Karsan Otomotiv

Company Report
29 May 2007
Karsan Otomotiv
Didem Özatalar
[email protected]
+90 (212) 317 69 36
Solid Growth through New Initiatives
Initiated
STRONG BUY
Automotive
Growth strategy through new projects
ƒ
Karsan has signed a series of new projects with different auto producers in
2007, namely: 1) Exports to Iran 2) Production and distribution of Hyundai
light trucks 3) Memorandum of understanding (MoU) to produce Renault
heavy trucks 4) MoU to produce a new taxi model for US and Canada 5)
Production of Peugeot’s “end of series” models in Karsan’s facility.
ƒ
Accordingly, exports should rise to 7.7k units in 2007 from 394 units,
and then double and triple in 2008 and 2009, respectively.
We believe these new projects should generate additional revenues of
USD51m, USD478m, and USD1,215m over 3 years until 2009; and
EBITDA of USD2m, USD27m, and USD98m during the same periods.
Moreover, in line with its multi-brand manufacturing strategy, Karsan is also
making efforts to establish new strategic partnerships.
Unit sales, revenues and EBITDA to grow at a 3-year
CAGR of 72%, 87% and 111%, respectively
ƒ
All in all, we believe that Karsan should grow its revenues and EBITDA by
34% and 33% in 2007; and 104% and 124% in 2008, respectively.
ƒ
In line with its operating performance recovery, Karsan’s EBITDA margin
should increase to 6.3% in 2008 and 8.3% in 2009.
ƒ
As a result, the company’s 3-year CAGR growth in total unit sales,
revenues and EBITDA should be 72%, 87% and 111%, respectively.
76% upside to our fair value estimate of USD377m
ƒ
Although Karsan shares were up by 140% in the last 3M on USD terms and
outperformed the ISE-100 index by 98%, we believe some part of our
expected growth for 2008 and 2009 is not priced in.
ƒ
Whilst the stock trades at 19.0x P/E and 7.5x EV/EBITDA on 2008 estimates,
it trades at 3.3x P/E and 2.4x EV/EBITDA on 2009 estimates.
Price Data
(USD)
ISE-100
Share Price
Absolute (%)
Relative (%)
Automotive
KARSN.TI
KARSN.IS
247
215
33%
100,000,000
3.77
46,928
1M
3M
12M
35,303
1.42
54.2
53.0
29,321
0.91
140.3
98.1
25,552
1.20
82.6
31.1
Current
Share Price (*)
Target
Share Price (*)
USD
TRY
USD
TRY
2.15
2.83
Key Ratios (%)
EBITDA margin
Gross margin
Debt/equity
ROA
ROE
ROIC
2006
5.8
7.1
164.9
n.m.
n.m.
2.2
3.77
4.97
2007E
5.8
7.9
125.8
n.m.
n.m.
5.2
2008E
6.3
10.8
90.9
8.0
22.9
17.1
Ownership Structure (%)
Kiraca Otomotiv
Diniz Group
Inan Kirac
Others
Free-Float
52.36
12.52
2.25
0.12
32.75
Price Chart (USD)
1.10
1.00
0.90
0.80
0.70
0.60
0.50
0.40
2.60
2.30
2.00
Valuation
P/E
EV/EBITDA
EV/Sales
P/BV
P/Sales
Share Price (USD)
Apr-07
May-07
Mar-07
Jan-07
3.3
2.4
0.2
1.6
0.2
0.80
Feb-07
19.0
7.5
0.5
3.9
0.4
1.10
Dec-06
n.m.
16.7
1.0
4.9
0.8
1.40
Oct-06
n.m.
22.2
1.3
6.4
1.1
1.70
Nov-06
FY2009E
1,261
105
65
89
137
Sep-06
FY2008E
525
33
11
33
55
Jul-06
FY2007E
257
15
-11
15
44
Aug-06
FY2006
192
11
-22
11
33
Jun-06
USD m
Revenue
EBITDA
Net Profit
Operating Cash Flow
Book Value
May-06
ƒ
Trading Data as of May 28th
Sector
Bloomberg
Reuters
EV (USDm) (*)
Mkt cap (USDm) (*)
Free float (%)
Shares Outstanding (*)
Ave. Daily Vol. (USDm)
ISE-100 (TRY)
Relative to ISE (RHS)
(*) Adjusted for 150% rights issue - Karsan’s
new shares trade in ISE with KARSNY ticker at
a price of TRY2.80 with 60 mn shares. KARSN
shares (old) trade at a price of TRY2.88 with
40 mn shares.
Tofas, 21 August 2005
Karsan, 29 May 2007
SUMMARY AND INVESTMENT CONCLUSION
We initiate our coverage of Karsan with a “Strong Buy” recommendation and a target price of
USD3.77/share (TRY4.97); an upside of 76%. Karsan, established as a commercial vehicle
producer in 1966 in Bursa, is a contract manufacturer operating in the light commercial vehicle (LCV)
segment. Karsan positions itself as a multi-brand manufacturer aiming to serve various world-wide
known automotive companies without any significant capacity investments. Karsan produces two
major models under the Peugeot license, namely J9 and Partner. Karsan’s market shares for J9 and
Partner models are 17.7% and 7.2%, respectively as of the year-end 2006. The licenses of these two
models were renewed in December 2002 and recently extended until mid 2008. More importantly,
the non-compete clauses were removed in the new license agreements with Peugeot and this
opened a new phase for Karsan as a multi-brand manufacturer.
