RATING CHANGE Equity TURKEY / REITs Research 6 March 2017 EMLAK KONUT REIT HOLD (Prev. BUY) What next after the sales campaign? . Downgraded to Hold. Reflecting sales campaign and 2016 Stock Data 03 March 2017 results, we slightly revise down Emlak Konut’s TP to TRY3.40/sh from TRY3.65. On 14% upside (inc. dividend yield of 6%), we Current price TRY3.15 downgrade the stock to HOLD from BUY. Because of pull-forward Target price TRY3.4 effect of the latest sales campaign and macro headwinds, pre-sales DPS TRY0.19 may lose momentum after strong February unless there is meaningful Total return 14% recovery in employment and GDP growth. In addition, RSM tenders, Current Mcap TRY11,970mn/ US$3216mn major catalysts for NAV, are likely to be scheduled more in 2H17. The stock trades at 39% discount to NAV, vs. 2-year average of 37%. Bloomberg Ticker EKGYO TI Number of outstanding shares (mn) 3,800 . Campaigns boost pre-sales, but come at a cost. Campaign in High / Low Price Range (12M) 3.22/2.47 August resulted in 2,405 units of presales (24% of 2016 sales) and 3-m Average Daily Turnover ($ mn) 23.2 current one reportedly led to 2,300 units (23% of 2017 target). Thus, 2017 pre-sales targets (9,900 units with TRY8bn proceeds) are Price Performance (%) 1M 3M 6M YtD achievable, in our view, under the current conditions. However, Return 2.9 11.3 7.5 5.4 August campaign delayed cashflows for Emlak (c.19% of proceeds) Relative to BIST100 -1.2 -9.2 -8.1 -8.2 while February campaign incurs cost of mortgage subsidy, which we calculate as TRY109mn and deduct from our valuation. 3.50 . Strong earnings visibility but flat yoy. With the current RSM 3.00 projects, Emlak Konut has secured TRY13.6bn revenues and 2.50 TRY7.9bn gross profit, which will be recognized over 4-5 years. 2.00 Following 85% yoy growth, we expect flattish earnings at TRY1.8bn 1.50 in 2017 and 2018 since i. Maslak 1453, heavy weight in 2016 topline 1.00 and margin, will be complete, ii. mortgage subsidy might slightly 0.50 lower margins, iii. interest expenses on trade payables to TOKI and - 12/10 02/11 04/11 06/11 08/11 10/11 12/11 02/12 04/12 06/12 08/12 10/12 12/12 02/13 04/13 06/13 08/13 10/13 12/13 02/14 04/14 06/14 08/14 10/14 12/14 02/15 04/15 06/15 08/15 10/15 12/15 02/16 04/16 06/16 08/16 10/16 12/16 new borrowing will continue, albeit at a lower rate. Upside would 02/17 come from faster completion of projects and upward revision to Price (TRY) Relative Price (TRY) secured revenues, i.e. increase in home prices (not very likely in ST). NAV growth slows down. Despite strong proceeds in 2016 (TRY7.3bn) and 2.08x tender multiple, NAV growth was limited to 8% due to delayed cashflows. This year, the company may tender c. TRY1bn worth of land and buy a similar amount of land. The company has TRY3.5bn payables to TOKI and will distribute c. TRY700mn this year, as well. Thus, we reflect only 15% value add for landbank and expect 4% yoy growth in 2017 NAV. TRYmn 2014 2015 2016 2017E 2018E Sales 1,805 1,787 3,456 4,407 3,406 EBITDA 661 768 1,650 1,603 1,450 Net income 954 953 1,761 1,827 1,810 EPS reported (TRY) 0.3 0.3 0.5 0.5 0.5 DPS (TRY) 0.1 0.1 0.19 0.2 0.2 P/E (x) 10.1 11.4 6.8 6.6 6.6 Adj. EV/EBITDA (x) 13.3 13.7 6.8 7.0 7.7 Elvin Akbulut Daglier P/BV 1.1 1.2 1.1 1.0 0.9 [email protected] Div. yield (%) 3.8 3.4 5.9 6.1 6.0 +90 212 319 83 65 IMPORTANT: Please refer to the last page of this report for “Important Disclosures” and Analyst(s) Certifications. 6 March 2017 – Emlak Konut REIT Financial Summary (TRYmn) 2014 2015 2016 2017E 2018E Investment Case Income Statement Emlak Konut is Turkey’s largest REIT with Total revenues 1,805 1,787 3,456 4,407 3,406 COGS -1,033 -899 -1,620 -2,593 -1,728 strong earnings visibility and low risk-high Gross profit 772 888 1,836 1,814 1,678 return business model with RSM tenders. Opex -112 -123 -194 -217 -235 Because of pull-forward effect of the latest EBITDA 661 768 1,650 1,603 1,450 sales campaign and macro headwinds, pre- Depreciation 2 3 7 7 7 sales may lose momentum after strong Operating income 659 765 1,643 1,596 1,443 Financial income/expense 190 34 -160 -79 29 February unless there is meaningful Net other income/expense 105 154 279 310 338 recovery in employment and GDP growth. Pre-tax income 954 953 1,761 1,827 1,810 RSM tenders, major catalysts for NAV, are Tax 0 0 0 0 0 likely to be scheduled more in 2H17. Minority interest/other 0 0 0 0 0 Upside would come from faster completion Net income 954 953 1,761 1,827 1,810 of projects and increase in home prices, which do not look very likely in the short Balance Sheet term. We also expect flattish earnings due Cash and liquid assets 2,843 3,149 2,642 2,868 3,076 to completion of high margin RSM projects. Real