Recommendation summary
- The underperformance of SAHOL stock vs its listed parts YTD has pushed the current NAV discount towards c50%
- We find this unjustified given strong upturn in non-bank profits and continued determination on strategy execution
- Raise TP to TRY95.00 (from TRY55.00); retain Buy; trades at 2023e PE of 2.3x, PB of 0.6x, current NAV discount of 49%
NAV discount widens again
Sabanci has underperformed the vast majority of its listed parts and the BIST100 index year-to-date 2023, pushing its current discount to listed parts and NAV to 26% and 49%, respectively, from 13% and 36% at year-beginning, according to our calculations. The NAV discount is at one of the highest levels historically and above the past 10-year average of c40%.
Discount unjustified, in our view
Sabanci’s 40.75% stake in Akbank (AKBNK, CP TRY28.56, Buy), the largest single-stock value driver in the NAV, represents c53% of Sabanci’s current market value, up from 45% at year-beginning. On the other hand, fundamentals show notably stronger growth in non-bank profits (66% y-o-y in 9M23) vs the bank (36% y-o-y) and thus improved contribution of non-bank operations to group profits (38% in 9M23 vs 33% in 9M22).
The largest contributor to non-bank profits has been the energy segment (56% of non-bank profit in 9M23), thanks partially to the unlisted energy generation unit which is the second-largest NAV contributor after the bank and which grew its profits by 84% y-o-y.
Determined pursuit of strategic plan
In addition to the strong performance of non-bank units and hence a more balanced portfolio in terms of profit distribution, we see no reason for a widening of the NAV discount towards all-time high levels from a strategy perspective. Steps are being taken to grow in essentially energy, advanced materials,and digital technologies, which overall serve the aim of growing the core operations, entering new growth platforms, and diversifying geographically to improve international revenues.
Effects are small yet (such as new digital operations and investments into renewable energy in the US) but could prove value-accretive over time.
Capital allocation rests on three pillars
Investments for growth (to double as a percentage of non-bank revenue in the medium term plan for 2022-26), sustainable dividends (5-20% of net income) and share buy-back (up to 5% of capital) comprise the three pillars of the capital allocation roadmap. Our only reservation is that we would put more emphasis on dividends over share buy-backs among capital return options.
Raise target price to TRY95.00 (from TRY55.00); retain Buy
We increase our target price primarily based on increases in the valuations for the listed subsidiaries. We value its non-bank portfolio at average c6x 2023-24e earnings (vs 6x 2023e previously) which results in our fair value NAV discount of 25% (from 20%).
Our TP implies a current NAV discount of 13%, upside of 70.4%; we retain our Buy rating.
Excerpt from HSBC company report
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