In 2007, Karsan started to follow a growth strategy through new projects with different auto
producers. Namely, these are: 1) Exports to Iran, Middle East and CIS countries 2) Production and
distribution of Hyundai light trucks for local market 3) MoU for the production of Renault heavy trucks
for local and export markets 4) Production of Peugeot’s “end of series” models in Turkey for local
and export markets 5) MoU for the production of a new taxi model for the US and Canadian markets.
Moreover, Karsan is also making efforts to establish new strategic partnerships.
Karsan’s local sales volume contracted by 7% y/y to 11.9k units in 2006. We believe, in 2007,
local sales volume should decline by 28% y/y to 8.5k units on the back of its export-oriented
multi-brand manufacturing strategy. However, our 2008 growth expectation for the local sales
volume of Karsan is 35% y/y carrying the domestic sales volume nearly to 2006 levels. Whilst
Karsan’s 2006 export volume was 394 units, it should increase to 7.7k units in 2007, thanks to Iran
project and Partner elongated model exports. We believe the company’s export volume should
double and triple in 2008 and 2009, respectively, thanks to the latest new agreements made with the
worldwide auto producers.
Accordingly, we expect Karsan’s unit sales, revenues and EBITDA to grow at a 3-year CAGR
of 72%, 87%, and 111%, respectively between 2006 and 2009. In line with the company’s new
initiatives and projects, the operating performance of the company should be stronger together with
the solid growth outlook for its sales volumes. Moreover, the new projects with high volumes will
increase Karsan’s capacity utilization rate and profitability lowering the idle capacity expenses which
were USD9m in 2006 andUSD3.5m in Q1 07.
New projects: The company is in constant search for new projects in order to apply its multi-brand
manufacturing strategy and enhance the value of its business, i.e. to increase its CUR and
profitability. The recent projects that Karsan has been awarded are as follows:
ƒ
Exports to Iran: In February 2007, Karsan agreed with Iranian Sanat Khodro Karnou to export
J9 mini-buses to Iran. The agreement will be effective from H2 07 for 5 years for exporting 3,000
units to Iran with an additional 1,000 units to Middle East and CIS countries per year. In our
model, we assumed that after 5 years of the agreement period, Karsan should continue to export
vehicles to the Iranian market. We expect the company to sell 2,750 units in 2007 and 4,000
units in 2008, corresponding to additional USD41m and USD60m revenues, respectively. In our
view, this business should generate additional revenues and EBITDA of USD41.3m and
USD1.7m in 2007; and USD60m and USD2.7m in 2008, respectively. In total, we believe the
Iranian agreement should help for an additional EBITDA of 11% in 2007 and 8% in 2008.
2
Tofas, 21 August 2005
Karsan, 29 May 2007
ƒ
Production and distribution of Hyundai light trucks: In late march 2007, Karsan agreed with
Hyundai for the production and distribution of Hyundai light trucks for the local market. The
agreement is for 5 years and the production will start in H2 07 to produce 2,000 units per year.
We assume that the two parties will extend the agreement period after 5 years. We expect the
company to sell 550 units in 2007 and 2,000 units in 2008, corresponding to additional USD10m
and USD35m revenues, respectively. We believe Hyundai project should generate additional
revenues and EBITDA of USD9.6m and USD0.8m in 2007; and USD35m and USD3.2m in
2008, respectively. In total, we believe Hyundai project should help for an additional
EBITDA of 6% in 2007 and 10% in 2008.
ƒ
Production of Renault heavy trucks: In late April, Karsan signed a MoU with Renault Trucks to
produce heavy trucks in Turkey. The agreement is targeted to be finalized until the end of July to
produce 5,000 units per annum starting from mid 2008. It is announced that the project will
generate annual EUR200m additional revenues and the trucks will be sold both in local and
export markets. It is also indicated that the two parties will evaluate to establish a joint venture
after 3 years. We expect Karsan to sell 2,500 units in 2008 and 5,000 units in 2009,
corresponding to additional USD135m and USD270m revenues, respectively. We believe this
business should generate additional revenues and EBITDA of USD135m and USD8.8m in
2008; and USD270m and USD20.3m in 2009, respectively. In total, we believe Renault
Trucks project should help for an additional EBITDA of 27% in 2008 and 19% in 2009.
ƒ
Production of a new taxi model for the US and Canadian markets: On 21st of May 2007,
Karsan management announced that the company signed a MoU to produce minimum 12,500
unit cab-formatted vehicles per annum which will be exported to US and Canada as suggested
by the investor company. Accordingly, the average production amount should be 20,000 units
per annum and generate additional USD400m revenues from 2009 onwards. The production
amount could be increased to 40,000 units per year. For investment purposes, Karsan will hire
additional 300 employees. Furthermore, USD100m capital expenditure for this project will be
assumed by the investor. The agreement is targeted to be finalized until September. We expect
the company to sell 15,000 units in 2009 and 20,000 units in 2010, corresponding to additional
USD300m and USD400m revenues, respectively. We believe the project should generate
additional revenues and EBITDA of USD300m and USD36m in 2009; and USD400m and
USD48m in 2010, respectively. In total, we believe this project should help for an
additional EBITDA of 34% in 2009 and 42% in 2010.
ƒ
A suitable candidate for the production of Peugeot’s “end of series” models in Turkey:
Currently, Karsan is considering producing “end of series” models of Peugeot in Turkey. The
negotiations between the two parties still continue and the agreement is not finalized yet. But, it
is likely that Karsan will be the most suitable candidate. If the outcome of the negotiations is
positive, 34,000 units per annum will be produced starting from late 2008 of which 30,000 units
will be exported annually. In our model, we assume that Karsan is awarded with this project and
expect the company to sell 15,500 units in 2008 and 34,000 units in 2009, implying an additional
USD248m and USD550m revenue generation, respectively. We believe this business should
generate additional revenues and EBITDA of USD248m and USD12.4m in 2008; and
USD550m and USD35.4m in 2009, respectively. In total, we believe this project should
help for an additional EBITDA of 37% in 2008 and 34% in 2009.
