DOGUS OTOMOTIV Buy

YKY Company Note
Research
TURKEY
Tulin Tekin
Senior Analyst
[email protected]
DOGUS OTOMOTIV
Buy
DOAS.IS
Coverage initiation
+90 212 284 1933
27 October 2005
10/05
US$
2.34
8/05
0.0
7/05
0.2
0
6/05
0.4
100
4/05
0.6
200
3/05
0.8
300
1/05
TL
31,474
ISE-100
1.0
400
12/04
1.3479
1.2
500
9/04
TL/US$
Rel.to ISE
26%
-8%
Relative to ISE (right)
600
10/04
US$
18%
16%
Market Cap,$ mn
7/04
Price Performance
1-month
Year-to-date
US¢
0.03
371
6/04
TL
4.54
Share Price
MCap (US$ mn)
Buy on revival in demand and prospects for business
diversification
We issue a “Buy” recommendation for Dogus Otomotiv with a target MCap of $504 mn
(TRY6.18 per share) and a 36% upside potential on the back of recovery in the domestic
automotive market and approval of long awaited transfer of nation-wide vehicle inspection
stations by the Council of State. Our valuation does not include the impact of vehicle
inspections, but we think Court decision will serve as a catalyst for value correction.
Uncertainty is over: Council of State allowed the transfer of motor vehicle inspection stations to
the winning consortium, TUV, in which Dogus Oto has a 33.3% stake. Motor vehicle inspection
stations will help Dogus Oto diversify its business from full value dependence on marketing of
imported cars.
Considering Dogus Oto’s 2005 financial performance against domestic automotive market in
general and a healthy growth expectation over 10% in 2006 in the domestic auto market,
Dogus Oto is clearly undervalued as indicated by its 2006F P/E of 4.7x and 2006F EV/EBITDA
of 3.4x. Dogus Oto trades at discounted multiples, partly because it lacks a production base
and is a marketing&sales company for Volkswagen cars; but we think a recovery in the
domestic auto market and contribution of vehicle inspection stations are not yet priced in.
Following two quarters of sales declines, the domestic auto sales revived in the third quarter
with a strong September, in which total auto sales grew by 11%, following 20% in August and
9% in July. Strong y/y growth in the last three months support the view that domestic sales in
2005 won’t be far behind the record numbers of 2004.
Year
2004A
2005F
2006F
Net Income
$ mn Growth
54
-5%
58
7%
79
36%
Key Financials
EBITDA
$ mn Growth
103
20%
82
-20%
111
35%
Key Multiples
Sales
$ mn Growth
1,719
59%
1,550
-10%
1,736
12%
P/E
EV/EBITDA
EV/SALES
04A
6.9
3.7
0.2
05F
6.4
4.6
0.2
06F
4.7
3.4
0.2
This report has been prepared by the Research Department of Yapi Kredi Yatirim Menkul Degerler A.S. Any recommendation contained in this report may not be suitable
for all investors. The information and data contained in this report has been acquired from sources believed to be reliable, however its accuracy and completeness can
not be guaranteed. This report is published solely for information purposes, neither the information nor the opinions expressed herein is to be interpreted as an offer to
sell or a solicitation of any offer to buy securities. Yapi Kredi Yatirim Menkul Degerler A.S. accepts no liabilities for any direct loss arising from the use of this report. This
report may not be reproduced, distributed or published completely or partly by any other party without the prior written consent of Yapi Kredi Yatirim Menkul Degerler A.S.
Dogus Oto
27 October 2005
Research
Dogus Oto: Target MCap of $504 mn represents a 36% upside potential
We valued Dogus Oto with average multiples of international peers for 2006F EV/EBITDA and
P/E. However, we applied a 50% discount to peers’ multiples because Dogus Oto is not a
production company. Unlike other listed Turkish auto companies, Dogus Oto does not have a
production base in Turkey, and is dependent on the importation of Volkswagen family vehicles,
including Volkswagen, Audi, Skoda, Seat, and luxury group Porche, and Scania, Krone trucks
and trailers. Dogus Oto has between 11-12% share in domestic auto sales.
