Koc Holding | BUY: Strong dividend income to support net cash

Surge in dividend income likely. We project Koc’s dividend income to more than
triple y-o-y to reach cTRY20bn in 2023 (to be paid from the results for 2022 for the
underlying group companies). Collections in 2022 of cTRY6bn were also strong,
surging c70% y-o-y, but 2023 should see further acceleration, in our view, with the
likely return of dividends for the refining business; a surge in profits for banking with a
higher pay-out (we assume a pay-out of 15% for the bank); and a surge in profits for
the other operating segments, particularly autos.

Getting ready for 2H23 and potential new investments. As far as Koc’s own
dividend payments are considered, we believe they may not be increased in
proportion to the upstream dividends. Hence, we expect the holding company to
reverse the downward trend in its net cash position in recent years and build liquidity
in preparation of possible macro trends post the general election in Turkey and
ahead of potential new investments, such as the EV battery plant in Ankara in a joint
venture with Ford Motor Co (agreement originally announced by Koc in March 2022).
We assume a pay-out (from 2022 profits) of 10%, equating to DPS of TRY2.57 and a
total payment of TRY7.8bn vs a pay-out of 15% and DPS of TRY0.90 from 2021.
2023 financial performance facing a high base from 2022. We raise our forecasts,
reflecting our recent estimate changes for the underlying companies under our
coverage. Given the high base from 2022, especially for banking and refinery, we
project a decline of 13% y-o-y for Koc’s consolidated profit and a decline of 17% for EBITDA but an increase of 25% y-o-y for group revenue. Since Koc is a major
exporter (as much as it is the leader in many consumer sectors in Turkey), FX rates
are also key in shaping the group’s performance as stated in TRY terms.

Retain Buy but raise target price to TRY93.00 from TRY61.40. After reflecting our
recent valuation changes for the listed parts, we calculate a higher target NAV for
Koc using our sum-of-the-parts approach (TRY294.8bn vs TRY194.7bn previously)
and, thus, raise our target price to TRY93.00 from TRY61.40, assuming an
unchanged fair holding discount of 20% based on the average discount for the past
five years. Our new target implies 21.6% upside. We maintain our Buy rating. We
think that the stock is attractively valued at a PE for 2023e of 3.4x and P/B of 1.0x. It
trades on a current NAV discount of 34%, which is also above the historical average.



HSBC Global Research