3
Tofas, 21 August 2005
Karsan, 29 May 2007
Table 1: Karsan – Key Figures (USDm)
Revenues
2003
2004
2005
2006
2007E
2008E
114
266
187
192
257
525
134%
-30%
2%
34%
104%
% increase / (decrease)
Domestic
107
260
187
186
134
221
Exports
6
8
7
6
122
303
8,282
17,003
13,143
12,317
16,300
27,000
105%
-23%
-6%
32%
66%
Total Unit Sales
% increase / (decrease)
Domestic
7,871
16,490
12,777
11,923
8,550
11,500
Exports
411
513
366
394
7,750
15,500
EBITDA
17
23
-2
11
15
33
36%
n.m.
n.m.
33%
124%
14.9%
8.6%
-1.0%
5.8%
5.8%
6.3%
7
1
-35
-22
-11
11
-86%
n.m.
n.m.
n.m.
n.m.
% increase / (decrease)
EBITDA Margin
Net Income
% increase / (decrease)
Source: Company data, YF Research
VALUATION
Our fair value estimate for the stock is USD3.70/share, providing a 70% upside. We apply two
methodologies to derive our fair value estimate. A 70% weight is applied on comparable multiples,
followed by a 30% weight on our DCF-driven value.
Table 2: Karsan – Valuation Summary
Method
Equity Value
Weight
(USD m)
Weighted Equity Value
(USD m)
DCF
588
30%
176
Peer Group Comparison
286
70%
200
Estimated Equity Value (USD m)
377
Current Market Cap. (USD m)
215
Upside Potential (USD)
76%
Source: YF Research
Our DCF indicates a fair value of USD588m. This approach provides the highest upside to the
current share price (+174%) as we believe the company’s EBITDA will grow at a 3-year CAGR of
111% between 2006 and 2009. Our DCF model is based on a risk-free rate of 7.2% (30-yr
Eurobond), WACC of 11.5%, an equity risk premium of 5%, and a terminal growth rate of 3.0%.
Note, on average, the company should generate USD32m free cash per year between 2007 and
2012.
4
Tofas, 21 August 2005
Karsan, 29 May 2007
The stock is also cheap on 2008 estimates compared to the global peers’ multiples. We
believe most of our expected EBITDA and revenue growth through new projects is priced in the
stock. Currently, Karsan shares trade at 19.0x P/E and 7.5x EV/EBITDA on 2008 estimates.
However, the P/E and EV/EBITDA multiples of the stock is 3.3x and 2.4x on 2009 estimates. Our fair
value derived from this approach is USD286m, which provides an upside of 33% in the stock.
Table 3: Karsan – DCF Analysis
Summary Cash Flow
USD m
EBITDA
2007E
2008E
2009E
2010E
2011E
2012E
15
33
105
114
120
120
2013E 2014E
120
120
2015E
2016E
119
120
0
0
16
18
20
20
20
20
19
19
Gross Cash Flow
15
33
89
96
101
101
100
100
100
100
- Capital expenditure
20
30
5
5
10
10
10
10
10
10
- Increase / (Decrease) in WC
13
36
98
14
0
0
0
0
0
0
-18
-33
-15
77
91
91
90
90
90
90
- Tax
Free Cash Flow (FCF)
Risk-Free Rate (30-year Eurobond)
Beta
Equity Risk Premium
WACC
Perpetual Growth
DCF Results
7.2%
0.9
5.0%
11.5%
3.0%
USD m
+Present value of FCFs (2007-2016)
241
+Present value of terminal value
380
% of Terminal Value in Firm Value
61%
Enterprise Value
-Net Debt (2007/03)
Equity Value
620
32
588
Source: YF Research
5
Tofas, 21 August 2005
Karsan, 29 May 2007
Table 4: Peer Group Comparison
Company
Country
EV/EBITDA
Market Cap.
USD m
EV/Sales
P/E
2007E
2008E
2009E
2007E
2008E
2009E
2007E
2008E
2009E
11.4
EMEA
Avtovaz-Cls
Russia
3,373
6.4
6.1
5.6
0.7
0.9
0.9
15.1
12.0
Kamaz-$
Russia
2,397
11.6
6.1
5.1
1.0
0.8
0.7
16.5
10.6
8.1
Severstal Auto
Russia
1,090
6.4
4.7
3.6
0.8
0.6
0.5
12.1
9.2
7.2
8.2
5.7
4.8
0.8
0.8
0.7
14.6
10.6
8.9
EMEA's Average
Emerging Markets
Maruti Udyog Ltd
India
5,802
9.4
9.2
8.3
1.5
1.5
1.4
15.6
14.8
13.4
Eicher Motors Ltd
India
192
8.4
8.4
7.6
0.5
0.5
0.5
11.3
11.4
10.4
Kia Motors Corporation
South Korea
4,436
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
Hyundai Motor Company
South Korea
15,975
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
Denway Motors Ltd
Hong Kong
3,420
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
11.4
10.2
9.0
Tianjin Faw Xiali Automobile
China
2,979
n.m.
n.m.
n.m.
3.1
2.5
2.3
n.m.