Table 1: International Peer Comparison
Dogus Otomotiv
1)
2006F
EBITDA ($ mn)
111
EV/EBIT DA o f Pee r av erage
N et debt ($ mn) as o f 1H 2005
3.5
9
Es timated Target MCap ($ mn)
38 1
N et Pr ofit ($ mn)
79
P /E of Pe er a verage
2)
4.8
Es timated Target MCap ($ mn)
37 9
Estimated Value o f Automotive Busine ss ($ mn)-a vg.of 1+2
380
+Dogus Ho lding ( 3.98%) -($ mn)*
125
Es timated Target Mcap ($ mn)
50 4
Current Mcap ($ mn)
371
Upside Potential
36%
Target Share P ric e (Y TL)
6.1 8
*: Value attributable to Dogus H olding from its 51% stake in Garanti Bank
Source: Bloomberg, YKY Research
Table 2: Summary Financial Statements
Sales
Gross Profit/ Loss
Gross Margin
Operating Profit/ Loss
Operating Margin
EBITDA
EBITDA Margin
Net Income/ Loss
Net Margin
2004
$ mn
1,719
204
11.9%
88
5.1%
103
2005E
$ mn
1,550
202
13.0%
67
4.3%
82
2006E
$ mn
1,736
243
14.0%
95
5.5%
111
6.0%
54
3.1%
5.3%
58
3.7%
6.4%
79
4.5%
Source: YKY Research
Page
2
Dogus Oto
27 October 2005
Research
Investment Idea
Signs of recovery in the auto market emerged in June 2005 when domestic auto sales declined
by 1% following a 15% fall in 1H05. Following two quarters of sales declines, domestic auto
market closed the third quarter with a strong September: Total auto sales in the domestic
market grew by 11% in September, following a 20% in August and a 9% in July. Strong y/y
growths in the last three months support the view that domestic sales in 2005 may catch up
with the record levels of 2004.
Table 3: January-September Auto Market
Units
Passenger Car
LCV
Total Market
F.Tractors
Sept'05
36,395
25,555
67,321
2,568
Sept'04
33,383
22,226
60,604
2,509
% Change
9.0%
15.0%
11.1%
2.4%
Jan-Sept
2005
2004
300,288
336,173
188,902
180,798
524,346
557,980
20,145
22,374
% Change
-10.7%
4.5%
-6.0%
-10.0%
Source: Automotive Manufacturers’ Association
Financials
Financially Dogus Otomotiv performed quite well in 2005 contrary to automotive market in
general. Although revenues declined by 23% to $726 mn in 1H05, margins did no deteriorate
too much in 1H05 thanks to new vehicle launches and strong brand name of VW in Turkey.
While operating and EBITDA margins fell slightly, gross and net margins actually improved.
Table 4: Dogus Oto 1H05 Summary Financials
IFRS
1H05
YTL mn
39
-5
0
57
50
134
972
1H04*
YTL mn
48
-6
2
102
96
166
1,269
Margins
Net Margin
EBITDA Margin
Operating Margin
Gross Margin
4.0%
5.9%
5.2%
13.8%
3.8%
8.0%
7.6%
13.1%
Net Debt, $ mn
Jun-05
9
Net Profit
Financial Gain/Expense
Monetary Gain/Loss
EBITDA
Operating Profit
Gross Profit
Net Sales
Real
Change
-20%
-18%
nm
-44%
-47%
-19%
-23%
1H05
$ mn
29
-4
0
43
38
100
726
1H04
$ mn
36
-4
1
76
71
124
946
Change
-19%
-18%
nm
-44%
-47%
-19%
-23%
*Restated to 31 Decembe r 2004
Source: ISE
Page
3
Dogus Oto
27 October 2005
Research
Considering Dogus Oto’s 2005 financial performance against domestic automotive market in
general and a healthy revenue growth expectation of 12% in 2006, Dogus Oto is undervalued
in terms of its 2006F P/E of 4.7x and 2006F EV/EBITDA of 3.4x compared to international
peers. On the other hand, Dogus Oto can not be fully compared with Turkey’s main automotive
companies, Tofas and Ford Otosan, because Dogus Oto is fully dependent on the domestic
market while others generate almost 50% of their revenues from exports and Dogus Oto is a
sales&marketing company. However, we think Dogus Oto trades at such discounted price
multiples that a recovery in the domestic auto market and contribution of vehicle inspection
stations are not yet priced in.
We expect Dogus Oto’s revenues in 2005 to stay at $1.55 bn indicating a 10% contraction
however, net income to grow by 7% to $58 mn, indicating 2005F P/E of 6.4x. In 2006, we
expect domestic auto market will experience a healthy growth of over 10% thus enabling
Dogus Oto to realize a 12% growth in revenues and a 35% growth in net income to $79 mn.
Vehicle Inspection Stations
Recently, a good news that long awaited decision of Council of State regarding approval of
transfer
of
vehicle
inspection
stations
has
come.
In
December
2004,
Privatisation
Administration had tendered operating rights of motor vehicle inspection stations for 20 years.
Dogus Oto has a 33.3% participation in the winning company established to operate vehicle
inspection stations. The so-called company TUV (TUV Tasit Muayene Istasyonları Yapim ve
Isletim A.S.) will get a 10% discount and pay $552 mn to the government in cash for the
privatisation of vehicle inspection stations though total privatisation amount is $613.5 mn. TUV
obtained $552 mn of loan from ABN Amro Bank N.V. and Bayerische Hypo-und Vereinsbank
AG. to pay this amount. Despite uncertain and extremely different figures circulated in the
media, TUV is expected to undertake high investment amounts in these stations. Upon the
completion of signing the agreement, stations are required to be operational within 18 months.
