İŞ INVESTMENT – Tekfen Holding TKFEN TI Company Review – 19.08.2016
TKFEN 2Q16 Earnings Review: Operationally weaker than estimates, downward revision in guidance
Bottom-line 8% lower than consensus estimate. Tekfen Holding reported TL73mn of net profit in 2Q16 (+150% YoY), 8% lower than consensus estimate of TL79mn and 3% lower than our estimate of TL75mn. Revenues of the Holding came in at TL1.1bn (+12% YoY) in 2Q16 roughly in line with both our call and consensus call of TL1.1bn. However, operational profit fell short of estimates by wide margin. Consolidated EBITDA came in at TL94mn (+56% YoY) in 2Q16, 17%/15% lower than consensus call of TL113mn/our call of TL110mn respectively, mainly due to the weaker than expected performance of fertilizer business.
Despite significant 120% YoY growth, EBITDA of agri-industry segment fell short of estimates. Agri-industry segment’s revenues decreased to TL360mn (-8% YoY) in 2Q16 due to the 12% YoY decrease in fertilizer prices in US$ terms and 7% YoY decline in fertilizer sales volume. The segment’s EBITDA, on the other hand, significantly increased to TL58mn (+120% YoY) in 2Q16 with a strong margin of 16.1% (up by 9.4pp YoY) thanks to the more favorable balance between fertilizer sales prices and input prices compared to 2Q15. Yet the figure is much lower than our forecast of TL82mn and is the main reason behind 15% lower than expected consolidated operational performance of the Holding.
Strong topline growth in contracting segment. Contracting segment’s revenues increased to TL690mn (+30% YoY) as a result of higher completion rates in projects this quarter. The backlog of the Group slightly decreased to US$1.8bn as of end-2Q16 from US$1.9bn as of end-1Q16. Contracting business’ EBITDA stands at TL44mn in 2Q16 (+14% YoY) exc. Azfen projects along with a margin of 6.3% down by 0.8pp. Including Azfen projects, EBITDA increased to TL61mn with a margin of 8.8%.
Downward revision in guidance. The Management revised its topline guidance to TL4,650 from TL4,888 by c.5%, consolidated EBITDA guidance to TL507mn from TL575mn by c.12% and net profit guidance to TL368mn from TL440mn by c.16%. The major revision came from agri-industry segment as the topline of the segment decreased to TL1,931 from TL2,134 by c.10% and EBITDA to TL304mn from TL364mn by c.16%. The Management expects that the balance between fertilizer sales prices and input prices will deteriorate in the second half of the year and the sales ban on nitrates will continue until the end of the year. Guidance for contracting segment, on the other hand, is kept unchanged.
Comment: We may see a negative market reaction due to the downward revision in guidance and weaker than expected operational performance. Following the guidance revision we revise our SOTP based valuation for Tekfen Holding. Our downward revision in agri industry segment was offset by a commensurate upward revision in contracting segment as we increased YE16 backlog estimates following the addition of Afyon Usak Rapid Train project into backlog. Accordingly, our unchanged 12M PT of TL6.3/share offers a 10% downside potential therefore we downgrade the stock to UNDERPERFORM. The shares currently trades at only 13% discount to its target NAV vs. its 1Y average discount of 33%.
HSBC – Tekfen Holding TKFEN TI Company Report – 11.08.2016
- Downgrade to Hold: New project awards critical to further value creation
- We expect Q2 results to confirm continued tailwinds for the construction line from favourable project mix at present
- Further value creation depends on margin-accretive new project wins while fertiliser line faces a more difficult H2
- Given the share price move, we downgrade to Hold with TP of TRY8.0 (from TRY7.3) on DCF roll-forward and lower WACC
Strong operational performance should continue in Q2: Tekfen Holding will report Q2 results on 18 August and we look for strong operating results from its two key lines; construction and fertilisers. Construction margins should continue to enjoy favourable project mix in the portfolio at present, with high-margin Azerbaijan projects at full-speed in terms of revenue generation and average completion rate of c70%. The fertiliser arm on the other hand should face growing revenue pressure from weak pricing and competition but may still keep margins higher y-o-y as supported by also lower input prices. Our consolidated net profit estimate of TRY81m for the quarter compares with TRY30m in 2Q15 and is marginally above consensus estimate of TRY78m.
Backlog expansion critical in H2 while fertiliser line faces challenges: We remain positive for the construction segment, but at improved current margin levels, a downside risk is new project awards leading to margin and profit dilution. In the low oil price environment, project markets, especially in oil/gas driven geographies remain tight and highly competitive. Also, as less profitable projects in the existing backlog (some of them in Turkey in our view) replace higher-margin ones, there is risk of margin dilution. New project wins totalled cUSD700m year-to-date (USD600m in Turkey) and we assume cUSD750m worth of new awards in the remainder of the year with full-year EBITDA margin estimate of 7.4% vs H1 estimate of 9.8%. For the fertiliser operation, we see headwinds mostly for revenues rather than margins in H2, due to weak global prices and some volume impact from existing nitrate sales ban in Turkey until Feb-2017. (Tekfen sells roughly 100k tons of AN/CAN type fertilisers in H2, which represents c20-25% of all fertiliser sales in H2 and 15-20% of full-year AN/CAN sales, all domestic (no meaningful exports).) Margins should see support from low input prices and the new acid plants operating in the phosphate season.