29.8
27.1
Proton Holdings
Malaysia
834
6.3
7.5
3.8
0.4
0.3
0.3
n.m.
n.m.
12.2
Tata Motors Ltd
India
6,721
9.2
7.7
7.0
1.1
0.9
0.8
13.4
12.2
11.1
Qingling Motors Company-H
China
520
4.0
3.5
3.2
0.4
0.4
0.3
n.m.
32.4
29.5
Beiqi Foton Motor Co Ltd
China
1,641
n.m.
n.m.
n.m.
0.6
0.5
0.5
n.m.
37.7
34.3
Tan Chong Motor Holdings BHD
Malaysia
258
6.1
5.1
5.9
0.4
0.4
0.4
8.1
8.2
8.6
Yulon Nissan Motor Co Ltd
Taiwan
725
5.3
4.8
4.4
0.4
0.4
0.3
7.6
9.5
8.6
Great Wall Motor Co.
China
1,291
7.2
5.9
5.4
1.3
1.0
0.9
13.0
11.1
10.1
Jiangling Motors Corp Ltd
China
1,613
11.8
10.5
9.5
1.2
1.0
0.9
16.7
18.7
17.0
Faw Car Company Ltd
China
2,907
n.m.
n.m.
n.m.
2.1
2.0
1.8
n.m.
n.m.
n.m.
Honda Atlas Cars Pakistan
Pakistan
71
7.4
6.5
5.9
0.2
0.2
0.2
6.5
5.9
5.5
Brilliance China Automotive
Bermuda
905
10.5
7.1
7.0
0.7
0.5
0.5
31.2
16.8
12.7
DRB-Hicom Bhd
Malaysia
559
10.6
9.3
8.4
0.7
0.7
0.6
10.4
12.7
11.5
China Motor Corp
Taiwan
1,213
11.2
10.5
14.3
1.1
1.1
1.1
12.8
12.0
13.0
Hotai Motor Co Ltd
Taiwan
1,295
10.7
10.9
9.9
0.5
0.5
0.4
13.2
12.3
11.2
8.4
7.6
7.2
1.0
0.8
0.8
13.2
16.0
14.4
Emerging Markets' Average
Developed Markets
Volkswagen AG
Germany
54,779
7.1
6.5
6.0
0.8
0.8
0.7
16.2
12.8
10.4
Renault SA
France
40,390
12.3
10.2
8.5
1.2
1.1
1.0
10.8
8.8
7.2
General Motors Corp.
US
17,742
3.5
3.5
3.6
0.3
0.2
0.2
10.2
8.6
8.3
Peugeot SA
France
19,023
8.4
7.4
6.7
0.7
0.6
0.6
15.5
11.0
9.0
Fiat SpA
Italy
35,388
7.1
6.5
5.9
0.7
0.7
0.6
15.7
11.8
9.9
Fuji Heavy Industries Ltd
Japan
3,702
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
Nissan Motor Co Ltd
Japan
49,823
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
Isuzu Motors Ltd
Japan
8,245
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
Toyota Motor Corp
Japan
216,710
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
Mitsubishi Motor Corp.
Japan
8,310
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
Audi AG
Germany
34,550
4.0
3.5
3.2
0.6
0.5
0.5
16.4
13.3
11.0
Daimler Chrysler AG
Germany
93,017
10.5
9.6
9.4
1.1
1.1
1.1
17.4
14.0
11.5
Bayerische Motoren Werke AG
Germany
43,600
8.3
8.0
7.9
1.3
1.2
1.2
12.2
11.2
10.6
7.7
6.9
6.4
0.8
0.8
0.8
14.3
11.4
9.8
Developed Markets' Average
Turkey
Dogus Otomotiv
Turkey
503
9.1
6.8
4.3
0.3
0.3
0.2
17.1
10.8
6.4
Anadolu Isuzu
Turkey
153
5.5
4.8
4.6
0.5
0.5
0.5
10.6
9.7
9.5
Otokar
Turkey
422
8.8
6.8
6.9
1.4
1.1
1.1
9.5
7.5
7.4
Tofas
Turkey
2,500
10.8
5.5
5.3
0.9
0.6
0.6
17.8
11.5
11.0
Turkey
3,484
6.3
5.3
5.1
0.7
0.7
0.7
9.7
7.9
7.7
8.1
5.9
5.2
0.8
0.6
0.6
13.0
9.5
8.4
16.7
7.5
2.4
1.0
0.5
0.2
n.m.
19.0
3.3
8.1
6.9
6.4
0.9
0.8
0.7
13.6
13.3
11.9
EMEA
104%
32%
-51%
17%
-39%
-72%
n.m.
79%
-63%
Emerging Markets
98%
-2%
-67%
0%
-45%
-75%
n.m.
19%
-77%
Developed Markets
118%
8%
-63%
17%
-40%
-74%
n.m.
66%
-66%
Turkey
106%
27%
-55%
25%
-26%
-69%
n.m.
101%
-61%
Peer Group Average
105%
7%
-63%
9%
-41%
-74%
n.m.
43%
-72%
Ford Otosan
Turkish Average
Karsan
Turkey
Peer Group Average
215
Karsan's premium / (discount) to
Source: IBES consensus estimates, YF Research
6
Tofas, 21 August 2005
Karsan, 29 May 2007
THE TURKISH AUTOMOTIVE INDUSTRY OUTLOOK
The Turkish automotive sector mainly comprises of PC and LCV producers and importers.