The owner/operator of motor vehicle inspection stations will transfer 30% of its annual
revenues to the government in the first three operational years, 40% of its revenues in the
next seven years and 50% of its revenues in the remaining 10 years. Vehicle inspection
stations are expected to create $7 bn of total revenues in 20 years but these figures are not
yet confirmed. However, TUV’s contribution to Dogus Oto will be at the net income level since
Dogus Oto will consolidate it through equity method. But, we think the biggest contribution of
TUV to Dogus Oto will be its addition of a new source of income, i.e diversification.
Page
4
Dogus Oto
27 October 2005
Research
Dogus Oto
Owned by the Dogus Group, Dogus Otomotiv is an automotive distributor of VW brands. Dogus
Otomotiv imports and sells VW, Audi, Seat, Skoda, Porche brand of passenger cars and LCVs,
and also Scania and Krone trucks and trailers. Dogus Otomotiv also provides after sales and
spare parts services to these brands. Dogus Otomotiv is the largest automotive importer and
the third largest distributor in the Turkish domestic automotive market. It operates with 174
dealer and service locations throughout Turkey. Through its affiliates, Dogus Otomotiv also
provides vehicle financing with VDF, fleet sales with Europcar and used vehicle sales with DOD.
Dogus Oto and Volkswagen signed an exclusive distributorship agreement in 1994. The major
drawback of this agreement is that any of the two parties can terminate this distributorship
agreement with a 12-month notification. Despite this fact, the two groups established strong
business relationship in over a decade, during which Dogus Oto raised VW’s market share in
Turkey by 6-folds to 12%. Thus, we do not think a termination of this relationship likely in the
foreseeable future. By contrast, Dogus Oto looks like a potential partner in the event VW
decides to establish a production base in Turkey, possibly for the manufacturing of light
commercial vehicles.
Table 5: Dogus Oto Shareholders and Participations
Dogus Oto Participations, Affiliates, JVs
Company
Dogus Holding
Dogus Oto Pazarlama
Katalonya
Dogus Motor Sporlari
TUV Tasit Muayene Istasyonlari
TUVTURK Guney Tasit Muayene Ist.
Yuce Oto
Dogus Sigorta
VDF Holding
Volkswagen Cons. Fin. (VDTF)
Business Area
Holding company
Marketing and after sale
Distribution of Seat cars
Car racing organisation
Vehicle inspection
Vehicle inspection
Distribution of Skoda cars
Insurance
Consumer financing
Sale of used cars+renting
Dogus Oto Shareholders
Participation
%
3.98%
86.45%
50.00%
99.95%
33.33%
33.33%
50.00%
42.00%
38.22%
48.00%
Shareholder
Dogus Insaat
Somtas Tarim T ic.A.S.
Dogus Yapi San.A.S.
Katalonya
Free Float
Participation
%
35.4%
19.9%
10.0%
0.2%
34.5%
Source: Company
Although Dogus Otomotiv’s stake in Dogus Holding seems small in proportion, it represents an
important value to Dogus Oto because Dogus Holding has a 51% of Garanti Bank, which is
valued at $6.1 bn. Dogus Oto indirectly owns 2.0% of Garanti Bank, representing $125 mn
value to Dogus Otomotiv. In our valuation, we chose to ignore any possible value from other
participations.
Page
5
Dogus Oto
27 October 2005
Research
Table 6: Indirect Ownership in Garanti Bank
Dogus Holding’s sale of Garanti Bank to GE
Dogus Otomotiv
hasn’t been finalized yet. Thus, we used presale participation rate of Dogus Holding in
3.98%
2.0%
($125 mn)
Garanti Bank. But, even after the sale of
Dogus Holding
25.5% of Garanti Bank shares to GE, Dogus
Holding will receive around $1.6 bn in cash,
51.0%
thus the value attributable to Dogus Holding
Garanti Bankasi
will not change due to sale of half of Garanti
($6.1 bn of Mcap)
Bank shares.
Source: Company
Table 7: Dogus Oto Market Share
13 %
12 %
11%
10 %
9%
12 %
13 %
11%
9%
6%
3%
2%
0 .5 %
93
94
2%
95
96
97
98
99
00
01
02
03
04
05E
06E
Source: Company
IPO Performance of Dogus Oto
Dogus Otomotiv started to trade in the ISE on 17 June 2004 with a MCap of $493 mn (per
share price: TRY6.75). Dogus Insaat sold its 34.5% stake in Dogus Otomotiv, generating $170
mn. Dogus Oto shares have declined by 25% in $ terms since the IPO.
Page
6
RESEARCH DEPARTMENT
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