DOGUS OTOMOTIV

May 3, 2006
Equity Research
DOGUS OTOMOTIV
TURKEY
Rating: BUY (maintained)
Current Price: YTL11.00 / US$8.36
Ticker: DOAS.IS
Target Price: YTL13.60 / US$10.30
Upgrading Forecasts and Valuation…
Forecasts & Valuation
2003
2004
2005
2006E
2007E
914
1,719
1,827
2,032
2,173
EBITDA (US$mn)
69
99
125
151
162
Net Profit (US$mn)
57
53
83
124
133
n.p.
(12)
0
(28)
26
(57)
33
(121)
53
(178)
Sales (US$mn)
†
Cash Dividend (US$mn)
Net Debt / (Cash)‡ (US$mn)
EV/EBITDA (x)
13.2
9.0
6.9
5.3
4.6
P/E (x)
16.1
17.2
11.1
7.4
6.9
Dividend Yield (%)
n.av.
0.0
2.8
3.6
5.8
Market Cap (US$mn)
920
†
Shares Outstanding (mn)
YTL / US$
110,000
ISE 100 (YTL / US$)
1.32
44,030 / 33,470
Free Float (%)
34
YTD Perf (US$, %)
71
Daily Turnover (3mo, US$mn)
3.1
YTD Perf (Rel, %)
51
†
•
‡
Gross, paid out in the same year plus net of rights issues, if any; After dividend payments/rights issues, if any
Dogus Otomotiv offers one of the purest exposures to the growing Turkish automotive
market and, therefore, to the Turkish consumer market – at a discount. Moreover, the
Company has the potential to diversify in the long-term and accelerate its growth by
further expanding into automotive-related businesses.
•
The Turkish automotive market is expected to double its growth to 6% YoY in 2006,
although 1Q06 data indicates this may even be surpassed. Having introduced numerous
new models in 2H05, while continuing to serve different market segments thru various
brands, the Company is set to outperform the market and raise its unit sales by 15% in
2006.
•
Mostly due to better-than-expected 2005 results and 1Q06 shipment performance we
have upgraded our 2006 EBITDA and earnings forecasts by 9% and 32%, respectively.
The earnings upgrade includes the planned corporate tax rate cut in 2006. The Company
is one of the most significant beneficiaries of the cut.
•
The stock trades at 2006E EV/EBITDA (adjusted) and P/E multiples of 4.5x and 7.4x,
respectively. When compared with its listed international peers, these imply on average
a 37% upside. Our target price for Dogus Otomotiv, fully-based on our DCF analysis,
implies 23% upside for the stock.
•
Based on the upside offered by our target price and the earnings growth foreseen for
2006 and 2007, we maintain our ‘BUY’ rating for the stock.
Alper Paksoy (+90-212-244 5566 x1254; [email protected])
THIS PAGE IS INTENTIONALLY LEFT BLANK
May 3, 2006
DOGUS OTOMOTIV
Update on Turkish Automotive Industry and Dogus Otomotiv
The Turkish automotive market (defined here as passenger car plus light commercial vehicles) grew by only 3% in
2005 after the 85% growth of 2004 as a significant portion of the 2004 demand increase had stemmed from pent-up
demand. The year 2004 being the first one of major declines in interest rates, and the only year for the application of
the scrap-based tax incentive, caused the headline growth rate in 2005 to appear weak compared with the previous
year. In addition, taxes were raised, especially for passenger cars in late 2004, resulting in slight passenger car market
YoY contraction in 2005.
Turkish Automotive Market
(‘000 vehicles)
2004
2005
Passenger Car
452
443
Change (YoY)
88%
-2%
LCV
245
277
Change
88%
13%
Total
697
720
Change
85%
3%
2006E
469
6%
291
5%
761
6%
2007E
498
6%
306
5%
803
6%
2008E
522
5%
321
5%
844
5%
1Q06
81
13%
48
1%
129
8%
Source: The Company, Global Securities
The Turkish automotive market has now largely returned to its normal growth track, and we forecast it growing by
6% YoY in both 2006 and 2007. While the market has grown by about 8% YoY in 1Q06, some of this is due to
abnormally depressed sales in January and February 2005.
