Tofas Turk Otomobil Fabrikasi (TOASO.IS): Off CEEMEA Focus Listpost strong performance; remains Buy

EQUITY RESEARCH Published April 3, 2013 Tofas Turk Otomobil Fabrikasi (TOASO.IS): Off CEEMEA Focus List post strong performance; remains Buy INVESTMENT LIST MEMBERSHIP: Pan-Europe Buy List COVERAGE VIEW: NEUTRAL What's changed  We remove Tofas from the CEEMEA Focus List following outperformance. Since July 1, 2012 Tofas shares have gained 74% (in USD terms), outperforming the MSCI EM EMEA Index by 68%, leaving upside potential to our 12-month price target below that of Q1 upside within the CEEMEA space. Over the last 12 months, the stock is up 73%, outperforming the MSCI EM EMEA Index by 83%. Our new 12-month price target is YTL16.1 (from YTL15.9), implying potential upside of 20%. Implications  While the potential upside to our price target is now more limited following the stock re-rating on the economy accelerating, we maintain our constructive view. We believe that the company will continue to benefit from stable profitability provided by the ‘pay’ side of the take or pay agreements on its exports volumes despite sluggish demand in Europe, with EBITDA margins remaining above peers in the next 2 years. In a recovering domestic market, we expect Tofas to be a beneficiary with volume growth of 8%/13% in 2013/14. Our new 2013/14 EBITDA estimates increase 1%/4%. Valuation  Rolling forward the mid-cycle multiple to the median of 2008-12, we now value Tofas on a target EV/EBITDA multiple of 7.6x, a 40% premium to its mid-cycle multiple of 5.3x to reflect the company’s CROCI moving into Q1 relative to our Turkish coverage as well and Turkey’s investment grade rating (which we apply across our Turkish coverage).. Our new 12-month price target is YTL16.1 which implies 20% potential upside. Key risks  Key risks to our view are: (1) lower GDP growth in Turkey, (2) increase in the Turkish government’s special consumption tax on autos, (3) increase in domestic interest rates (with 70% of autos in Turkey bought on credit), (4) loss of market share on intensifying competition. Click here to read more