 8.34 9.94 DPS (TL) 0.65 0.97 0.73 0.70 1.07 1.28 19,0 EV/Sales 2.3 2.2 1.6 1.1 0.9 0.8 Price BIST 100 (Rebased) 17,0 EV/EBITDA 20.1 19.6 15.2 11.9 9.2 8.1
04.16 05.16 07.16 09.16 10.16 11.16 12.16 01.17 02.17 04.17 08.16 03.17 PER 31.4 23.8 16.4 14.1 11.7 10.2 06.16
PBR 7.2 6.1 5.3 4.6 3.3 2.7 Analyst: Furkan OKUMUŞ [email protected] Istanbul: +902123148186
1 GENEL-PUBLIC GENEL-PUBLIC
Table of Contents
Investment Case 3 Investment Positives Investment Negatives Our estimates versus consensus Sector Overview 7 Company Overview 10 Financials and Forecasts 22
Consensus EPS (TL)
2,40 2017 EPS
2,20 2016 EPS
2,00
1,80
1,60
1,40
1,20
1,00
Jul 15 Jul Jul 16 Jul
Jan 15 Jan 17 Jan
Jan 16
Oct 16 Oct Oct 15 Oct
Apr 15 Apr Apr 16 Apr
2 GENEL-PUBLIC GENEL-PUBLIC
Investment Case
Investment positives
Koc Holding & Fiat Chrysler Joint Venture. Tofas is JV between two strong consumer brands, Koç holding and Fiat Chrysler Automobiles (FCA). Koc and Fiat add significant recognition and awareness to Tofas brand itself, at home and abroad.
Tofas is the only company that manufactures both passenger cars and commercial vehicles in Turkey. Selling both PCs and LCV indeed reduces the risk to sales in the event of a demand shock in one of those two segments.
Tofas operates the largest capacity of any manufacturer in the Turkish market, which gives the company an edge in distribution and marketing. Ranked number 1 in Turkish car exports (2016), Tofas also stands out.
The success story of Egea is to last. Egea, which has attracted strong demand since it was launched, is likely to drive sales growth for the foreseeable future. In 2016 Egea sales reached 150k units or 38.3% of unit sales. The 1,600 cc diesel engine model equipped with an automatic gearbox is likely to be major contributor to sales in the next three years, both home and export markets.
Special discount in special consumption tax (SCT) for commercial vehicles. Special Consumption Tax will not be collected from automobilles such as city taxies; dolmushes, minibuses, midibuses, in about 3 years in Turkey, which should benefit Tofas. Both Linea, still in production and Egea models are used as taxies. Tofas is the second largest player in LCV market.
Investments will start to yield fruit. Tofas recorded €330 mn capex in 2016. This investments expenditure was mainly for Egea new bodies (SW&HB). Considering that Egea investments have been completed to a very large extent, we expect that investment expenditures will decrease to €200 mn levels in 2017 and it is time to berry of investments from now on for Tofas.
3 GENEL-PUBLIC GENEL-PUBLIC
Investment Case
Investment negatives
High interest rates. After the Fed's rate hike decision, CBRT rose the upper band to 9.75% by 50 bps and late liquidity window interest rates to 12.0% by 100 bps and increasing weighted avarage cost of funds will cause the credit rates to be higher. We think that this case will affect automotive sales negatively due to significant portion of sales take place by using credit.
Currency risks. Depreciation of TRY especially against Euro affects Tofas positively Tofas due to exports are mainly in Europe. If the Turkish lira appreciates, the export revenues will decrease.
Competitive and weaker domestic market. In 2016 the automotive market (PV+LCV) grew by a dismal 1.6% to reach 983,720 units. The new regulation on SCT and competitor models make the market even more difficult this year. Moreover, the companies couldn't reflect exchange difference, which has occurred particularly last quarter of 2016, to the prices. Automotive prices are affected now by high currency and New SCT rates. These high prices will cause demand to be low.
Limited production capacity. Tofas enhanced production capacity from 400k to 450k units with 3 shifts labour against high demand on new models. The following years, in case of higher demand than in 2016, the company will has difficulty to augment capacity due to a limited area in Bursa factory.
4 GENEL-PUBLIC GENEL-PUBLIC
Our estimates versus consensus
In 2016, sales was recorded at TL14,236 mn with major increase 43.5% YoY, thanks to strong export volume and prices. We estimate sales unit and sales to reach 438.3k units (compose of 335k units export) and TL18,447 mn by increasing 29.6% YoY respectively. It is TL18,151 mn for sales revenue on bloomberg consensus.
Moreover, we estimate OPEX will be announced as TL659 mn in 2017 up by 9.1% YoY due to the biggest contribution of sales coming from exports. Increasing capacity production (which went up to 450k units vehicle/per year) will not lead to higher employment for the company. We also predict that EBITDA margin will be released similar to the one released in 2016. Our forecast is at 9.6% EBITDA margin and TL1,774 mn EBITDA which are similar as with bloomberg consensus. According to consensus, EBITDA is TL1,745 mn while EBITDA margin is 9.6.
On our 2017E estimates, Tofas is currently trading at 11.7x P/E and 9.2x EV/EBITDA. P/E and EV/EBITDA multiples are 11.8x and 9.1x respectively, according to Bloomberg consensus estimates. Tofas 5-year historical average of multiples are 11.7x and 8.0x for P/E and EV/EBITDA respectively.
