Restructuring and new investment plans create optimism, but the current performance says ‘wait-and-see’
Divestitures/new partnerships could act as catalysts, but any prolonged weakness in existing operations would be a drag
Our sum-of-the-parts with a fair 30% NAV discount leads to a new TRY46.20 TP from TRY34.00;
Maintain Hold
Renewed strategy sounds positive, but there are risks. The new five-year strategic plan announced in June aims to reposition the loss-making construction business as a leaner contractor with a focus on energy solutions, and allocate USD1bn in total into vertical integration for fertilisers and creation of a green energy line as a third growth platform in the portfolio. To this end, divestitures (land, property, non-core operations) and partnership/alliance opportunities in construction and fertilisers will be sought.
Judging by the share price reaction to the news, the market has given management limited credit in advance and is probably waiting for solid action and timely execution. The weak cycle that the two core operations (construction and fertilisers) are going through could be another reason for a ‘waitand-see’ mode as well as the group’s volatile record in general with respect to the sustainability/stability mentioned in the company’s new strategy.
Fertilisers are up for a recovery, construction still under pressure. Tekfen’s portfolio has produced weak results YTD, with losses booked in two core operations along with a notable deterioration in the group’s net cash position, turning to net debt in Q2. Fertiliser prices continued their downtrend, while margins improved notably q-o-q from the extremely depressed levels in Q1, but FX losses kept the bottom line in the red. Construction continued to generate negative operating margins, excluding one-off income from Libya. Among the two, we expect visible earnings recovery from fertilisers in H2, lifting overall group profitability, while construction will likely remain under pressure. Based on Tekfen’s reclassification of the segmental breakdown of its portfolio, we see an Engineering & Contracting (i.e. construction) EBITDA margin of 2.7% for YE23e (vs 5.1% in H1) and Agri-Industry (mainly fertilisers) margin of 14.5% (vs 7.4% in H1). We cut our 2023e consolidated group EBITDA by 15% and net profit by 49%, but are 17%/12% above company guidance, respectively.
Raise TP to TRY46.20, retain Hold rating. Our USD based sum-of-parts approach yields an NAV of USD902m, down from USD984m previously, due mainly to deterioration in net cash position. After a 30% holding discount (unchanged), we arrive at a new higher TP of TRY46.20 (from TRY34.00) mainly due to a higher spot USD/TRY rate (27.05 from 18.28 previously). On our revised numbers, Tekfen trades at 2023e PE of 9.6x and EV/EBITDA of 3.9x, which are neither compelling nor stretched, in our view. We prefer to wait for more concrete steps to be taken on the new strategy.
By HSBC, excerpt
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