Company Outlook | Aselsan: High growth and compelling valuation

Stock’s underperformance of a retreating Turkish market unjustified in our view. Aselsan’s share price fell by 12% in the last month and by 18% year-to-date,
underperforming the Turkish market (BIST100) by 7% and 13% over the respective
periods. The shares now trade (after our revised forecasts) at compelling 2021e
multiples; 7.1x PE and 6.7x EV/EBITDA, vs global defence industry averages of 14x
and 11x. We see this as a good opportunity to have exposure in a high-growth and
operationally FX long and defensive business, which runs a solid USD9.5bn project
backlog, generating an EBITDA margin comfortably above 20%.

Risks seem overplayed. On the operational side, tight budget resources and a
deterioration in Aselsan’s receivables, WC and net cash performance have been the
main market focus as a negative trend in the last two years. We believe this is no
longer fresh negative news; time has revealed collections are back-loaded with
strong execution in the final quarter of the year and potentially limited negative
earnings impact of net cash deterioration going forward (thanks to ample external
funding available at low cost if and when needed). On a more macro level, the main
perceived downside risk by investors in recent years has been potential economic/
military sanctions against Turkey by foreign countries; there have been no recent
developments and in any case we believe Aselsan is better prepared today to
minimise potential effects (via alternate sourcing etc).

Upgrade to Buy – growth should return in 2021 at decent operating margins.
2020 was a year of relatively weak new awards (USD1.3bn), slow-down in the
execution of larger R&D driven projects in backlog (due partly to COVID-19 effects)
but strong EBITDA margin (24.4%) due to faster execution on higher margin smaller
projects as well as cost cutting. We expect most of the trends last year to partially
reverse back to normal in 2021; top-line growth to accelerate again with better
execution on long-term bigger projects, but operating margins to normalize from the
2020 level.

We assume new awards of USD2bn in 2021e; revenue growth of 39%
y-o-y (vs guidance of 40-50% – we assume average USD/TRY of 8.0; EBITDA margin
of 22% (vs 20-22% guidance) and a further moderate deterioration in net cash (to net
debt of TRY424m at YE21). We cut our 2021e revenue by 3%; EBITDA by 2%, and
raise net profit by 3%. Our equally weighted DCF (fair value TRY17.3 from TRY16)
and peer comparison (TRY21.7 from TRY21.2) valuation approach yields a new TP
of TRY19.5 (TRY18.6) and we upgrade to Buy from Hold.



Source: HSBC Global Research