TOASO HLY Research Bloomberg Difference (TLmn) 2017E 2018E 2017E 2018E 2017E 2018E Net Sales 18,447 20,504 18,151 18,822 2% 9% EBITDA 1,774 2,017 1,745 1,883 2% 7% Net Profit 1,163 1,334 1,166 1,122 -0.3% 19% EBITDA Margin 9.6% 9.8% 9.6% 10.0% 0.0pp -0.2pp Net Income Margin 6.3% 6.5% 6.4% 6.0% -0.1pp 0.5pp
Tofas: 1yr forward looking P/E Tofas: 1yr forward looking EV/EBITDA
17 12
15 10 13
11 8
9 6 7
5 4
04.12 07.12 10.12 01.13 04.13 07.13 10.13 07.14 10.14 01.15 04.15 07.15 10.15 07.16 10.16 01.17 04.12 07.12 10.12 01.13 04.13 07.13 10.13 07.14 10.14 01.15 04.15 07.15 10.15 07.16 10.16 01.17 01.14 04.14 01.16 04.16 01.14 04.14 01.16 04.16
Source: Halk Invest, Bloomberg Source: Halk Invest, Bloomberg
5 GENEL-PUBLIC GENEL-PUBLIC
Peer Comparison
Figure 3: EV/EBITDA Figure 4: EV/SALES
14 1.4 EV/EBITDA EV/SALES TOYOTA 12 TOFAŞ TOFAŞ (HLY Est.) 1.2 VOLVO TOFAŞ TOFAŞ (Hly Est.) BAYER MOTOR 10 HYUNDAI VOLVO 1.0 FORD OTOSAN TOYOTA HYUNDAI 8 0.8 FORD OTOSAN
ISUZU TATA 6 BAYER MOTOR TATA 0.6 ISUZU
4 KIA MOTORS 0.4 GENERAL DAIMLER DAIMLER MOTOR NISSAN FORD MOTOR 2 0.2 KIA MOTORS GENERAL NISSAN FORD MOTOR MOTOR EBITDA CAGR (17E-19E) SALES CAGR (17E-19E) 0 0.0 0% 5% 10% 15% 20% 25% 30% 0% 2% 4% 6% 8% 10% 12% 14%
Source: Halk Invest, Bloomberg Source: Halk Invest, Bloomberg
Figure 5: P/E Figure 6: P/B
25.0 5.0 P/E P/B TOFAŞ (HLY Est.) TOFAŞ 4.5
20.0 VOLVO 4.0 FORD OTOSAN 3.5 TOFAŞ TOFAŞ (HLY Est.) 15.0 TATA 3.0 FORD OTOSAN VOLVO 2.5 TOYOTA ISUZU 10.0DAİMLER 2.0 TATA NISSAN BAYER MOTOR HYUNDAI 1.5 ISUZU DAIMLER FORD MOTOR FORD MOTOR GENERAL MOTOR 5.0 KIA MOTORS 1.0 TOYOTA BAYER MOTOR GENERAL NISSAN MOTOR 0.5 HYUNDAI EARNINGS CAGR (17E-19E) KIA MOTORS ROE Avg.(17-19) 0.0 0.0 -10% 0% 10% 20% 30% 40% 50% 60% 70% 0 5 10 15 20 25 30 35
Source: Halk Invest, Bloomberg Source: Halk Invest, Bloomberg
6 GENEL-PUBLIC GENEL-PUBLIC
Automotive Sector in Turkey
At the beginning of the 1960s. the automotive sector was mainly operating on montage in Turkey. Afterwards, increasing production capacity, superior design ability and increasing qualified staff amount enable the sector to manufacture in full.
The Turkey automotive sector has been growing every year and coming to the fore in the world automobile market. On OICA (Organisation Internationale des Constructeurs d’Automobiles) 2015 data, Turkish automotive sector’s production capacity reached 1.358 million units (+16.1% YoY), while the world automotive production grew by 1.1%. Turkey is now the 15th largest automotive manufacturer in the world by the end of 2015.
The automotive sector is a locomotive position for the economy of Turkey. According to TİM (Turkey Exporters Association), the dominance of automobile export in total export has been increasing regularly since 2012. In 2016 automotive export grew by 12.9% YoY to $23.9 bn while Turkey’s total exports decreased by 1.1% in the same period.
Figure 7: Automotive Export in Turkey
180 18% Automotive Indusrty Export Total Eport Weights (Right Axis) 160
Bn USD Bn USD 17% 140
120 16%
100 15% 80
60 14%
40 13% 20
0 12% 2010 2011 2012 2013 2014 2015 2016
Source: Halk Invest, Turkey Exporters Association
"Turkey's 500 Big Industrial Establishments" studies which have been published by Istanbul Chamber of Industry (ISO) since 1982, enable us to examine the performances of the companies in respect to some variables such as asset, equity and sales from production. According to the study published in 2015, three automotive companies were listed in the top five big, when the companies performance ranking according to Net sales from production.
