A viable option for the difficult 2024
With a portfolio located mostly outside Türkiye, Enka is an attractive story in a potentially difficult 2024 when interest rates are likely to remain elevated and the domestic economy will likely slow down (from 4.0% in 2023 to 2.5% in 2024 based on HSBC economic forecasts), weighing on the earnings of most of the domestically-driven businesses. The portfolio, specifically in construction and real estate, is predominantly FX driven and sits on a net cash of USD4.7bn as of end of 3Q23, equating to c63% of the current market value.
Potential positive catalysts
In addition to being defensive, Enka’s earnings are not coming off a post COVID-19 high base, unlike many consumer and industrial businesses in Türkiye. Enka has the potential to improve its earnings in 2024, via accelerated new awards in construction and improved returns on its very large cash portfolio. The first looks possible as we understand Enka’s bidding pipeline is busy into the new year and the latter should be enabled by likely global rate cuts (HSBC expects the Fed and ECB to start easing in June 2024) and the c40% of the securities portfolio invested in G-bonds (as of YE2022, breakdown N/A for 2023).
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Real estate has held up well, energy the only investment line
Enka’s office and retail (shopping mall) rental operations in Russia have held up better than market expectations, in our view, in the aftermath of new sanctions post the invasion of Ukraine. In offices, space from international tenants that left the country has been filled by locals, leaving rental rates under pressure but occupancy rates are above 90%.
Rental revenue and EBITDA in 9M23 stand 5% and 3% above the pre-invasion period (9M21) level and only 8% and 6% below pre COVID-19 (9M19) level. Energy operations, on the other hand, consisting of natural gas based generation in Türkiye, remain highly volatile and dependent on renewable output in the market and spot power prices. Given the freeze of new space projects in Russia, energy is the only investment area for Enka with ongoing investments in Türkiye (another natural gas plant with 900MW capacity) and solar investment in Bulgaria (40MW) both due in 2025.
Raise TP to TRY44, upgrade to Buy
We raise our target price to TRY44.00 from TRY28.40 driven by higher FX rate in setting our TRY-based TP from our USD-based SOTP. Our NAV of USD11.4bn is up 2% from USD11.2bn and we continue to set our TP applying a holding discount of 20%. Based on the 21.6% implied upside, we upgrade to Buy from Hold. The stock trades on 2024e PE of 10.3x and EV/EBITDA of 1.5x, as we expect a rise in net cash position next year.
Excerpt from HSBC Global Research Report
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