Attractive portfolio at a high discount… We re-initiate coverage on Koç Holding as we see the widening of NAV discount, currently as high as 36% vs. 3-year average of 15%, as a good opportunity to build position and own exposure to the top-tier asset mix under holding company.
Exposure to consumer both in EMs and DMs. Koç Holding offers exposure to consumer growth stories such as e-commerce, which drive LCV sales in many countries and benefits Koç’s automotive subsidiaries like Ford Otosan and Tofaş. In consumer durables, Arçelik is gaining scale globally with increased presence in emerging Asia in addition to its continuous market share gains in Europe.
Energy business lagged behind recently, but set to recover as the impact of pandemic fades. Tupras is a unique asset with a resilient track record of cash flow generation. While refining business usually has low sensitivity to GDP growth, Covid-19 has created extraordinary pressure on margins due to the halt in air traffic and lower fuel consumption. We expect performance of the company to improve in the coming period thanks to increasing global economic activity, accelerating vaccination and better supply-demand balance in the oil market.
Yapı Kredi perform strongly despite macro volatility. We think that asset quality developments could turn out to be better than expected especially for private Turkish banks as corporate balance sheets have been provided with ample support by monetary, fiscal and regulatory steps, to deal with their cash flow and debt stock issues. This could support earnings, potentially offsetting the negative NIM impact arising from higher funding costs. We have been impressed with Yapi Kredi’s focus on strengthening its credit risk profile and results of its effective asset management since 2018. We expect 2021 to be a year of further ROE progression for the Bank, thanks to resilient NIM (2021E: 3.3%, 2020: 3.8%), strong fee income generation (+15% y/y) and lower cost of risk (2021E: 120bps, 2020: 251bps). Our 2021 net income estimate of TL7.2bn (+42% y/y) corresponds to 15.3% ROE.
Limited risk from Turkish macro. Koç group companies mostly generate cash flow in FX with c.50% of total revenues derived either from international operations or linked to FX. In domestic market, Koç usually commences leadership position in sectors it operates, meaning the subsidiary companies have capacity to protect their business even during challenging periods in terms of domestic macroeconomic outlook.
TP of TL31.8/share offers 63% upside. We set out TP based on NAV analysis, where we use our TP for listed subsidiaries and book values for non-listed assets. We apply 15% conglomerate discount and arrive at a TP of TL31.8/share, implying a hefty upside of 63%. Sensitivity of our TP is highest to the changes in valuation of FROTO, TUPRS, YKBNK and ARCLK among subsidiaries, whereas 5% change in conglomerate discount assumption would increase/decrease our TP by 6%.
Source: Y.F. Securities Research