Figure 8: Automotive Companies Draw the Attention
Company City Net Sales Form Production (TL) 1. Tüpraş- Turkey Petroleum Refineries Inc. Kocaeli 35,437,857,256 2. Ford Automotive Industry Inc. İstanbul 14,732,855,608 3. Arçelik Inc. İstanbul 9,998,905,712 4. Oyak-Renault Automobile Factories Inc. İstanbul 9,893,409,307 5. TOFAŞ Turkish Automotive Company Inc. İstanbul 8,434,241,768 6. EÜAŞ Electricity Generation Inc. Ankara 6,794,953,087 7. Eregli Iron and Steel Factory Inc. İstanbul 6,475,141,395 8. Hyundai Assan Automotive Industry and Trade Inc. Kocaeli 6,236,714,393 9. Iskenderun Iron and Steel Inc. İskenderun 5,890,461,750 10. İçdaş Steel Energy Shipyard and Transportation Industry Inc. İstanbul 5,773,475,786 Source: Halk Invest, Istanbul Chamber of Industry (ISO)
7 GENEL-PUBLIC GENEL-PUBLIC
Production
Turkey arouses attention of strong brands such as Ford, Renault, Fiat and Mercedes due to the fact that its geopolitical position is very advantageous compared to other countries. Many brands operate in Turkey, particularly in production. Being in Turkey makes it convenient for producers in terms of transaction.
In 2016, Turkey produced 1,485,927 units of vehicles (including PC and CV) which are 9.3% higher than 2015. While 36% of total production was CV, 64% was PC. Produced vehicle are being mainly exported and the ratio of exported vehicle is rising year by year. In 2016, the volume of exported vehicles increased by 15% YoY to 992,335 units. So 77 out of every 100 cars are exported.
Figure 9: Production Vehicle & Export Weight
1,600 90% CV PV Export/Production-Unit (Right Axis) 1,400
K unitsK 85% 1,200 80% 1,000
800 75%
600 70% 400 65% 200
- 60%
2006 2007 2008 2009 2010 2013 2014 2015 2016 2011 2012 2005 Source: Halk Invest, OSD
8 GENEL-PUBLIC GENEL-PUBLIC
Consumption
When we look at the domestic market, PC is more popular than CV. In 2016, 983,720 units of vehicles (PC+LCV) were sold with an increase of 1.6% according to the previous year. This amount consists of 756,938 units PC and 226,782 units LCV. According to TUIK (Turkish statistical Institute), as of the end of 2016, there are 21,090 K registered vehicles, which grow by 5.5% YoY, in Turkey. 53.7% of the total vehicle are PC.
Figure 10: Sold Vehicles Breakdown Figure 11: Turkey Automotive Market
1,200 Import
LCV PV 1,000 K Unit K K Unit K 1,000 Domestic Market TOTAL 800 800
600 600
400 400
200 200
0 0
2010 2011 2012 2013 2014 2015 2016
2006 2007 2009 2010 2011 2013 2014 2016 2005 2008 2012 2015
Source: Halk Invest, ODD Source: Halk Invest, ODD
The breakdown on sales, imported vehicles were always in demand instead of domestic ones. According to the sales in 2016, 68.3% of total sales were imported vehicle. In LCV segment, this rate was 52.5%.
In 2016, Renault was the market leader thanks to renewed models especially Megane. Volkswagen, which took place at the top in 2015 despite the emission scandal, followed Renault with small differences. On the other hand, LCV side was a competitive sector between Ford and Tofas especially in 2015. While Ford has 29.5% of the market share, Tofas has 25.6% in the stated date. The difference between market shares of Tofas and Ford was getting bigger in 2016 in favour of Ford. While Ford was the market leader with 30.1%, Tofas was 23.7%.
Figure 12: Turkey LCV Market Figure 13: Turkey PC Market
35% 16% Light Commercial Vehicle Personel Car 30% 14%
25% 12% 10% 20% 8% 15% 6% 10% 4% 5% 2% 0% 0% Ford Fiat VW Renault Peugeot Citroen Renault VW Opel Fiat Hyundai Toyota Source: Halk Invest, ODD Source: Halk Invest, ODD
9 GENEL-PUBLIC GENEL-PUBLIC
Turk Otomobil Fabrikası AS - TOFAS
Company Profile
Tofas is a Turkish automotive company founded in 1968 by Vehbi Koç and has equal shareholder as Koç Holding and Fiat Chrysler Automobiles (FCA). Tofas, which is also the second largest R&D center of FCA in Europe and is the only automotive company that produces both passenger cars and commercial vehicles in Turkey. The factory has 450k units manufacturing capacity with 3 shifts labor. In 2016 FY, 9,554 people were employed. Furthermore, Tofas is also the 5th largest industrial organization of Turkey and also the distributor of six major brands such as Ferrari, Maserati, Jeep, Lancia, Alfa Romeo and Fiat.
Tofas has been manufacturing for 7 different brands. In details, for passenger vehicle segment, Egea which is manufacturing under Fiat brand, is also being produced for Dodge, the company is also manufacturer position for Fiat, Citroen and Peugeot brands within the scope of the Minicargo and is manufacturing for Fiat, Opel, Vauxhall and RAM brands within the scope of the new Doblo project.
Tofas operates in Turkey with 114 sales and 136 service points.