BMC, Isuzu, Ford Otosan, Honda, Hyundai, Dogus Otomotiv, Renault, Tofas (Fiat), and Toyota are
the main producers in the sector. They are the producers of passenger cars, light and medium
trucks, pick-ups, buses, mini and midibuses. As of 12M 2006, Oyak Renault is the leader in the
domestic PC market, followed by Ford Otosan, which solely acts as an importer for Ford PCs.
Karsan, as a multi-brand producer of light and medium commercial vehicles has a market share of
17.7% in minibuses with Peugeot’s J9 model, and 7.2% in LCV segment with Partner model in 2006.
Local demand contracted sharply in Jan-April period and the outlook for 2007 is not thrilling.
While the long term outlook for Turkish auto demand remains promising, the recent political
uncertainties caused a contraction in the first 4-months of 2007. Local auto demand declined by 29%
y/y in Jan-April 2007. While local PC demand was down 33% y/y in the first 4-months of 2007, LCV
sales declined by 24% in the same period. Demand was never able to show a meaningful recovery
since July. In our view, 2007 will also not be a thrilling year, as we believe, the high real interest rate
environment will continue for the most part of the year due to a number of political uncertainties. We
expect the local auto demand to contract by 3% in 2007 with the m/m trend to bottom out in June.
We believe local PC and LCV demand should decline by 28% y/y in H1 07. However, H2 07 growth
of the sector will be 25% y/y, in our view.
Chart 1: Monthly PC and LCV demand (2004-2005-2006-2007) (units)
105,000
90,000
75,000
60,000
45,000
30,000
15,000
0
Jan
Feb
Mar
Apr
May June
2004
2005
July
Aug
2006
Sept
Oct
Nov
Dec
2007
Source: Automotive Manufacturers Association
The domestic demand should recover in 2008. We believe, 2008 will be the key recovery year for
Turkish auto companies; local demand should grow by 15% due to our lower interest rate outlook as
the year long pressure in a number of political events should be lifted.
Exports continue to provide a cushion against local volatility – The overall sales of Turkish
producers should continue to grow despite the local weakness. In 1995, Turkish producers
exported 12% of their total sales, while this has increased to 50% as the international partners of the
local producers increased their commitment to the Turkish players and allowed them to gain more
international market share which has resulted in becoming an export hub for Europe. This helps the
Turkish producers to maintain high capacity utilization; that is to maintain lower fixed costs and
production stability during local volatility. For example, despite the current weakness of the local
market over the last few months, PC and LCV exports continued to surge by 21% y/y in the first 4-
7
Tofas, 21 August 2005
Karsan, 29 May 2007
months of this year. As a result, despite a 29% contraction in the local market, the overall sales of
the Turkish producers declined only by 3% in Jan-April 2007. Our expected 3-year CAGR in exports
is 23% between 2005 and 2008. Note that, while exports ensure stability for Turkish auto producers,
export margins are substantially thinner than local sales. All in all, we expect the overall Turkish auto
sector sales to grow at a 3-year CAGR of 11% between 2005 and 2008.
Chart 2: Exports continue to provide a cushion against local weakness
1,050,000
850,000
650,000
450,000
250,000
50,000
-150,000
1995
1996
1997
1998
1999
2000
2001
2002
Domestic Sales (PC + LCV) (units)
2003
2004
2005
2006 2007E 2008E
Exports (PC + LCV) (units)
Source: Automotive Manufacturers Association, YF Research
Table 5: Domestic Demand of PC and LCV (units)
(units)
2002
2003
2004
2005
2006
2007E
2008E
90,615
227,036
451,209
438,597
373,218
358,450
412,218
Domestic
35,519
73,267
139,501
136,696
117,725
109,379
125,786
Imported
55,096
153,769
311,708
301,901
255,493
249,071
286,432
57%
62%
66%
62%
60%
60%
60%
151%
99%
-3%
-15%
-4%
15%
PC Sales
% of total market
y/y change
67,001
137,012
235,973
271,811
244,633
242,294
278,638
Domestic
42,969
77,575
135,980
147,179
128,136
123,981
142,578
Imported
24,032
59,437
99,993
124,632
116,497
118,313
136,060
43%
38%
34%
38%
40%
40%
40%
104%
72%
15%
-10%
-1%
15%
157,616
364,048
687,182
710,408
617,851
600,744
690,856
Domestic
78,488
150,842
275,481
283,875
245,861
233,360
268,364
Imported
79,128
213,206
411,701
426,533
371,990
367,384
422,492
131%
89%
3%
-13%
-3%
15%
LCV Sales
% of total market
y/y change
Total
y/y change
Source: AMA, YF Research
8
Tofas, 21 August 2005
Karsan, 29 May 2007
KARSAN – COMPANY OVERVIEW
Karsan was founded as a commercial vehicle producer in 1966 in Bursa. Karsan was
established in 1966 in Bursa to produce commercial vehicles. Then the company was acquired by
Koc Group in 1979. During 1981 and 1997, Karsan produced Peugeot J9 minibuses under Peugeot
license with an installed capacity of 10k units. In 1998, Inan Kirac and Claude Nahum (former Koc
Group senior executives who hold extensive experience in the automotive sector) took over the
majority stake in Karsan. After the acquisition of the stakes, the capacity was increased to 25k units
per year investing USD70m. Following this investment, Karsan signed a new license agreement with
Peugeot for the production of Partner model. Then the company added Boxer and Ducato LCV
models to its portfolio in 2000. The licenses of these two models were renewed in December 2002
and recently extended until mid 2008. More importantly, the non-compete clauses were removed in
the new license agreements with Peugeot and this opened a new phase for Karsan as a multi-brand
manufacturer.