Downgrade to Hold with new TP of TRY8.0. With downward revisions to our fertiliser line estimates but upward for construction, our 2016e net profit comes down by 7% and 2017e down by 6% while EBITDA goes up by 2% for both years. Tekfen shares have performed remarkably well so far this year (+62% BIST relative). In the face of this significant re-rating, we believe that positives (recovery in construction margins, speed up in new awards, a solid beginning to year by the fertiliser arm in Q1) are mostly in the valuation. While we raise our TP to TRY8.0 from TRY7.3) on DCF roll-forward and lower WACC, we downgrade to Hold from Buy.
İŞ INVESTMENT – Tekfen Holding TKFEN TI Company News – 09.06.2016
According to Daily Haberturk, the Government suspends the sale of nitrate based fertilizers due to terrorist attacks with ammonium nitrate fertilizers. Nitrate based fertilizer accounted for 36% of total fertilizer sales volume and 26% of revenues of Tekfen in 2015. Seasonally 1Q and 2Q are the strongest periods for nitrate based fertilizers. Therefore, we don’t expect a substantial impact on domestic sales volume in 2016. We expect sales to resume following the necessary measures such as implementing fertilizer sales tracking methods.
İŞ INVESTMENT – Tekfen Holding TKFEN TI Company Report Price Target Revision – 11.05.2016
Trading at historic low discount
Highlights of the Quarter
Consensus beating bottom-line. Tekfen Holding reported TL149mn of net profit in 1Q16, up by 77% YoY. The figure is much stronger than our estimate of TL 105mn and consensus estimate of TL114mn on the back of strong operational profitability both in agri-industry and contracting segments.
Strong revenue growth in agri-industry and contracting segments. Revenues of the Holding came in at TL1.37bn (+%26 YoY) in 1Q16 in line with estimates. Agri-industry segment’s revenues increased to TL731mn (+25% YoY) in 1Q16 thanks to the 5% YoY increase in TL-based fertilizer prices and 19% YoY growth in fertilizer sales volume as the dealers shifted their early procurement from the previous quarter to this quarter due to VAT lift off. Contracting segment revenues increased to TL628mn (+30% YoY) as a result of higher completion rates in projects. The backlog of the Group increased to US$1.9bn as of end-1Q16 from US$1.7bn as of YE15 with the addition of TANAP compressor project (US$457mn) in this quarter.
Significant improvement in operational profitability. Consolidated EBITDA came in at TL176mn (+163% YoY) in 1Q16 higher than our estimate of TL130mn and consensus call of TL143mn. Agri-industry segment’s EBITDA doubled to TL120mn YoY in 1Q16 with a strong margin of 16.4% (up by 6.1pp YoY) thanks to the more favorable balance between fertilizer sales prices and input prices compared to the same quarter last year. Contracting business’ EBITDA increased to TL71mn 1Q16 (vs. TL 18mn in 1Q15) including Azfen projects along with a strong margin of 11.3% (vs. 3.8% in 1Q15) thanks to lack of one-off expenses in ongoing projects.
Kept its 2016 guidance unchanged. Following the strong 1Q16 results the Management did not change its 2016 guidance. The Management expects Agri-industry segment to post TL2,134mn (2015FY:1,659) of revenues and TL364mn of EBITDA (2015FY: TL145mn). The figures are TL2,648mn (2015FY:TL2,153mn) and TL228mn (2015FY: TL164mn) for contracting segment. Accordingly, the consolidated revenues is expected to reach TL4,888mn (+26% YoY) and EBITDA to TL575mn (+96% YoY) in 2016 with a margin of 11.8% (+4.2pp YoY). The Management also forecast to post TL440mn of consolidated net profit in 2016 (+128% YoY). The robust 1Q16 results will provide a strong cushion for the Management to meet its aggressive guidance, in our view.
Impact on Valuation & Outlook Revise up our earnings estimates for 2016. We rise our 2016 agri-industry and contracting segment’s EBITDA estimates by 45% and 12% to TL348mn and TL220mn, respectively.
Maintain MARKETPERFORM. Accordingly, we revise up our SOTP based valuation for Tekfen Holding. We increase our 12M PT to TL6.3/share (from TL5.15/share) and maintain our MARKETPERFORM recommendation for stock. The shares currently trades at 19% discount to its target NAV vs. its 3Y average discount of 40%.
İŞ INVESTMENT – Tekfen Holding TKFEN TI Company News – 03.03.2016
Tekfen Holding announced to propose a share buyback program in the next General Meeting to purchase shares up to 10% of paid in capital (37mn shares) with a maximum price of 6TL/share within the six months after the approval of program in the AGM. The total resources allocated for the purchases is at most TL222mn. We deem the news positive as it should support the share price.