The company increased its market share (PC + LCV) by 0.7p in 2005 to 11.8%, especially thx to the new models
introduced in 2H05. Consequently, total shipments have risen 13% to 86.7k vehicles. The positive effects of the
changes have been continuing in 2006 so far as indicated by the continued rise in market share in 1Q06 to 13.1% (up
by 3.2pp YoY). We forecast the company’s overall market share rising by 1.1pp in 2006 to 12.8%, and slightly higher
levels in the following year. Note that the company’s sales performance has exceeded our expectation so far in 2006,
and accordingly, we have raised our unit sales forecasts for 2006 and 2007.
Dogus Otomotiv Unit Sales
(‘000 vehicles)
Passenger Car
Change (YoY)
Market share
LCV
Change
Market share
2004
50.1
49%
11.1%
27.0
148%
11.0%
2005
51.5
3%
11.6%
33.2
23%
12.0%
2006E
58.2
13%
12.4%
39.3
19%
13.5%
2007E
63.7
9%
12.8%
41.3
5%
13.5%
2008E
67.4
6%
12.9%
41.7
1%
13.0%
1Q06
9.9
65%
12.2%
7.1
21%
14.6%
PC + LCV
Change
Market share
Truck
Change
Total
Change
77.1
73%
11.1%
1.8
21%
78.9
70%
84.7
10%
11.8%
2.1
13%
86.7
10%
97.5
15%
12.8%
2.3
9%
99.8
15%
105.0
8%
13.1%
2.5
10%
107.5
8%
109.1
4%
12.9%
2.7
7%
111.8
4%
16.9
43%
13.1%
0.5
40%
17.4
43%
Source: The Company, Global Securities
Global Securities - RESEARCH
3
May 3, 2006
DOGUS OTOMOTIV
Revised Financial Forecasts
As the Company announced results better than we had expected in 2005 and 1Q06 unit sales performance has also
exceeded our expectations, we have revised our financial forecasts as follows:
Dogus Otomotiv Revised Forecasts
(mn USD)
Revenues
EBITDA
EBITDA Margin
Earnings
Net margin
2006
Old
New
1,907
2,032
138
151
7.2%
7.4%
94
124
4.9%
6.1%
2007
Old
New
2,134
2,173
159
162
7.4%
7.4%
110
133
5.2%
6.1%
Source: Global Securities
We have raised our revenue forecast mainly for 2006 (+7%) to US$2.0bn, which now represents an 11% YoY
increase in revenues. The rise is partly based upon higher volume estimates and partly on improved pricing
environment expectations. Our 2007 revenue forecast is raised by 2% to US$2.17bn, mainly due to better volume
estimates.
Our EBITDA estimate is now raised by 9% to US$151mn for 2006, indicating a 21% YoY growth. Most of the
growth comes from our higher revenue expectation for 2006. We maintain our 2007 EBITDA forecast at around
US$150mn.
Our earnings forecast for 2006 has been raised by 32% to US$124mn due to i) higher EBITDA estimate and ii)
higher income expectation from associates as implied by the year-end 2005 financials and ii) the 10 pp decline in
corporate tax rate planned for 2006. Our 2007 earnings estimate has been raised by 21% to US$133mn due to i)
higher income expectation from associates and ii) decline in corporate tax rate.
Global Securities - RESEARCH
4
May 3, 2006
DOGUS OTOMOTIV
Valuation
Because of further improvements to the visibility of the Turkish automotive market, we have now fully switched to
DCF analysis in valuing Dogus Otomotiv. DCF analysis of the company yields a target Mcap of US$1.09bn, or an
upside of 23% (adjusted). However, in order to provide investors an alternative view of the stock’s valuation, we also
provide an int’l peer multiple comparison, which implies an upside of 37%.
Discounted Cash Flow Analysis
Our DCF analysis yields a valuation of US$1.09bn for the company, implying 23% upside (adjusted).
We have based our valuation on a 7.5% Turkish long-term Eurobond rate and a 4% equity risk premium, yielding a
WACC of 11.5% for a company without any leverage and a beta of 1.0. We have attached a beta of 1.2 for the stock
due to the cyclical nature of the Company’s main business and significant short and mid-term FX mismatch between
revenues and costs. Due to a high beta, we arrive at a WACC of 13.5% for the stock.
