Turkish top stock picks

Adding OTKAR

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.

Removing TKFEN

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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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.