Equity / Mid Cap. / Construction 03.12.2014

Alarko Holding Price Target Revision

OUTPERFORM (Previous: U.R) Upside Potential 32%

Becoming an Energy Play, LT Buy Reiterated OUTPERFORM maintained with revised TP of TL5.3 Following 3Q14 financials we go over our estimates and cut our TP by 10% to TL5.3 (from TL5.94). Our revised TP offers 32% upside potential, therefore we maintain our OUTPERFORM recommendation. We revise our SOTP valuation with; i) lower backlog for contracting segment along with lower operational profitability assumption, ii) lower CUR at NGPPs, and iii) incorporate the delay in Karakuz HEPP. The share price decreased by 37% in a year period and underperformed the market by 45%, mainly due to the project cancellations in Kazakhstan, devaluation of Kazak Tenge, suspension decision of the Court for EIA report of Karabiga TPP and lack of new project additions at contracting segment. However, we believe the strong underperformance is unwarranted and likely to be corrected to some extent. The financing of Karabiga close to the end. The EIA report for Karabiga coal PP, which had been suspended by the Court, has been approved. The Management expects the financing of the plant to be closed in Dec’14, which may have a significant impact on the share price. The total investment for the project is at US$1.2bn. Our revenue and EBITDA estimates for the project are c.US$685mn and c.US$250mn (Alarko has 50% stake). We conservatively calculate c.US$730mn equity value, implying a 6.2x 2018 EV/ EBITDA multiple and 14% IRR. Yet, we do not include the project into our model, since the financing has not been completed yet. Karakuz HEPP is expected to be fully operational in 2H15. Karakuz HEPP, with 76MW capacity, has eventually been completed after a certain delay and impounding started. The plant will increase the total generation capacity to 253 MW by a significant 43%. In our model we assume the plant will be fully operational in 2H15 and contribute c.US$11mn/US$19mn to 2015/2016 EBITDA. The aggregate margins of generation assets will soar to 30% level, up from current 7% when the plant becomes fully operational.

Ticker

ALARK

Stock Data

TL

US$

Price at 02 12 2014 4.03 Target Price 5.32 Prev.Target Price 0.00 Mcap (mn) 901 Float Mcap (mn) 254 Avg.Daily Volume (3M, mn) 7.1 No. of Shares Outstanding (mn) Free Float (%) Multiples 2014E 2015E

1.82 2.26 0.00 405 114 3.2 223 28.21 2016E

P/E P/BV EV/EBITDA Price Perf. (%)

31.5 0.7 n.a

13.9 0.7 3.7

10.9 0.7 3.1

1 Mn

3 Mn

12 Mn

0 0 -5

-13 -15 -16

-37 -43 -45

TL US$ Relative to BIST-100

Price / Relative Price 7.00

160 140 120 100 80 60 40 20 0

6.00

5.00 4.00 3.00 2.00

1

10.14

07.14

01.14

10.13

07.13

04.13

01.13

Please refer to important disclaimer at the end of this report.

Relative to BIST1 00

3.81

5.20

40 20

19.11

05.11

21.10

19.09

0

03.10

Foreign Sh are (%) 3M Ave rage

05.09

New contracts en route to the backlog. While the Group getting more footing in energy, the backlog of Alsim decreased to historically low US$300mn levels as of Sep’14. However, there are several projects that Alsim has already placed bid or will bid including TANAP pipeline (3 packages, expected size: each US$550-600mn, among the 6 groups in short list) and a station project (US$800-1,000mn), Sabiha Gokcen railway (US$350mn, the tender on 4th Dec), Bakirkoy-Beylikduzu metro (US$1.35bn), Sivas-Erzincan (US$150mn), Samsun-Sivas (the tender on 16th Dec), and Ankara-Sivas railway projects, Qatar water projects (5 packages, each US$900-1,000mn, submitted bid), Tace Plant in Turkmenistan (US$300-500mn, submitted bid), Moscow refinery project and Baltic Urea Plant in Russia (US$250, submitted bid).

04.14

1.00

The privatization tenders of Gencos in Dec’14 may trigger the share 0.00 price. The Group is evaluating all three upcoming privatization tenders of generation assets to be held in Dec’14. The final bidding deadline for Orhaneli (210MW) and Tuncbilek’s (365MW) TPPs is 8th Dec., while for ALA RK Close(LHS) Soma B (990MW) is 19th Dec. Moreover, 2015 will be the year of HEPP privatizations. The Group is expected to be opportunist in these tenders as 52 Week Range (Close TL) well. Besides, Alarko plans to increase its presence in generation business Foreign Share (%) with solar and wind PP investments. The Group is undertaking an 80 investment for 10 solar PPs with a total capacity of 10MW within 2015, which 60 is not included in our valuation.