Karsan’s majority shareholder is Kiraca Otomotiv. Kiraca Otomotiv is a holding company
operating in auto spare parts and foreign trade business, and is owned by İnan Kirac, the ex-CEO
and current BOD member in Koc Holding. Free-float share of Karsan is currently 32.75%.
Chart 3: Karsan – Shareholding Structure
İnan Kirac
2%
Others
0%
Diniz Group
13%
Free Float
33%
Kiraca
Otomotiv
52%
Source: Company data
Karsan’s revenues grew at a 4-year CAGR of 14% between 2002 and 2006. While the company
had USD115m revenues in 2002, it increased to USD192m in 2006. We believe, the company
should grow its revenues and units sales at a 3-year CAGR of 87% and 72%, respectively between
2006 and 2009 on the back of new agreements made with worldwide auto producers in line with its
multi-brand manufacturing strategy. In our view, Karsan should increase its revenues to USD1,261m
and total sales volume to 63k units in 2009 from USD192m revenues and 12.3k total sales volume in
2006. As a result, the company will turn into a global player as a multi-brand manufacturer
with a great turnaround story.
9
Tofas, 21 August 2005
Karsan, 29 May 2007
Chart 4: Karsan – Revenues (2002-2010E) (USDm)
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
2002
2003
2004
2005
2006
2007E
2008E
2009E
2010E
Source: Company data, YF Research
FINANCIAL ANALYSIS
Karsan had a net loss of USD22m in 2006, mainly due to high financial expenses of USD17m
on the back of its bank debts amounting to USD55m. Weak local currency, mainly in Q2 06 affected
the company’s performance negatively. Moreover, the company also had an idle capacity expense of
USD9m in 2006. Revenues increased by 2% y/y to USD192m in 2006, rising by 22% q/q in Q4 06.
However, 42% y/y decrease in revenues in Q1 07 is mainly due to the decline in local sales volume
which came down by 56% y/y. While Karsan had an operating loss of USD11m in 2005, it had an
operating profit of USD2m in 2006, because of the improving cost margins from 93.4% in 2005 to
88.2% in 2006. Note that Karsan registered USD11m EBITDA in 2006 with 5.8% EBITDA margin.
We believe the company’s EBITDA margin will increase to 6.3% in 2008 and 8.3% in 2009.
Margins should recover back to its 2004 levels in 2008 and 2009. Although the company’s
margins will increase gradually in 2008 and 2009, they will continue to be lower than the sector
averages. Note that, the average EBITDA margins of the global peers are 9.3% and 10.1% for 2007
and 2008 compared to Karsan’s estimated margins of 5.8% and 6.3% for the same periods. Yet, we
believe Karsan’s 2009 EBITDA margin should increase to 8.3% in line with its revenue growth.
Chart 5: Karsan – Gross, EBITDA and Net Margins (2004-2008E)
16.0%
18.0%
12.0%
16.0%
8.0%
14.0%
12.0%
4.0%
10.0%
0.0%
-4.0%
2002
2003
2004
2005
2006
-8.0%
2007E
2008E
2009E
8.0%
6.0%
4.0%
-12.0%
2.0%
-16.0%
0.0%
-20.0%
-2.0%
Gross margin
Net margin
EBITDA margin (RHS)
Source: Company data, YF Research
10
Tofas, 21 August 2005
Karsan, 29 May 2007
What’s the impact of new businesses on EBITDA and the bottom line? The new businesses
should provide significant improvement toward a more stable and export-based business model.
Iranian sales should show its full impact in 2008 with an additional impact of USD60m revenues and
USD2.7m EBITDA, 11% and 8% of our total estimates for 2008. Hyundai project should also show
its full impact in 2008 with an additional impact of USD35m revenues and USD3.2m EBITDA, 7%
and 10% of our total estimates for 2008. Renault heavy trucks project should show its full impact in
2009 with an additional impact of USD270m revenues and USD20.3m EBITDA, 21% and 19% of our
total estimates for 2009. A new taxi model production should show most of its impact in 2009 with
an additional impact of USD300m revenues and USD36m EBITDA, 24% and 34% of our total
estimates for 2009. Peugeot’s “end of series” production business should also show its full
impact in 2009 with an additional impact of USD550m revenues and USD35.4m EBITDA, 44% and
34% of our total estimates for 2009. All in all, these new projects should make up 96% of total
revenues and 94% of total EBITDA in 2009.
Chart 6: Karsan – Impact of new projects in total EBITDA in 2009 (USDm)
50
45
40
35
30
25
20
15
10
5
0
600
500
400
300
200
100
0
Iran project
Hy undai project Renault Trucks Peugeot "end of
Taxi
project
series" project (Canada&USA)
EBITDA
Rev enues (RHS)
Source: Company data, YF Research
We estimate annual free cash generation to rise to USD77m in 2010. Since, most of the new
projects should show their full impact in 2009 and investments will have been finalized by then, free
cash should rise to USD77m from USD24m in 2006. In our view, the average annual free cash
generation will be USD32m between 2007 and 2012.