Discounted Cash Flow Valuation of Dogus Otomotiv
(mn USD)
2006E
2007E
2008E
2009E
2010E
2011E
2012E
2013E
2014E
2015E
Revenues
Growth
Gross Profit
Gross Margin
Operating Expenses
Op. exp. / Revenues
Operating Profit
Operating Margin
EBITDA
EBITDA Margin
Taxes on EBIT
(Incr) / Decr in Net Working Capital
Capital Expenditures
Operating Free Cashflows
2,032
11%
314
15.4%
172
8.5%
141
7.0%
151
7.4%
(28)
(11)
(10)
102
2,173
7%
338
15.5%
187
8.6%
151
7.0%
162
7.4%
(30)
(10)
(10)
112
2,266
4%
346
15.3%
200
8.8%
146
6.4%
158
7.0%
(29)
(9)
(15)
105
2,440
8%
371
15.2%
220
9.0%
150
6.2%
163
6.7%
(30)
(12)
(15)
106
2,625
8%
396
15.1%
240
9.1%
156
6.0%
171
6.5%
(31)
(13)
(17)
109
2,827
8%
423
15.0%
261
9.2%
162
5.7%
177
6.3%
(32)
(15)
(17)
113
2,952
4%
434
14.7%
276
9.4%
157
5.3%
174
5.9%
(31)
(5)
(20)
117
3,083
4%
444
14.4%
288
9.4%
156
5.1%
173
5.6%
(31)
(5)
(20)
117
3,219
4%
455
14.1%
302
9.4%
153
4.8%
172
5.3%
(31)
(5)
(20)
116
3,361
4%
466
13.9%
315
9.4%
151
4.5%
170
5.1%
(30)
(6)
(20)
114
Discount Rate
Discount Factor
PV of Op. Fcf
13.5%
1.15
89
13.5%
1.30
86
13.5%
1.48
71
13.5%
1.68
63
13.5%
1.90
57
13.5%
2.16
52
13.5%
2.45
48
13.5%
2.78
42
13.5%
3.16
37
13.5%
3.58
32
Unlevered Beta
Terminal Growth Rate
Terminal Discount Rate
1.20
2.0%
13.5%
Terminal Value
PV of Terminal Value
PV of Op. Fcf
Core Business Value
1,015
283
577
860
Participations
Dogus Holding (Book Value)
Others (Book Value)
Net Debt (Cash)
Equity Value
176
153
24
-57
1,094
Nominal No. Of Shares (mn)
Adjusted No. Of Shares (mn)
110.0
105.8
Target Price (USD / share)
Target Price (YTL / share)
10.3
13.6
Source: Global Securities
Global Securities - RESEARCH
5
May 3, 2006
DOGUS OTOMOTIV
In our long-term assumptions, we forecast the Company being able to realize a 6% top-line growth until 2015.
However, we estimate that its (EBITDA) margin will decline to levels slightly higher than those of companies in
similar businesses in developed markets. We assume the Company’s EBITDA margin declining to about 5% in the
long-run from the current 7%.
We value the Company’s unconsolidated participations based on their respective book values. Given that industrials
in our coverage universe trade on the average at 2005 P/BV of 2.5x, this is a conservative estimate.
The Company has the following minority shareholdings. Note that one of the participations, Dogus Holding, owns
19.96% of Dogus Otomotiv. We take this cross-shareholding into account in calculating our target price for the stock.
Dogus Otomotiv Unconsolidated Participations (2005)
Participation
Yuce Auto
VDF Holding
Dogus Sigorta
VW Dogus Tuketici Finansmani
Dogus Holding
TUVTURK Kuzey
TUVTURK South
Stake
(%)
50.0
38.2
42.0
48.0
3.9
33.0
33.0
Book Value
of Stake
(mn USD)
4.0
7.6
1.3
7.9
153.2
2.8
0.0
Business
Skoda Distribution
Holding Company
Auto Insurance
Consumer Finance
Holding Company
Vehicle Inspection
Vehicle Inspection
Source: The Company, Global Securities
The court case against the Vehicle Inspection Stations project is ongoing, and the outcome remains highly uncertain.