Figure 14: Partnership Distribution
0.3%
37.6% 24.3%
37.9%
Fiat Auto S.p.A Koç Holding Other Koç Others Source: Halk Invest, Company Releases
10 GENEL-PUBLIC GENEL-PUBLIC
Egea wind will continue to blow
Tofas, which has a very important place in production both of LCV and PC in Turkey, is making investments for new models and innovations. As an outcome of these investments, Egea has been coming to prominence. New Egea will take place of Linea completely which was Turkey's best-selling vehicle in 2015 despite its face that looks old.
Production of Egea started in September of 2015, with an investment of $ 1 million and now it is a very popular model both in Turkey and abroad. New Egea which is also produced with named Dodge Neon for Mexico, reached 6,570 domestic sales and 3,587 export volumes only in 3 months in 2015. The product range of Egea was completed by becoming available hatchback version in April 2016 and producing station wagon version in July 2016. Thanks to all of these versions, in 2016, a total of 150,055 units were sold, including 111,106 exports. In last quarter 2016, Egea models which have 1.600 cc diesel engine are equipped with an automatic gearbox. We think that this version will contribute to both domestic and export sales. Especially, with this new version, Tofas will become more competitive in Turkey PC market. At the end of the year, Egea was awarded "The most preferred car of the year" with 38,949 units sale in Turkey. We expect the Egea's popularity to continue in 2017 both side.
Figure 15: Egea Sales
7,000 Fiat Egea Sales 6,000 Fiat PC Sales Excluding Egea
5,000 Increasing demand 4,000 on Egea 3,000
2,000
1,000
0
04.16 05.16 06.16 07.16 08.16 10.16 11.16 12.16 01.17 02.17 03.17 09.16 Source: Halk Invest, Company Releases
11 GENEL-PUBLIC GENEL-PUBLIC
A Good Insurance: Take or Pay
One of the most important elements that distinguishes Tofas from other companies is “take or pay" agreements. These agreements provide Tofas to avoid the export sales risks. Almost all models exported, especially Egea, are secured by this agreement. In 2017, this agreement will continue to contribute to export sales.
New Special Consumption Tax may be an advantage for Tofas
With the publication of the official journal dated 25th November 2016, the new SCT rates, which became valid earlier than anticipated, caused price fluctuations in the automotive market.
It was pointed out that the SCT rates are not only based on the engine volume but also on the variables such as brand, price groups, vehicle type, class, structure definition of the car and cargo carrying capacity.
According to new enactment, SCT is started to be applied up to 60% in vehicles that do not exceed the engine cylinder capacity of 1.600 cc. This rate is 45% (unchanged) for vehicles not exceeding TL40 thousand base basic price, 50% tax between TL40k and TL70k and 60% for over TL70k. With the effect of price increases after the regulation, the demand will shift to brands in the lower segment, especially from luxury brands; We think that models which are not affected by the excise tax regulation, will become quite attractive. We think that Tofas will come into prominence against its competitors due to the fact that 1.300 cc diesel engine Egea, which is the top selling of the company, is not affected by the new SCT regulation.
12 GENEL-PUBLIC GENEL-PUBLIC
When we consider that a part of the demand in 2017 was withdrawn at the end of 2016, the new SCT rates and especially the depreciation in TL (Between 31 October and 13 January, the EUR / TRY pair increased by 16.7%.) since the end of October, 2016 drove the brands to bid and this rise in the prices did not fully take place in 2016 and extended to 2017, we think that domestic demand will be relatively weak compared to last year. In this direction, we anticipate that year-end sales of automobiles and light commercial vehicles will decrease by 12.5% compared to 2016 and be at the level of 861,000 units.
Figure 16: Tofas is important player in market
1,200,000 12.2% Total Domestic Sales Tofaş's Weight in Market (Right Axis) 1,000,000 12.0% We expect a decline in domestic 800,000 11.8% automotive sales in 2017.
600,000 11.6%
400,000 11.4%
200,000 11.2%
0 11.0% 2013 2014 2015 2016 2017E 2018E Source: Halk Invest, Company Releases
As of the end of 2016, Tofas, which sold 109,022 retail vehicles, experienced a decline in market share against the sector, which showed on annual basis decrease in volume, due to the fact that the competitors had renewed models and the company were not able to meet the domestic demand for Ducato model. The market share, which was 11.8% in 2015, declined to 11.1% in 2016. In the light commercial vehicle segment, the market share was 25.6% and 23.7% respectively.
We anticipate that the downfall we expect to take place in the sector in 2017 will result in Tofas reaching sales of 103.3 thousand units by the end of the year. We expect that the Egea model's HB & SW body will be on sale all the year, and besides that the market share will increase compared to 2016 and reach 12%, considering Egea had the combination of diesel-automatic gearboxes in last quarter 2016 that domestic consumers are very interested in.