estate 740 10,330 12,085 2,286 2,406 Accounts receivable 1,160 919 683 733 968 The stock trades close to its 2-year Other current assets 707 700 1,667 1,800 1,928 average NAV discount and we expect Total current assets 5,450 15,098 17,077 7,688 8,377 limited NAV growth in line with slowdown in Real estate 8,245 16 38 9,185 9,663 housing market. Financial/equity investments 0 0 0 0 0 Other non-current assets 1,259 1,622 1,587 2,067 1,771 Stock Triggers & Risks Total non-current assets 9,503 1,638 1,625 11,252 11,434 Total assets 14,953 16,736 18,702 18,939 19,811 Strong pre-sales, new tenders and rising Short-term debt 172 231 219 174 196 earnings momentum are major triggers for Accounts payable 1,376 2,231 3,824 2,350 2,087 Advances received 3,528 3,990 3,141 3,239 3,227 Emlak. Fall in mortgage rates would be Other current liabilities 636 689 770 781 788 supportive as well. Pace of infrastructure Total current liabilities 5,712 7,140 7,954 6,544 6,298 projects, regulatory risks (abolition of Long-term debt 434 214 0 523 560 corporate tax exemption), political noises Advances received 0 0 0 0 0 and economic hiccups are major risks. Other non-current liabilities 56 56 18 19 21 Total non-current liabilities 490 270 18 542 581 Chart 1: Shareholder Structure Minority interest 0 0 0 0 0 Total shareholders' equity 8,751 9,325 10,730 11,853 12,932 Total liabilities and equity 14,953 16,736 18,702 18,939 19,811 Cash Flow Statemement Free Profit before tax 954 953 1,761 1,827 1,810 float - TOKI Depreciation 2 3 7 7 7 excl TS 49% Changes in working capital -3,183 -570 -253 -1,407 -849 48% Other -502 -638 -797 -645 -323 Treasury Operating cash flow -2,728 -252 719 -218 645 stock Capex -27 -46 -20 0 0 Asset sales & other 437 110 17 18 20 3% Investing cash flow 410 65 -3 18 20 Source: The company Change in debt -163 -162 -225 478 59 Dividends -455 -356 -356 -705 -731 Chart 2: 2016 Real estate portfolio Other 92 12 62 67 72 Financing cash flow -527 -506 -519 -159 -600 Total cash flow -2,845 -694 197 -359 64 Building Net debt -847 -315 -737 100 95 stock 2% Key Ratios Projects 73% Gross margin 43% 50% 53% 41% 49% Land EBITDA margin 37% 43% 48% 36% 43% 25% Revenue growth (%) -23% -1% 93% 28% -23% EBITDA growth (%) -27% 16% 115% -3% -10% Earnings growth (%) -10% 0% 85% 4% -1% Tax rate (effective) 0% 0% 0% 0% 0% Net debt-to-equity (x) nm nm nm 0.0 0.0 Source: The company Net debt-to-EBITDA (x) nm nm nm 0.1 0.1 2 6 March 2017 – Emlak Konut REIT VALUATION and ESTIMATES Reflecting the impact of recent sales campaigns and 2016 realization, we slightly revise down our 12M TP for Emlak Konut to TRY3.40 from TRY3.65. Considering 14% total return potential (including dividend yield of 6%), we downgrade the stock to HOLD from BUY. The latest campaigns and the government’s market-friendly regulatory changes are likely to be supportive for the housing market, but we remain cautious for demand until we see sustainable pick-up in the economy and employment. Our major assumptions are: - 15% value-add for landplots (project launch in mid 2018, 80% RSM, 1.75x tender multiple for RSM and 1.2x value add for turnkey projects) - No value-add for cash - Pre-sales slightly upped for the new campaign in 2017 (now:9,944 units,prev:9,638 units) - 5% upside to future RSM projects - PV of mortgage loan subsidy netted off Table 1: Emlak Konut REIT Target NAV SOTP valuation TRY mn Landbank - revalued 5,996 appraisal+ value add Land - Istanbul Kucukcekmece Halkalı 2,092 Land - Basaksehir - Hosdere-16 parsel 665 Land - Ankara - Cankaya Muhye 546 Land- Istanbul Sisli-Teşvikiye 522 Land - Istanbul Zeytinburnu Bestelsiz 472 Land - Istanbul - Arnavutkoy Dursunlu (14 parcels) 437 Others 1,262 Building stock 293 Appraisal Ongoing projects (RSM) 5,363 DCF Nidakule Kucukyali 1,155 Buyukyali 1,133 Nidapark Kayasehir - Basaksehir Kayabasi 5 362 Validebag Konaklari 293 İst Marina 181 Others 2,239 Ongoing projects (turnkey) 1,506 DCF Ayazma Emlak Konut 527 Kayabasi (Basaksehir) 449 Hosdere (Bahcekent) 222 Others 308 Future projects (RSM) 2,627 DCF Sariyer Istinye 1,116 Ankara- Yenimahalle 902 Avangart Istanbul 447 Others 162 Total real estate values 15,784 3 6 March 2017 – Emlak Konut REIT Current solo cash 956 adj 2016 PV of administrative costs -687 DCF PV of new campaign -109 Payables to TOKI (adj) -2,398 HAA debt -219 Key payment plan-2016 Treasury stock 340 @10% discount Target NAV 13,666 REIT discount 0% 12M TP (cum div) 3.59 12M TP (ex div) 3.40 Current price 3.15 Upside potential 14% *Emlak’s headquarters are not included Source: YKY Research estimates Sales campaigns support pre-sales at a cost and may pull demand forward Since the coup attempt in July 2016, Emlak Konut REIT initiated two sales campaigns.