Koc Holding: NAV discount back at attractive levels

Attractive from an NAV standpoint. Koc’s NAV discount had narrowed to mid-teen levels in mid-2024 but has widened in a volatile course since then to c30% today. In a period when Türkiye’s CDS rates hover at the lows of the past eight years, the NAV discount, which provides a good historical correlation with the market risk perception, looks stretched, in our view. In our valuation, we continue to assume a fair value discount of 10%, which used to be the average discount level when CDS rates were
previously at current levels.

The slowdown in consumption and FX are the main headwinds. Behind the widened NAV discounts are expectations of slower consumption in Türkiye in at least the first half of 2025, and further relative TRY strength putting pressure on Koc’s export operations, in our view. In 9M24, the combined group operating profit was down 72% y-o-y, driven by higher competition in the domestic market and pricing pressure in autos, merger effects and rise in raw material costs in consumer durables, NIM pressure in
banking, and softer crack margins in energy/refining. Although non-cash, monetary losses incurred in banking and due to cash at the Holdco level under the IAS29 practice sent the consolidated group bottom line into negative territory as of 9 M24. Solid dividend income in 2024. While disinflationary policy actions should provide relief on the consumer demand, pricing, and funding cost fronts in the latter part of the year, solid dividends collected last year (we estimate cUSD1.2bn) are a key positive, in our view. Koc had gross cash of USD1.6bn and net cash of USD853m at the Holdco (parent) level as of 9M24, which might have improved further by the end of 2024, thanks to further collections during 4Q24. Koc distributed cUSD600m as cash dividends itself during the year, implying half of the collections were retained, improving liquidity and creating room for potential new investments. One of the potential uses of the cash at hand could also be the retirement of the USD750m bonds maturing in 2025.

Cut TP to TRY240; retain Buy. We expect Koc to return to profitability in 2025 as inflation continues to trend down and other headwinds abate (i.e. consumer demand, pricing, cost inflation, and FX) presumably starting the second half. As group performance deteriorated in 2024, we expect dividend income to also moderate from the 2024 peak, but Koc’s net cash (parent) should remain at high levels (cUSD1bn, barring major capital expenditures). Our sum-of-parts based TP, which includes a 10% fair Holdco discount (unchanged), implies 40% upside and we retain our Buy rating.