Therefore, we have not included this project in our valuation except for the total US$3mn book value of the two
companies incorporated for this project.
Global Securities - RESEARCH
6
May 3, 2006
DOGUS OTOMOTIV
Multiple Comparison
Our comparison of Dogus Otomotiv with international peers – taking into account its unconsolidated peers - implies
that the stock is undervalued by about 27%, i.e. has an upside of 37%.
We have compared Dogus Otomotiv with three international peers whose main businesses include automotive
distribution and related services. We took into account the book value (US$176mn) of the Company’s unconsolidated
participations while doing the comparison. Based on its 2006E adjusted EV/EBITDA of 4.5x, the stock trades at a
25% discount to its int’l peers. Based on its 2006 P/E of 7.4x, the stock trades at a 29% discount to its int’l peers.
Int’l Peer Multiple Comparison of Dogus Otomotiv
2-May-06
D'Ieteren - Belgium
Astra Int. - Indonesia
SAG - Portugal
Dogus Otomotiv
Mcap
EV~
P/E
EV/EBITDA
Business
(US$mn) (US$mn) 04
05 06E 04
05 06E
Auto Glass / Distribution / Rental
1,738
4,181 30.6 17.4 15.2 5.6
6.5 5.2
Manuf. / Dist. / Finance / Agric.
5,447
6,664
9.0
9.7
9.4 10.0
8.1 7.2
Distribution / Finance
425
802 21.1 10.2
6.8 8.6
8.6 7.1
Average: 20.3 12.4 10.5 8.1 7.7 6.5
EV/Sales
04
05 06E
1.0 0.7
0.7
1.3 1.1
1.0
0.9 0.9
0.8
1.1 0.9
0.8
Auto Distribution / Finance
Adjusted For Participations
0.5
0.4
920
920
857 17.1 11.1
681
7.4
8.6
6.9
6.9
5.4
5.7
4.5
0.5
0.4
0.4
0.3
Source: Bloomberg, Global Securities; ~based on current net debt
Global Securities - RESEARCH
7
May 3, 2006
DOGUS OTOMOTIV
Financials
Dogus Otomotiv Financials
(mn USD)
2004
2005
2006E
2007E
2008E
INCOME STATEMENT
Revenues
COGS
Gross Profit
Operating Expenses
Marketing & Selling Expenses
G&A Expenses Bef. D&A
D&A
Warranty Expenses
Other operating income, net
Operating Profit
EBITDA
Other income, net
Financial Expenses
Earnings before mon. gain/loss & taxes
Monetary Gain (Loss)
Earnings before taxes
Tax Provision
Minority Interest
Earnings
IFRS
1,719
1,504
204
119
64
36
11
7
3
88
99
7
14
82
1
83
29
0
54
CMB
1,827
1,553
264
153
76
50
9
18
4
115
125
16
13
118
0
118
35
1
83
CMB
2,032
1,718
314
177
91
55
10
20
4
141
151
17
6
152
0
153
31
1
124
CMB
2,173
1,836
338
191
98
61
11
22
4
151
162
18
6
164
0
165
33
1
133
CMB
2,266
1,921
346
205
104
66
12
23
5
146
158
19
4
161
0
163
33
1
131
BALANCE SHEET
Cash & cash equivalents
Trade Receivables
Investment Securities
Inventories, net
Other current assets
Total current assets
Available for sale financial assets
PPE, net
Intangibles, net
Other non-current assets
Deferred tax assets
Total non-current assets
Total Assets
53
60
0
274
18
406
90
75
5
2
2
173
579
94
103
0
273
28
498
176
73
5
1
2
257
755
121
108
0
298
31
558
168
73
6
3
0
251
809
178
121
0
318
33
648
162
73
6
3
0
244
892
222
132
0
332
34
720
155
77
6
3
0
241
961
ST bank borrowings
Trade Payables
Taxes Payable
Accruals and other current liabilities
Total current liabilities
Long term bank borrowings
Other non-current liabilities
Total non-current liabilities
Minority Interests
Total Shareholders' Equity
Total liabilities & Shareholders' Equity
16
305
0
18
339
9
4
14
6
220
579
16
324
0
35
375
21
5
26
5
349
755
0
342
0
38
380
0
5
5
4
419
809
0
364
0
41
405
0
5
5
3
479
892
0
381
0
42
423
0
5
5
2
531
961
Source: Global Securities, The Company