13 GENEL-PUBLIC GENEL-PUBLIC
SCT Discount on Commercial Vehicles
For renewing old, too much driven city taxies; dolmushes, minibuses, midibuses, shuttles, private-public buses and municipality buses and lorries, pick-up trucks and trucks used in trading cargo, a regulation was conducted in August 2016. According to the regulation, Special Consumption Tax will not be received from the mentioned cars in the process spreading to about 3 years. When we consider both that Linea which is still in production in the segment of passenger car and mainly Egea models, which are still in production in the segment of passenger car, are constantly used as taxies and also Tofas is the second important player in LCV market in Turkey, we think that the regulation will make a positive contribution to both passenger and commercial vehicle sales of the company. When we look at the breakdown of sales in 2015, in terms of both the income distribution and the sales of the company, we see that the light commercial is more predominant than the automobile. When we get to 2016, there is a balance in the distribution of automobile and light commercial vehicle sales by the influence of Egea, which is the company's important trump. We see that the predominance of sales of automobiles and light commercial vehicles is almost the same. We believe that this situation makes the company more invulnerable in the event of a negative risk to the vehicle segments.
Figure 17: Export Sales Breakdown Figure 18: Domestic Sales Breakdown
100% 100%
90% PC 90% PC
80% LCV 80% LCV 70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Source: Halk Invest, ODD
Doblo, which was renovated in 2015, and Fiorino, who underwent facelift in 2016, are the most important trumps of Tofas. We see new and facelifted models of the company, whose 72% of sales are light commercial, as a supporting factor for domestic and overseas sales volumes. The company reached 53,737 sales volume in 2016 and this comprises more than 47 thousand Doblo and Fiorino models. Having entered the pick- up segment with the Fullback model in June 2016, Tofas has reached 388 sales figures in the 6 months to the end of the year.
14 GENEL-PUBLIC GENEL-PUBLIC
Figure 19: LCV Breakdown
80,000
70,000
60,000 DOBLO 50,000 FIORINO Total LCV 40,000
30,000
20,000
10,000
0 2010 2011 2012 2013 2014 2015 2016
Source: Halk Invest, Company Releases We expect the recovery to continue in Europe as we are receiving signals in the direction of recovery with the impact of supportive monetary policy measures after the crisis in the economy. In this respect, we believe that the export side will be stronger in the coming year for the company that makes a great majority of its exports mainly to Italy and Europe in 2017. Since Hatchback and Stationwagon bodies have more interest from European countries compared to Turkey, we expect the overseas sales of Tofas in 2017 to increase by 20% on annual basis, to around 335k units, supported mainly by Egean sales. Figure 20: Export Country
Mexico Other MENA 2% 2% 5% USA &Canada 7%
Italy The vast majority of exports to 38% Europe Rest of Europe 12%
Belgium 4% Spain 8% UK France 6% Germany 8% 8%
Source: Halk Invest, Company Releases Sales, which increased by 43.5% in the whole of 2016, were at the level of TL14,236 mn. The cost of sales was at the level of TL12,839 mn, by increasing 46.8% on annual basis. In this direction, gross profit margin was at the level of 10.2% decline compared to 2015. The gross margin for 2015 was 12.3%. We attribute the decline in the gross margin to the fact that the "take or pay" deal that Tofas has made is more towards the "take" side.
We see that the domestic market is quite competitive as in previous years, and therefore the domestic margins are under pressure. We expect that most of the year 2016 margins were supported by exports and this situation will continue in 2017. Accordingly, we estimate that the gross profit margin will be 10.1% in 2017 which is similar to the year 2016.
15 GENEL-PUBLIC GENEL-PUBLIC
Sales
Tofas announced TL14.2 bn sales in 2016 up by 43.5% YoY. The main driver for sales revenue is particularly strong export volume which was more supported by the new Egea model. In 2016, total sales volume rose 32% YoY to 329k units, while export volume grew to 279.5k units up by 60.8% YoY. Depending on high export volume, the company reported TL9.8 bn export sales revenue by increasing 71.7% YoY, which has 69.1% weight of total sales revenue. Domestic sales were reported TL 4.3 bn up by 4.1% YoY, in spite of domestic sales volume decreased by 8.5% to 112k units.
We have stated that we expect Turkey automotive market in 2017 will be weaker than the previous year. However, we don't expect any drop in total sales for Tofas in current year due to more than half of sales revenue coming from exports. So we think that the company will not be affected so much by the weak domestic market.
On the export side, we expect the recovery to continue in Europe as we are receiving signals in the direction of the recovery with the impact of supportive monetary policy after the crisis in the economy. So we expect that strong export sales will last in the following years and believe that export side will continue to be stronger. Since HB & SW versions are being more interested in European countries than in our country, Egea, which is the big weapon of Tofas, will resume to support export sales. In this direction, in 2017 we think export sales of Tofas will grow by 19.8% to 335k units. (Company's guidance: 330k-345k)
In this direction, in 2017, we expect TL18.4 bn total sales revenue, including TL 14.2 bn export sales and TL 4.2 bn domestic sales.
Figure 21: Revenue Breakdown Figure 22: Volume Breakdown
25,000 500 Domestic Sales Domestic Sales Volume
450
TL Mn TL Mn K unit K 20,000 Export Sales 400 Export Sales Volume 350 15,000 300 250 10,000 200 150 5,000 100 50
0 0
2010 2011 2015 2016 2012 2013 2014
2010 2011 2012 2013 2015 2016 2014
2017E 2018E 2019E 2020E
2018E 2019E 2017E 2020E
Source: Halk Invest, Company Releases
16 GENEL-PUBLIC GENEL-PUBLIC
Profitability
Margins
Steel Prices are an important parameter for Tofas's costs. However, the company buys steel with long-term contract by favour of FCA network. Depending on the duration of the contract, steel prices are fixed during the term. For this reason, volatility of the steel prices don't affect Tofas in terms of cost.
