Domestic demand outlook
There is a big supply-demand imbalance in the Turkish
market currently driven by supply chain problems whereas demand remains healthy.
Tofas has managed the situation reasonably well so far but there are still challenges in
the production tempo (lead times are longer to fulfil the robust order book). Tofas
therefore prefers to maintain its domestic volume guidance despite underlying demand pointing to higher volumes than 800-850k that company expect for FY21.
Exports outlook
The delta variant in Europe and supply shortage have been negatively
affecting export demand since mid-2021; thus shipments remain under pressure. That
however, helps Tofas divert sales into more profitable local sales, supporting margins
particularly given that export volumes are below quotas in take-or-pay contracts
(so local sales covering also take-or-pay compensation in this environment).
2022 outlook
In Jan-2022, Tofas will be introducing the hybrid and automatic gear versions of the face-lifted Egea/Tipo passenger car family, filling a big market segment gap (hybrid for Europe, automatic for Turkey) that the company has not previously addressed. Accordingly, 2022 offers notably accelerated volumes and market share for Tofas provided that supply side problems do not deteriorate.
New models/new capex cycle. Planning to share a roadmap before the end of 2021
(subject to an awaited Capital Markets Day by parent Stellantis), Tofas is looking to kick
off a new capex cycle between 2022-2024, including new models, with hybrid and fully
electric versions. Tofas plans to triple R&D centre capacity with more involvement in
battery production (i.e software, electronics). Late-stage discussions still continue and the evolution of Tofas will likely be towards higher-end models (e.g. SUV, electric) with higher earnings power and more diversified end markets in exports. Options are on the table for models that will help i) fully utilising the existing 400k capacity, or ii) taking it up to 550k maximum possible at the existing facility.
Dividends
The new capex cycle will unlikely be notably above the previous capex cycle when Tofas spent cEUR700m for the all new Egea/Tipo and thus will not create a big burden on the B/S that might result in a material cut in the dividend pay-out. Project finance and if needed and market conditions justify, external borrowing, will be the sources of the needed funding. Self-financing means take-or-pay protection should continue to exist with new models although the focus is launching best-seller models with minimum possible reliance on take-or-pay protection.
HSBC Global Research