Too early to worry about a downturn yet. The operating environment that drove margins and profits of the Turkish vehicle industry in 2H20 remains largely valid at the beginning of 2021. Sales mixes are still in favour of the high-margin domestic market (January vehicle sales up 60% y-o-y in Turkey) and ongoing TRY strength provides a good cushion against cost pressure from the uptrend in material prices.
2020 was proof that a strong domestic market is key for the earnings performance of even major exporters. While our 2021 outlook is a noteworthy recovery in export volumes on the weak base of last year (vs a slight contraction in the domestic market), we expect it to occur mainly in the second half as the impact of the pandemic keeps shipments (to Europe) under pressure currently, while local demand remains vibrant. Similarly, the return of delayed “opex/capex” from 2020 implies moderately softer margins and a downturn in free cash generation, more visibly in the second half, as we expect.
Buy on Ford, Tofas, and TT, Hold on Dogus – raise TPs on higher forecasts. We project further earnings growth and valuation upside for all but importer Dogus in FY21. We project net profit growth of 60% for Turk Traktor, 28% for Ford Otosan, 16% for Tofas and -12% for Dogus. Turk Traktor offers the strongest sales and earnings momentum in the first half of 2021 in our view. Similarly, Ford Otosan should see limited contraction in its operating margins in H1 while Tofas offers optionality for filling its ample capacity with new products (post the FCA-PSA merger) without substantial investments. With revised estimates, we increase our TPs, as summarised in the table below.
We maintain our Buy ratings on Ford, Tofas and Turk Traktor (due to strong earnings momentum in at least 1H21) and Hold on Dogus. Our new TPs imply a 2021e PE of 12x for Ford, 10x for Tofas and Turk Traktor each and 8x for Dogus. 2020e dividend yields are; 7.8% for TT (already announced), 5.2% for Ford, 8.2% for Tofas and 7.4% for Dogus.
Source: HSBC Global Research