Gross margin has consistently decreased since 2014. The main reason for falling gross margin is "take or pay contract". In order to exist higher demand on cars, especially on new Doblo renewed in 1Q2015 and on new Egea models, leads companies to buy the products from Tofas, instead of paying penalty.
In 2015, Gross margin and CoGS were announced 12.3% and TL8.8 bn respectively. Tofas recorded TL 12.9 bn CoGS in 2016 up by 46.8% YoY while gross margin was 10.2%. We expect that the abroad demand will continue in the coming year and that the gross profit margin will be realized at a level similar of 2016.
OPEX & EBITDA
Opex in Tofas is driven by generally three main drivers such as General Administrative Expenses, Research & Development Expenses and mostly Marketing Selling & Distribution Expenses. In 2016, the company announced TL604 mn operating expense by increasing 19% YoY. Opex/Sales margin generally fluctuated between 4.2% and 6% between 2010 and 2016 years. We expect Opex will increase 9.1% to TL 659 mn in 2017. We expect that Marketing Selling & Distribution Expenses will realize as similar as in 2016 with TL659 mn and increasing of 0.4% YoY due to weaker domestic sales according to previous year.
Figure 23: OPEX Breakdown Figure 24: CoGS & Gross Margin
700 25,000 Research & Development Expenses Cost of Sales 600 General Administrative Expenses 13.5% TL Mn Gross Margin (Right Axis) Marketing Selling & Distrib. Expenses 20,000 500 12.5% 400 15,000
300 11.5% 10,000
200 5,000 10.5% 100
0 0 9.5% 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Source: Halk Invest, Company Releases
17 GENEL-PUBLIC GENEL-PUBLIC
Profitability
Tofas realized TL1,367 mn EBITDA in 2016 with increasing of 9.6% YoY. The CAGR of 12.9% EBITDA between 2010 and 2016. EBITDA in 4Q16 grew up by 75.2% YoY to TL442 mn with high export sales volume while TL252 mn EBITDA in 4Q15. Decreasing on gross margin leads to EBITDA margin be lower comprised to last years. We expect the company to record TL 1.774 mn EBITDA by growing 29.8% YoY and 9.6% EBITDA margin.
Figure 25: EBITDA & Margins Figure 26: EBITDA / Per Car
3,000 14% 6,000 EBITDA/per Car (TL)
2,500 12% 5,000
10% 2,000 EBITDA 4,000 EBITDA Margin (Right Axis) 8% 1,500 Gross Profit Margin (Right Axis) 3,000 6% 1,000 2,000 4%
500 2% 1,000
0 0% -
2010 2012 2013 2014 2015 2016 2011
2010 2011 2012 2013 2015 2016 2017 2018 2020 2014 2019
2017T 2019T 2020T 2018T
Source: Halk Invest, Company Releases Source: Halk Invest, Company Releases
Financing
At the end of 2016 Tofas has TL 5.01 mn total borrowings. Short terms borrowing and Long Term Borrowing weights are 41% and 59% respectively. TL 1.02 mn short term borrowings include 241.5k euro while TL 2.98 mn long term contain 513.9 thousand Euro. Financial liabilities denominated in Turkish Lira have fixed interest rate while financial liabilities denominated Euro have floating interest rate. It is worth mention that all euro denominated debt is guaranteed by Fiat scope of "take or pay" contracts.
Figure 27: Net Debt / EBITDA
4.0 2.5x Net Debt 3.5 Net Debt/EBITDA (Right Axis) 2.0x 3.0
2.5 1.5x 2.0
1.5 1.0x
1.0 0.5x 0.5
0.0 0.0x
2014 2015 2016
2013 2017E Source: Halk Invest, Company Releases
18 GENEL-PUBLIC GENEL-PUBLIC
Profitability
Net Income
Net income increased by 16.8% YoY to TL970 mn in 2016. The contribution of high export and depreciation in Euro are main drivers for net income. Net margin was 6.8%. CAGR of net income between 2010 and 2016 is 12.9%. In 2016 Tofas announced 191 mn deferred tax income due to investments especially for Doblo and Egea in last years. It was TL226 mn in 2015.
We expect Tofas to release TL1.163 mn net income growth by 19.8% YoY, with 6.3% net income margin due to strong exports and EURTRY. Deferred taxes are important to play role for net income. Recorded high investments in last years can affect net income positively circuitously.
Figure 28: Net Income Margin
1,800 9.0% Net Income Net Income Margin (Right Axis) 1,600 8.0% 1,400 7.0% 1,200 6.0% 1,000 5.0% 800 4.0% 600 3.0% 400 2.0% 200 1.0%
0 0.0%
2010 2011 2012 2013 2015 2016 2014
2017T 2018T 2020T 2019T
Source: Halk Invest, Company Releases
Capex
33% of the US $10 bn investment made by the automotive industry, was made only by Tofas. The company had €577 mn investments expenditure only for Egea from 2013 to 2016 September. Tofas recorded €330 mn investment expenditure only in 2016.