Mustafa Kucukmeral [email protected] +90 212 350 25 16

Alarko Holding The current backlog level does not offer a healthy forward revenue cover. Alarko's current backlog of US$300mn indicates only c.0.8x forward revenue cover in absence of any addition into the current backlog even on our decreased 2014E contracting revenue estimate of US$360mn. Yet, possible additions to backlog in upcoming periods would lead to recovery in the ratio. Exposure to Tenge and project cancellations took its toll on 9M14 financials. The projects in Kazakhstan is making 93% of Alsim’s current backlog. Roughly 30% of Aktau-Manasha highway projects and 100% of Taldykol lake rehabilitation projects are in Kazak Tenge, implying that c.80% of current backlog is in Tenge. Yet, most of the construction expenditures in Taldykol and Aktau-Manasha projects are in KZT currency and are subject to escalation as well, which may partially compensate the losses. Yet, still the devaluation of Tenge in 2Q14 was one of the main reason behind the weak performances in 9M14. Moreover, the losses incur due to the partial cancellation of Kazakhmys projects took its toll in 9M14 financials. These items may continue to have negative impact on contracting segment’s profitability in 2014, yet the incremental impact should be limited, if any. The evaluation process of a hotel investment in Cyprus is still on-going. The Management once again emphases that the Group is planning to make a hotel investment in Cyprus and they have further plans to grow in tourism sector. Alarko to divest its stake at seafood arm Alfarm Alarko. The Group started talks to sale its 50% stake at Alfarm Alarko Leroy to Norwegian Leroy Seafood, which already has the remaining 50%. Alfarm is a small noncore asset, constituting merely 1-2% of combined revenues and EBITDA of the Holding and makes up only 0.5% of NAV. Possible higher price tag may positively affect the share price, yet due to the low share in NAV the impact should be limited. Has a strong solo cash position, benefits from weak TL. The Holding has a solo net cash position of US$72mn as of 3Q14, making 10% of the NAV. The consolidated net cash position (corresponding to its stakes at subs) stands at US$118mn, corresponding to c.30% of current Mcap. The Holding has a c.TL395mn long FX exposure, recording gains from the depreciation in TL against hard currencies. OUTPERFORM maintained with revised TP of TL5.32/share. We revise our SOTP valuation with; i) lower backlog along with lower operational profitability assumption at contracting segment, ii) lower CUR at NGPPs (comprising 65% of current capacity including Karakuz), as these plants are not dispatched at high load factors, iii) incorporate the delay in Karakuz HEPP, which is now expected to be fully operational in 2H15 (previously was expected to be fully operational in 2H14). We also revise the current cash positions at Holding and its subsidiaries and mark to market values of uncovered listed assets and applied 35% discount to reach our Target MCAP of US$506mn. Accordingly, we reduce our TP by 10% to TL5.32/ share from TL5.94/share. Our revised TP offers 32% upside potential deserving OUTPERFORM recommendation. Alarko Holding NAV Breakdown (US$mn) Business Segm ent/Com pany Contracting Group

Ticker

ALARK's Stake

Alsim

100.0%

Current Current ALARK's Valuation Method Value Stake 166 166 DCF & Peer Comp.

Energy Group Alcen (Retail&Distribution) Altek (Generation) Karabiga TPP * (Generation) ALGYO

Target Valuation Method

166

166

23%

521

298

42%

445

222

31%

DCF

Target ALARK's Value Stake 185 185

DCF/Peer Comparison

Weight in NAV 24%

185

185

576

330

24% 42%

492

246

32% 11%

49.9%

DCF

100.0%

DCF

76

76

11%

DCF

84

84

50.0%

DCF

659

0

0%

DCF

732

0

0%

136

69

10%

152

75

10%

108

55

7%

44

20

3%

187

81

10%

187

81

10%

32

32

4%

32

32

4%

8

4

0%

8

4

0%

Real Estate Group Alarko REIT

Weight in NAV 23%

51.0%

Current Mcap

96

49

7%

Current Mcap * (1+CoE)

50.0%

at 9% rental yield

40

20

3%

at 9% rental yield * (1+CoE)

167

72

10%

167

72

10%

29

29

4%

29

29

4%

7

3

0%

7

3

0%

Total Value from Participations

636

100%

Total Value From Participations

705

100%

Listed

121

19%

Listed

135

19%

Unlisted

515

81%

Unlisted

570

81%

72

10%

Holding Only Net Cash (Debt)

72

9%

Mos Alarko Industry & Trade Group Alarko Carrier

ALCAR

43.0%

Current Mcap

Tourism Group Attas

100.0%

Multiple Comparison

Seafood Group Alfarm

50.0%

Book Value

Holding Only Net Cash (Debt) Current NAV

709

Current Mcap * (1+CoE) Multiple Comparison Book Value * (1+CoE)

Target NAV

778

Prem / (Disc) to Current NAV

-42.8%

Prem / (Disc) to Target NAV

-47.9%

Historical Average Discount (one year)

