We think OTKAR continues to have strong growth prospects both in defense and commercial vehicle business lines. For commercial vehicle business, the decline in tourism activity due to Covid-19 could be offset by possible increase in demand from municipalities in an attempt to avoid overcrowding in public transportation. OTKAR recently submitted the best bid in a domestic tender for 304 buses worth approximately TL476mn (17% of total revenue, 40% of commercial segment revenue estimates for 2020E). Note also that manufacturing deal with Iveco would also support growth outlook from 2021 onwards.
As part of the five-year deal signed back in February, more than 5,000 vehicles would be manufactured by OTKAR implying about USD100mn/year incremental revenue based on our estimate. We also believe there could be further synergies between OTKAR and IVECO in the longer term. For defense vehicles, we expect export-driven growth to continue with current backlog of USD273mn providing visibility for the segment revenues at least till 2021-end. Considering potential new deals, we estimate defense segment revenue to grow at a CAGR of 14% (USD) between 2019-2025. Our estimates point to P/E multiples of 9.1x/8.1x for 2020E and 2021E and given potential pick-up in sales after 2021 with potential defense deals and contribution from IVECO deal, we think these multiples are attractive.
Our TP of TL185 offer 30% upside potential. While we estimate flattish EBITDA margin performance in 2020E, we also note that OTKAR could see a positive impact from lower sales&marketing spending (15.9% of sales in 2019) as the pandemic would delay defense exhibitions worldwide, which could be an upside risk to margins.
TKFEN delivered a strong performance since its inclusion to our portfolio in March with absolute performance of 47% and outperformance of 10% relative to BIST100. The company announced last week that it is awarded USD150mn contract for connection roads to Al Khor motorway in Qatar, which is equal to 10% of Tekfen’s backlog and expected revenue (about USD75mn/year) would be 7% of our 2020E revenue estimate for construction segment. With limited upside potential of 11% to our latest TP of TL19.1 (which we revised recently from TL17.1), we are taking profits and remove TKFEN from our top picks.
Excerpt, Yatirim Invest equity strategy report
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