Figure 29: Investments will decrease
400 Investments (Mn Eur) 350
300
250
200
150
100 50 0 2010 2011 2012 2013 2014 2015 2016 2017T 2018T Source: Halk Invest, Company Releases
19 GENEL-PUBLIC GENEL-PUBLIC
In order to meet the demand against the new model, the company switched to 3 shifts system in the second half of 2016. In addition, it was planned to establish "second body production line" with €50 mn investment expenditure. Thus, production capacity will go up from 400k units to 450k. This capacity increase will be active in 2017 year. Furthermore, the company decided to improve engine which is used in Doblo model, in order to adapt to EURO 6 emission standards.
We do not expect to see high investment expenditures in 2017 as in the previous years due to Egea Hatchback and Station wagon version has been started to be produced since July 2016 and there is no model needed to facelift in the near future. For all of this reason, we expect Tofas to have investments €200 mn in 2017 and decreasing investment expenditure for following years.
Dividend Policy
Tofas distributed TL350 mn of 2016 year income that corresponds to 36,1% payout ratio. For current year, we expect payout ratio will be 55% with TL534 mn dividend payout.
Figure 30: Dividend Payout
900 120% Dividend Payout Dividend Payout Ratio (Right Axis) 800 100% 700
600 80%
500 60% 400
300 40%
200 20% 100
0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Halk Invest, Company Releases
20 GENEL-PUBLIC GENEL-PUBLIC
DCF
DCF Valuation Summary
Our target prices model is built on DCF. Our model assumes no major capex in the forecast period and beyond. As the capex cycle has come to an end, we project positive free cash flow throughout the forecast period. The model values Tofas’ equity at TL15.9 billion, consistent with a per-share amount of TL31.80, the target price we set in this research report. This valuation of equity points to a 17% upside in shares. We have assumed a risk-free rate of return of 11.5%. The details and the rest of our assumptions are in the DCF valuation table below.
DCF Valuation 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenues(TL Mn) 14,236 18,447 20,504 22,401 24,240 25,989 27,864 29,874 32,031 34,343 YoY 30% 11% 9% 8% 7% 7% 7% 7% 7% Cash Gross Margin 10.2% 10.1% 10.4% 10.1% 10.5% 10.6% 10.7% 10.8% 10.9% 10.5% EBIT 844 1,202 1,415 1,511 1,719 1,903 2,050 2,245 2,420 2,503 Depreciation 523 572 603 642 683 726 770 815 861 909 EBITDA 1,367 1,774 2,017 2,153 2,402 2,629 2,820 3,060 3,281 3,412 EBITDA Margin 9.6% 9.6% 9.8% 9.6% 9.9% 10.1% 10.1% 10.2% 10.2% 9.9% (-) Tax@EBIT 169 240 283 302 344 381 410 449 484 501 (-) Capex 1,177 790 628 615 640 659 679 699 720 742 (-) Change in WC -212 -147 -84 -89 -104 -106 -114 -122 -130 -163 Free cash flow (FCF) 232 890 1,191 1,324 1,522 1,695 1,845 2,034 2,207 2,333 WACC 12% 12% 13% 13% 13% 13% 13% 13% 13% 13% Discounted FCF 232 819 970 956 972 955 917 890 852 806
Terminal growth rate 3.0% Terminal value 24,155 PV of terminal value 8,349 Discounted FCF 8,138 EV (TL Mn) 16,487 Net Debt 2,632 Minorities 0 Equity Value (TL Mn) 13,854 Market Cap (TL Mn) 13,650 Target Equity Value (TL Mn) 15,925 Upside Potential (%) 16%
# of shares (million) 500 Share price 27.30 Target Price 31.80
21 GENEL-PUBLIC GENEL-PUBLIC
Financials & Forecasts
TOASO Financials and Forecasrs (TRLm) 2013 2014 2015 2016 2017E 2018E Sales 7,038 7,440 9,921 14,236 18,447 20,504 Cash COGS -6,216 -6,516 -8,781 -12,888 -16,715 -18,506 Gross income 822 924 1,140 1,348 1,732 1,998 Cash Opex -387 -450 -508 -604 -659 -727 EBITDA 811 832 1,069 1,367 1,774 2,017 Depreciation -324 -299 -360 -523 -572 -603 EBIT 487 534 709 844 1,202 1,415 Net financial income 103 -61 -69 -3 99 77 Net other income -113 -1 -22 -43 -37 -41 EBT 477 472 618 798 1,264 1,451 Period tax -33 -18 -14 -19 -37 -21 Deferred taxes -10 120 226 191 -64 -96 Net income 434 574 831 970 1,163 1,334 Minorities 0 0 0 0 0 0 Net income after minorities 434 574 831 970 1,163 1,334 Dividends paid out 325 485 365 350 534 639 Retained earnings 109 89 466 620 629 695 Total assets 5,928 7,124 9,867 11,830 13,226 14,049 Cash and securities 1,747 1,715 2,466 2,383 2,909 3,046 Fixed assets 2,523 3,311 4,659 5,595 5,755 5,938 Inventories 379 453 548 920 952 1,054 Total debt 2,284 2,597 4,386 5,016 4,612 4,203 Share capital 500 500 500 500 500 500 Book equity 1,899 2,241 2,582 2,957 4,171 4,972 Market equity 6,700 7,975 9,475 12,320 13,650 13,650 MV of net debt 537 883 1,920 2,632 1,703 1,157 Minorities 0 0 0 0 0 0 Preferred equity 0 0 0 0 0 0 Enterprise value 7,237 8,858 11,395 14,952 15,353 14,807
