Top Picks Update: Adding PETKM, Removing TKFEN & MGROS

Buy PETKM. We like PETKM as we think the market has not appreciated yet SOCAR Turkey’s new natural gas supply mechanism, which allows PETKM and STAR refinery to use Azerbaijan gas (up to 1.7bn m3 per year) via Turkey’s pipeline infrastructure at a special tariff for these companies. We think this mechanism would provide significant cost advantage and help both Petkim’s petchem spreads and STAR’s refining margins to outperform peers.

We see European petchem prices rebounding strongly in April as heightened energy and feedstock costs continue to support prices, while a scenario of gas rationing in Europe could make supply dynamics even worse. We expect PETKM to post better margins than the market feared in both Q1 and FY22E, estimating EBITDA of USD400mn in 2022, which is lower than USD684mn in 2021 but still stronger than long-term average of c.USD300mn for the company. As for STAR refinery, we think it would be a major beneficiary of recent spike in diesel and jet fuel cracks, which could lift its EBITDA performance to above >USD2.0bn vs. initial projections of c.USD1.0bn/year. Note that Star has c.70% mid-distillate production yield (low sulfur diesel and jet fuel) and, as we noted, it would be in a better position than other refineries thanks to lower gas costs. Based on this, we now think PETKM’s pending acquisition of 18% stake in Star (for USD720mn) would imply an attractive EV/EBITDA multiple of less than <4.0x (as opposed to previous view in the market that the deal would not be value accretive).

Strong profitability of Star is also likely to help it deleverage faster, bringing forward expected dividends. PETKM currently has a Mcap of USD1.6bn and potential value creation through Star acquisition (expected to be finalized in 2022) could be equal to 25-30% of current Mcap, on our estimates. Even without considering this, we think PETKM is attractively valued at 4.4x EV/EBITDA (adjusting net debt for pre-payments related to purchase of Star stake). Resumption of dividends could be another near-term catalyst as we estimate the company could pay out around TL0.8/share from 2021 earnings, implying 8.5% yield.

TKFEN & MGROS out. We think both stocks offer decent upside (>50%) and their current stock prices already discount almost all risk factors associated with them (poor earnings performance of contracting business in the case of TKFEN and regulatory risks for MGROS). Therefore, we believe long-term value investors should still KEEP these two names, but for the portfolios that focus on RELATIVE performance and beating benchmark index, current underperformances of both TKFEN and MGROS could trigger stop-loss mechanisms, similar to what we apply in our model portfolio as a rule. We hope this move turns out to be regret and long-term value prevails.

Our Model Portfolio outperformed BIST100 by 11.4% year-to-date.

Y.F. Securities Research