Chart 7: Karsan – Capex, EBITDA and Free Cash Flows (2003-2010E)
120
85
100
70
55
80
40
60
25
40
10
20
-5
0
-20
-20
2003
2004
2005
Capital Expenditure (RHS)
2006
2007E
EBITDA
2008E
2009E
2010E
-35
Free Cash Flow (RHS)
Source: Company data, YF Research
11
Tofas, 21 August 2005
Karsan, 29 May 2007
Table 6: Karsan – Sales Volume Breakdown (2003-2008E)
(units)
Domestic Sales
2002
2003
2004
2005
2006
2007E
2008E
2009E
2010E
6,167
7,871
16,490
12,777
11,923
8,550
11,500
11,000
11,350
J9 Premier
553
3,178
4,131
1,661
2,963
3,000
3,000
3,000
3,150
Peugeot Partner
5,510
4,642
12,358
11,116
8,960
5,000
5,500
4,000
4,200
Peugeot Boxer
104
51
1
0
0
0
0
0
0
Hyundai Light Truck
0
0
0
0
0
550
2,000
2,000
2,000
Renault Heavy Truck
0
0
0
0
0
0
1,000
2,000
2,000
28%
110%
-23%
-7%
-28%
35%
-4%
3%
5,836
411
513
366
394
7,750
15,500
52,000
57,000
J9 Premier
5,836
411
513
366
394
0
0
0
0
Partner Elongated
0
0
0
0
0
5,000
10,000
30,000
30,000
J9 Premier (Iran)
0
0
0
0
0
2,000
3,000
3,000
3,000
y/y change
Exports
J9 Premier (Other)
0
0
0
0
0
750
1,000
1,000
1,000
Renault Heavy Truck
0
0
0
0
0
0
1,500
3,000
3,000
Taxi (Canada&USA)
0
0
0
0
0
0
0
15,000
20,000
-93%
25%
-29%
8%
1867%
100%
235%
10%
8,282
17,003
13,143
12,317
16,300
27,000
63,000
68,350
-31%
105%
-23%
-6%
32%
66%
133%
8%
y/y change
Total Sales
12,003
y/y change
Source: Company data, YF Research
12
Tupras, 29 May 2007
Karsan, 29 May 2007
FINANCIAL STATEMENTS
Karsan - Income Statement – IFRS – USDm – (2004-2008E)
Net sales
COGS
Depreciation
Gross profit
2004
2005
2006
2007E
2008E
266
187
192
257
525
-232
-175
-169
-226
-457
-8
-9
-9
-10
-12
26
4
14
20
57
-10
-14
-12
-16
-35
Operating profit
15
-11
2
5
21
EBITDA
23
-2
11
15
33
-10
-5
-17
-9
-4
Other income / (expense)
-7
-11
-7
-6
-6
Profit before tax & monetary gain & minority expense
Operating expenses
Financial income / (expense) (net)
-2
-27
-22
-11
11
Monetary gain
3
0
0
0
0
Minority interest expense
0
0
0
0
0
Profit before tax
2
-27
-22
-11
11
-1
-9
0
0
0
1
-35
-22
-11
11
2004
2005
2006
2007E
2008E
134%
-30%
2%
34%
104%
36%
n.m.
n.m.
33%
124%
-86%
n.m.
n.m.
n.m.
n.m.
Taxation
Net profit
Karsan – Growth Rates – (2004-2008E)
Net Sales
EBITDA
Net Income
13
Tofas, 21 August 2005
Karsan, 29 May 2007
Karsan – Margins – (2004-2008E)
2004
2005
2006
2007E
2008E
Net sales
100.0%
100.0%
100.0%
100.0%
100.0%
COGS
-87.4%
-93.4%
-88.2%
-88.1%
-87.0%
Depreciation
-2.9%
-4.7%
-4.7%
-4.0%
-2.2%
Gross profit
9.6%
2.0%
7.1%
7.9%
10.8%
-3.9%
-7.7%
-6.0%
-6.1%
-6.7%
5.7%
-5.7%
1.1%
1.8%
4.1%
Operating expenses
Operating profit
EBITDA
8.6%
-1.0%
5.8%
5.8%
6.3%
Financial income / (expense) (net)
-3.8%
-2.4%
-9.1%
-3.7%
-0.8%
Other income / (expense)
-2.6%
-6.0%
-3.6%
-2.5%
-1.1%
Profit before tax & monetary gain & minority expense
-0.7%
-14.2%
-11.6%
-4.4%
2.1%
Monetary gain
1.3%
0.0%
0.0%
0.0%
0.0%
Minority interest expense
0.0%
0.0%
0.0%
0.0%
0.0%
Profit before tax
0.6%
-14.2%
-11.6%
-4.4%
2.1%
Tax Rate
38.0%
-32.2%
0.0%
0.0%
0.0%
Net profit
0.4%
-18.7%
-11.6%
-4.4%
2.1%
Karsan – Balance Sheet Analysis – (2004-2008E)
2004
2005
2006
2007E
2008E
Days Receivable
25
40
22
25
25
Days Payable
25
14
18
20
20
Days Inventory
49
39
39
45
45
Cash Conversion Cycle
49
64
43
50
50
Current Ratio
Debt to Equity
1.1
1.8
1.7
1.7
1.2
55%
159%
165%
126%
91%
14
Tofas, 21 August 2005
Karsan, 29 May 2007
Karsan – Balance Sheet – IFRS – USDm – (2004-2008E)
2004
Cash and Banks
2005
2006
2007E
2008E
0
0
0
4
-44
Short Term Trade Receivables
18
20
12
18
36
Other Short Term Receivables
0
0
1
1
3
32
20
19
29
58
1
1
0
1
1
52
42
32
53
54
78
73
62
72
90
Intangible Fixed Assets
3
7
7
7
7
Deferred Tax Asset
9
0
0
0
0
Other Non-Current Assets
1
0
0
0
0
90
80
69
79
98
142
121
101
132
151
Bank Debts
27
14
7
15
15
Short Term Trade Payables
16
7
9
13
26
Advances
0
0
1
1
1
Provisions for Expenses and Liabilities
3
1
2
2
2
46
23
19
31
44
16
55
48
40
35
1
1
1
1
1
17
55
49
41
36
Paid in Capital
14
14
28
66
66
Capital inflation adjustment
17
17
16
0
0
Share Premium
16
16
15
15
15
Legal Reserves
9
9
9
9
9
35
35
33
33
33
1
-35
-22
-11
11
-13
-12
-45
-67
-78
78
43
33
44
55
142
121
102
116
135
Inventories
Other Current Assets
Current Assets
Net Tangible Assets
Non-Current Assets
TOTAL ASSETS
Current Liabilities
Bank Debts
