Including Enerjisa to our top picks: Building upon our rating upgrade report (Oct. 8), we are including Enerjisa to our top picks. The primary drivers of the upgrade (and inclusion in our top picks) are a combination of company-specific factors (acceleration in CAPEX and absolute RAB growth, dividend yield), the macro backdrop (continued inflationary pressures, outlook on Turkey’s real interest rates, etc) and relative valuation (wider discount to peers). We like Enerjisa’s business model which features a favourable real return component and high operating visibility, underpinned by management’s execution capabilities, which could garner more interest, particularly in periods of lower macro/market visibility. The details of our argument are as follows:
Valuation discount vs peers widened visibly: Enerjisa’s shares have underperformed the BIST-100 by 10% YTD while declining by 27% in USD. More importantly, shares have trailed peers on a FY22E P/E (6.2x) and EV/EBITDA (4.3x) basis, with discount to peer multiples expanding by c.15pps YTD to c.55%. While we acknowledge that the bulk of the divergence is related to volatility in sentiment towards Turkish assets, the magnitude of the discount is compelling, in our view.
CAPEX acceleration/normalisation to benefit absolute RAB growth: Following relatively subdued CAPEX in 2020 due to pandemic-related constraints, we expect Enerjisa’s CAPEX to continue its normalisation trend over the coming quarters. Accordingly, we expect FY21 CAPEX to increase by 57% y/y, to TL2.8bn, and by 15% y/y, to TL3.2bn, in FY22. While higher CAPEX translates to lower FCF in the near term, we view it as an important L/T value driver for Enerjisa as it expands RAB (FY20: TL9.4bn; FY21E: TL11.2bn; FY22E: TL12.3bn) subject to the inflation + WACC income mechanism.
We expect the favourable WACC of 12.3% to be sustained until end- 2025: We expect the EMRA to maintain the current WACC level at 12.3% until the end of 2025 due to: 1) the necessity for favourable cash flows for the distribution companies to CAPEX and to sustain the overall financial health of the sector, given their exposure to TL weakness from FX-denominated financial obligations); and 2) continued investment needs in historically underinvested grids, coupled with the above-EU-average population and electricity consumption growth outlook in Turkey. While we are not anticipating an increase in regulated WACC until 2025, EMRA’s proactive interim (in 2018) increase of the real return component to 13.6% from 11.9% during the third regulatory period reflects EMRA’s stance, in our view.
Following the inclusion of Enerjisa, the constituents of our model portfolio are Pegasus, Kardemir, Coca Cola Icecek, MLP Care, Arcelik, Tofas, Alarko Holding, Aksigorta and Enerjisa. Our Top Picks portfolio has outperformed the BIST-100 by 18.5% YTD.
ÜNLÜ & Co