Global Securities - RESEARCH
8
May 3, 2006
DOGUS OTOMOTIV
Dogus Otomotiv Financial Ratios
As a % of revenues
COGS
Depreciation
Gross Profit
Operating Expenses
Marketing & Selling Expenses
G&A Expenses Bef. D&A
Warranty Expenses
Other operating income, net
Operating Profit
EBITDA
Financial Expenses
Earnings before mon. gain/loss & taxes
Monetary Gain (Loss)
Earnings before taxes
Tax Provision
Earnings
Cash Conversion Cycle
Days in Receivable
Days in Inventory
Days in Payable
Leverage Ratios
Gross Debt-to-Equity
Net debt-to-Equity
Net debt-to-EBITDA
Profitability Ratios
ROA
ROE
Effective Tax Rate
Source: Global Securities
Global Securities - RESEARCH
2004
IFRS
87.5%
0.6%
11.9%
6.9%
3.7%
2.1%
0.4%
0.2%
5.1%
5.8%
0.8%
4.8%
0.1%
4.8%
1.7%
3.1%
2005
CMB
85.0%
0.5%
14.5%
8.4%
4.1%
2.7%
1.0%
0.2%
6.3%
6.8%
0.7%
6.4%
0.0%
6.4%
1.9%
4.5%
2006E
CMB
84.6%
0.5%
15.4%
8.7%
4.5%
2.7%
1.0%
0.2%
7.0%
7.4%
0.3%
7.5%
0.0%
7.5%
1.5%
6.1%
2007E
CMB
84.5%
0.5%
15.5%
8.8%
4.5%
2.8%
1.0%
0.2%
7.0%
7.4%
0.3%
7.5%
0.0%
7.6%
1.5%
6.1%
2008E
CMB
84.7%
0.5%
15.3%
9.0%
4.6%
2.9%
1.0%
0.2%
6.4%
7.0%
0.2%
7.1%
0.0%
7.2%
1.4%
5.8%
4.9
12.7
66.1
73.9
8.2
20.5
63.8
76.1
9.7
19.4
63.0
72.7
10.6
20.3
62.8
72.4
11.6
21.2
62.7
72.3
1.63
-13%
-28%
1.16
-16%
-46%
0.93
-29%
-83%
0.86
-37%
-114%
0.81
-42%
-146%
10.8%
25.1%
12.4%
29.1%
15.5%
31.6%
15.3%
28.9%
13.8%
25.3%
35%
30%
20%
20%
20%
9
May 3, 2006
DOGUS OTOMOTIV
Relative to ISE
NATIONAL - 100
0.30
DOGUS OTOMOTIV USD & Relative Prices
USD
9.00
8.00
0.25
7.00
0.20
6.00
5.00
0.15
4.00
0.10
3.00
2.00
0.05
1.00
0.00
04/05
05/05
06/05
07/05
08/05
09/05
10/05
USD
Global Securities - RESEARCH
11/05
12/05
01/06
02/06
03/06
0.00
04/06
Relative
10
May 3, 2006
DOGUS OTOMOTIV
This material was produced by Global Menkul Değerler A.Ş. (“Global Securities”) (“GS”) or its Affiliates, solely for information purposes and for the use of the
recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the
United States of America by Global Securities (USA), Inc. and elsewhere in the world by GS or an authorised affiliate of GS (such entities and any other entity,
directly or indirectly, controlled by GS, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of GS or its Affiliates or any
other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources which GS
or its Affiliates considers to be reliable. None of GS or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such
information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. One or more of GS or its
Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon either
on their own account or on behalf of their clients. GS or its Affiliates may, to the extent permitted by law, act upon or use the above material or the conclusions stated
above or the research or analysis on which they are based before the material is published to recipients and from time to time provide investment banking, investment
management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Global Securities (USA), Inc. is distributing this document in the United States of America and, in connection therewith, accepts responsibility for its
contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a
representative of Global Securities (USA), Inc.
© 2006 Global Menkul Değerler A.Ş.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior consent of Global Menkul Değerler A.Ş.
Global Securities - RESEARCH
11