Retirement Pay Provision
Long Term Liabilities
Extraordinary Reserves
Net Income (Loss)
Accumulated Reserves
Shareholders' Equity
TOTAL LIAB. & SH. EQUITY
15
Tofas, 21 August 2005
Karsan, 29 May 2007
Karsan – Cash Flow – IFRS – USDm – (2004-2008E)
2004
2005
2006
2007E
2008E
2
-27
-22
-11
11
+ Depreciation
8
9
9
10
12
+ Allowance for Severence Payments
0
0
0
0
0
- Tax Payments
0
-1
-9
0
0
10
-18
-22
-1
23
+/- in ST Trade Receivables
10
2
-9
6
18
+/- in ST Other Receivables
0
0
1
0
2
17
-13
-1
10
29
1
0
-1
0
1
EBT
Cash Inflow
Change in Working Capital Requirements
+/- in Inventories
+/- in Other Current & Non-Current Assets
+/- in LT & Other LT Trade Receivables
0
0
0
0
0
+/- in Investments in Participations
0
0
0
0
0
+/- in ST Trade Payables
-2
-9
2
4
13
+/- in ST Other Payables
0
0
0
0
0
+/- in Advances
0
0
1
0
0
+/- in Provisions for Expenses and Liabilities
1
-1
1
0
0
+/- in LT Trade Payables
0
0
0
0
0
+/- in LT Other Payables
0
0
0
0
0
29
0
-13
13
36
-20
-18
-9
-14
-13
5
7
0
20
30
-25
-25
-9
-34
-43
+/- in Short Term Bank Debts
21
-13
-7
8
0
+/- in Long Term Bank Debts
5
39
-7
-8
-5
+/- Cash capital Injection
0
0
14
37
0
+/- Share Premium & Reserves
8
0
-2
0
0
+/- Dividends Paid
0
0
0
0
0
Financial Cash Flow
9
0
-11
4
-48
+/- in Working Capital Requirements
Investable Funds
Investments
Operating Cash Flow
16
Tofas, 21 August 2005
Karsan, 29 May 2007
YF Securities: Stock Rating Definitions
YF Rating
Definition*
Investment Horizon
Strong Buy
Stock return is > 20%
1-12 months
Outperform
Stock return ranges between 10 and 20%
1-12 months
Neutral
Stock trades near fair value and return is between
-10% and 10% depending on the degree of
market volatility
1-12 months
Underperform
Stock trades 10-20% > than fair value estimate
1-12 months
Sell
Stock trades 20% > than fair value estimate
1-12 months
Trading Buy
Stock return is > 10%: This is based on technical
analysis, supported by fundamentals and
potential catalyst
1-2 months
Trading Sell
Stock return is -10%: This is based on technical
analysis, supported by fundamentals and
potential catalyst
1-2 months
17
Tofas, 21 August 2005
Karsan, 29 May 2007
Yatırım Finansman Securities
Nispetiye Caddesi Akmerkez E-3 Blok Kat:4
Etiler / İstanbul TURKEY
Phone: +90 (212) 317 69 00
Fax: +90 (212) 317 69 32
[email protected]
Although the information in this document has been compiled from various sources which are believed
to be reliable, we cannot guarantee their accuracy or adequacy and cannot be held responsible for any
omissions, errors or dates that are subject to change without notice. This document is not intended as
an offer, invitation or solicitation to buy or sell securities. Yatırım Finansman (YF) Securities Inc., its
clients and/or employees may have a position in the securities discussed and may be involved in the
provision of investment banking activities and other services for the companies mentioned in this
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distributed or published in whole or in part without the prior written permission of Yatırım Finansman
(YF) Securities Inc.
Murat Tanrıöver
[email protected]
+90 (212) 317 68 05
Head of Sales, Trading
Director, Institutional Sales
Associate Director, Trading
Associate, Sales
Associate, Sales
Associate, Settlement
[email protected]
+90 (212) 317 69 40
+90 (212) 317 69 45
+90 (212) 317 69 66
+90 (212) 317 69 43
+90 (212) 317 69 51
+90 (212) 317 68 42
Director
Chief Economist
Senior Analyst
Senior Analyst
Senior Analyst
Analyst
[email protected]
[email protected]
+90 (212) 317 69 37
+90 (212) 317 69 33
+90 (212) 317 69 34
+90 (212) 317 69 36
+90 (212) 317 69 35
+90 (212) 317 69 39
Director
[email protected]
+90 (212) 317 68 70
Executive Vice President
Institutional Sales and Trading
Emre Balkeser
Nezihi Abay
Murat Borucu
Pelin Hekimoğlu
İdil Hacıhanifioğlu
Mehmet Ali Sukuşu
[email protected]
[email protected]
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Research
Soner Güney
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Aslı Kuşçu
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Pınar Şahin
[email protected]
[email protected]
[email protected]
[email protected]
Corporate Finance
Pervin Bakankuş
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