EnerjiSA / Upgrade to Buy: Underperformance seems exaggerated

Earthquake damage contained to a likely temporary FCF impact. Citizens in the 10 earthquake hit cities in Southern Turkey were granted three-month postponement of their electricity bill payments, as announced by the President on 1 March. The energy market regulator, EMRA, had also announced a decision to defer some power distribution company liabilities and abolish regulated breach terms during the three- month State of Emergency declared for these cities.

EnerjiSA’s Toroslar region runs electricity services in several cities directly impacted. We associate part of the share price weakness year-to-date to the earthquake. However, we expect the impact to be
temporary and limited. Talks among distribution companies and the regulator continue for further potential compensation. Toroslar is one of EnerjiSA’s three distribution regions in the country and, more importantly, more than 80% of EnerjiSA’s operational earnings are driven by distribution operations, as opposed to retail services, where income streams are not directly impacted.

Downturn in inflation and reduced tariffs. These could be two other factors of pressure on the stock price lately, on top of what appeared to be profit taking at the beginning of the year. The shares surged by more than two-times in 4Q22, outperforming the market (BIST100) by 20%. Inflation trending down in Turkey and energy tariff cuts ahead of the upcoming elections should result in more moderate nominal growth this year vs 2022 and lower the absolute profit in regulated retail services (which is based on sourcing cost plus a fixed gross profit margin). With these taken into consideration in our revised estimates, we project operational earnings and underlying net income (clean profits that are basis for dividend payments) growth of 40%/36% y-o-y, respectively, this year vs 101%/85% in 2022. We increase our 2023e operational earnings/net income forecasts by 13%/53%, respectively, and now project cash DPS of TRY3.12 (vs TRY2.02 previously) based on c60% pay-out, implying 11.4% yield.

Raise TP and upgrade to Buy; exposure to EVs to accelerate from 2023e. Our sum-of-the-parts approach results in a new target price of TRY42.70 as a result of our higher estimates. Our TP implies upside of 55.8% and we upgrade to Buy (from Hold). Aside from being a balanced growth-dividend investment, EnerjiSA provides exposure to the electric vehicle market in Turkey via its EV charging stations business, Esarj, the largest, with more than 500 D/C units). We expect the Turkish EV market to see exponential growth from 2023e onwards, with the pending start of retail shipments of TOGG; Turkey’s national EV car brand.



HSBC Global Research