22 GENEL-PUBLIC GENEL-PUBLIC
Financials & Forecasts
Margins 2013 2014 2015 2016 2017E 2018E Gross 11.7 12.4 11.5 9.5 9.4 9.7 EBITDA 11.5 11.2 10.8 9.6 9.6 9.8 EBIT 6.9 7.2 7.1 5.9 6.5 6.9 EBT 6.8 6.3 6.2 5.6 6.9 7.1 Net 6.2 7.7 8.4 6.8 6.3 6.5 Depreciation -4.6 -4.0 -3.6 -3.7 -3.1 -2.9 Inventories 5.4 6.1 5.5 6.5 5.2 5.1 Opex -5.5 -6.0 -5.1 -4.2 -3.6 -3.5 Financing 1.5 -0.8 -0.7 -0.0 0.5 0.4 Cost of funding (net) 19.2 -6.9 -3.6 -0.1 5.8 6.6 Profitability 2013 2014 2015 2016 2017E 2018E Asset turnover 118.7 104.4 100.5 120.3 139.5 145.9 ROA 7.3 8.1 8.4 8.2 8.8 9.5 ROE 22.9 25.6 32.2 32.8 27.9 26.8 Leverage ratios 2013 2014 2015 2016 2017E 2018E Debt/Assets 38.5 36.5 44.5 42.4 34.9 29.9 Debt/Equity 120.3 115.9 169.9 169.6 110.6 84.5 Net debt/Equity 0.3x 0.4x 0.7x 0.9x 0.4x 0.2x Net debt/EBITDA 0.7x 1.1x 1.8x 1.9x 1.0x 0.6x Dividend pay-out 74.8 84.5 43.9 36.1 45.9 47.9 Per share data and multiples 2013 2014 2015 2016 2017E 2018E EPS (TL) 0.87 1.15 1.66 1.94 2.33 2.67 BVPS (TL) 3.80 4.48 5.16 5.91 8.34 9.94 DPS (TL) 0.65 0.97 0.73 0.70 1.07 1.28 CFPS (TL) 1.72 -0.15 0.51 0.80 2.26 2.95 Dividend yield (%) 2.4 3.6 2.7 2.6 3.9 4.7 Earnings yield (%) 3.2 4.2 6.1 7.1 8.5 9.8 FCF yield (%) 6.3 -0.5 1.9 2.9 8.3 10.8 EV/Sales 2.3x 2.2x 1.6x 1.1x 0.9x 0.8x EV/EBITDA 20.1x 19.6x 15.2x 11.9x 9.2x 8.1x P/FCF 15.9x -185.1x 53.5x 34.1x 12.1x 9.3x PER 31.4x 23.8x 16.4x 14.1x 11.7x 10.2x PBR 7.2x 6.1x 5.3x 4.6x 3.3x 2.7x
23 GENEL-PUBLIC GENEL-PUBLIC
Halk Invest Rating Definitions
We rate a stock BUY if we see 15% or more upside in shares. Any upside between 1% and 15% merits a HOLD rating. We rate a stock SELL if our target value is below the current market value.
Equity Research Equity Sales & Trading
Banu Kivci Tokali Serhan Yenigün Alpogan Sabri Erdogan Head of Research Energy & Utilities Head of Financial Markets Chief Economist Strategy +90 (212) 314 8182 [email protected] [email protected] [email protected]
Ilknur Turhan Mehtap Ilbi Nazan Ozdemir Generalist, Consumer, European and US Institutions Building Materials Consumer Staples +90 (212) 314 8184 [email protected] [email protected] [email protected]
Abdullah Demirer Furkan Okumus Arzu Arioz Industrials, Consumer, Asia and MENA Mid-caps Consumer Discretionary +90 (212) 314 8137 [email protected] [email protected] [email protected]
A.Cuneyt Mehmetoglu Huseyin Akar Industrials, Macro Research Base Metals Economist [email protected] [email protected]
Disclaimer
This report has been prepared by Halk Yatırım Menkul Değerler A.Ş. (“Halk Invest”), solely to provide information to the recipient as of the date of issue and are subject to changes without prior notice. The comments, estimates and recommendations included herein do not constitute an offer or an invitation to buy or sell any security. The advice given in this document is not a part of investment advisory activity. Investment advisory services are given according to the investment advisory contract, signed between the authorised institution and the client. The information presented in this report has been obtained from published information and other sources which Halk Invest considers to be reliable. Halk Invest does not accept any liability or responsibility for the accuracy or completeness of any such information. The opinions discussed in this report may not be appropriate for all investors. Transactions in securities, instruments or investments to which it refers to can involve high risks, therefore it is highly recommended that investors make their own investment decisions based on their specific investment objectives, financial positions and risk profiles. Halk Invest and its affiliated organisations and persons may, from time to time, take position on any of the securities covered herein and may buy or sell those securities or their derivative securities either on their own account and / or on behalf of their clients. All information in this document remains as the property of Halk Invest and must not be reproduced under any circumstances, not to be copied or made available to any person other than the recipient.
24 GENEL-PUBLIC