Following another strong quarter supported by both healty domestic demand and exports,we increase our F2Y1E-22E EPS on avg by 8% and raise our POs. Our top pick are KOC and Sabanci with total return potential of 45% and 40% respectively. We also reitarate our Buy on Tofas (which was recently added to our Emerging EMEA 1 list) and Neutral on Arcelik and Ford Otosan(FROTO). KOC and Sabanci currently trade at steep NAV discounts od c.30%(vs long-term discount of c.12%) and c.48% (vs long-term discount c.40%), respectively. While Tofas currently trades at a c.11% vs the global peer average of 3%.
Steep discounts at KOC and Sabanci unjustified
We maintain our positive view on both KOC and Sabanci and view the steep c.30% and c.48% NAV discounts as unwarranted given the bullish outlook for their respective holding investments. For KOC, we forecast 2021E dividend income at c.TRY 3.4bn, increasing to c.TRY 5.9bn in 2024E, driven by increasing earnings and dividends from its holding companies. For Sabanci, we forecast dividend income to grow at a c.73% CAGR from 2020-23E. We expect the Banking and the Energy sectors to be the key drivers, accounting for c.70% of total dividend income from FY21E-23E.
Autos: Exports likely to pick-up h/h in 2H21
We continue to prefer Tofas over FROTO, mainly due to a more attractive valuation (TOFAS 2021E PE at 7.7x at vs FROTO at 10.5x) and higher dividend yield. Tofas 2021E DY at c.11% vs FROTO at c.6%). While domestic volumes remain solid (Tofas domestic volumes up 59% y/y in 1H21 vs FROTO up 42%), we expect export volumes to sequentially pick-up driven by lifting of lockdowns across Europe as well as more uninterrupted production in the case of FROTO, which suffered significant downtime in 2Q, mainly due to semi-conductor chip shortages. We expect Tofas’ exports to pick up 47% h/h in 2H21 while Ford Otosan is likely to see a 52% increase h/h.
Arcelik: 2021 EBITDA margin guidance lowered
EBITDA margin guidance for the year is lower now at c.11% vs previous guidance at c.12% (guidance now takes into account the Hitachi and Whirpool acquisitions, which were complete at the beginning of July and end-June, respectively). In line with expectations, Arcelik’s strong EBITDA margin in 1Q21 at c.14.5% was not sustained in 2Q21 (9.8%) due to an increase in raw material prices. 3Q EBITDA margin is likely to be similar to 2Q, while 4Q could see an improvement as the company should be better able to pass on increased raw material prices to end products.
Source: BoFA Securities