-43.3%

Historical Average Discount

-43.3%

Current Mcap

405

Target Mcap**

506

* Karabiga TPP is not included in our valuation

Target Share Price (US$)

2.26

net cash (debt) is as of 3Q14

Target Share Price (TL)

** after applying 35% conglomerate discount

Upside Potential

Source: Company, IS Investment

2

5.32 31.9%

Alarko Holding Consolidated Financials of Alarko Holding (TL mn) Incom e Statem ent (TL m n) Revenues EBITDA Net income Cash Flow Statem ent (TL m n) Net Income Depreciation & Amortisation Change in Working Capital Cash Flow from Operations Capital Expenditure Free Cash Flow Balance Sheet (TL m n) Tangible Fixed Assets Cash & equivalents Total assets Short-term debt Total Debt Total equity Ratios Net debt/EBITDA (x) EBITDA Margin Net Margin Valuation Metrics EV/Sales (x) EV/EBITDA (x) EV/IC (x) P/E (x) FCF yield (%) Dividend yield (%) *based on average Mcap during the year Source: Company, IS Investment

3

2012A* 535 39 75

2013A* 1,261 149 184

2014E 1,023 33 29

2015E 743 90 65

2016E 727 109 82

75 32 249 356 (46) 402

184 69 (284) (28) 327 (355)

29 51 (48) 32 (91) 123

65 39 (30) 73 104 (31)

82 37 (30) 90 96 (7)

453 506 1,731 47 137 1,002

712 586 2,620 100 266 1,184

569 623 2,538 99 329 1,301

632 692 2,820 120 397 1,328

690 756 3,078 136 453 1,376

-9.4 7.3 14.0

-2.2 11.8 14.6

-8.9 3.2 2.8

-3.3 12.1 8.7

-2.8 15.0 11.3

1.4x 19.9x 1.3x 11.8x 46% 1%

0.5x 4.5x 0.6x 6.8x -28% 1%

0.6x 18.2x 0.5x 31.5x 14% 1%

0.8x 6.6x 0.5x 13.9x -3% 2%

0.8x 5.5x 0.5x 10.9x -1% 2%

0

OP

MP

UP

UR

Source : Is Investment Estimates

NR

4 Banking

Real Estate Investment Trust

Conglomerate

12M Trailing P/E

Airlines&Ground Handling…

Estimated Forward P/E & 12M Trailing P/E Estimated Forward P/BV & Current P/BV

30.00

1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50 0.40

25.11.2014

04.11.2014

14.10.2014

23.09.2014

02.09.2014

12.08.2014

22.07.2014

01.07.2014

10.06.2014

20.05.2014

29.04.2014

08.04.2014

18.03.2014

25.02.2014

04.02.2014

14.01.2014

24.12.2013

Sectoral Recommendations

5

4

3

7

4

Estimated Forward P/BV Source : BIST/ Is Investment Estimates

OUTPERFORM NOT RATED MARKETPERFORM

Number of Companies

6

24

12

50

2

9

1

UNDER REVIEW UNDER PERFORM

Current P/BV

Rec. Breakdown for Coverage (%)

25.11.2014

04.11.2014

14.10.2014

23.09.2014

02.09.2014

12.08.2014

22.07.2014

01.07.2014

10.06.2014

20.05.2014

29.04.2014

08.04.2014

18.03.2014

25.02.2014

04.02.2014

14.01.2014

0.00

24.12.2013

5.00

Petroleum and Energy

10.00

03.12.2013

15.00

Food

20.00

Retail Trade

25.00

Cement & Concrete

03.12.2013

11.14

11.14

10.14

09.14

09.14

08.14

07.14

07.14

06.14

05.14

04.14

04.14

03.14

02.14

02.14

01.14

12.13

12.13

11.13

10.13

10.13

09.13

08.13

07.13

07.13

06.13

05.13

05.13

04.13

03.13

03.13

02.13

01.13

01.13

UR

OP OP OP

MP OP

OP

OP

OP

OP

OP

OP

OP

TL

Transportation

Utilities

Technologly

Agricultural Chemicals

Automotive & Parts

Beverages

Media

Construction

Estimated Forward P/E Source : BIST/ Is Investment Estimates

Communication

Iron Steel

Glass

Integrated Textile

Insurance

Pharmaceutical and Health

Auto part

Tyre Production

Mining

Chemicals

Paper

Livestock

8

Other

150 140 130 120 110 100 90 80 70 60

Leasing & Factoring

9

Consumer Durables

Alarko Holding

Price / Recommendations

Source : BIST/ Is Investment Estimates Relative to BIST1 00

Alarko Holding

This report has been prepared by “İş Yatırım Menkul Değerler A.Ş.” (İş Investment) solely for the information of clients of İş Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary. The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of İş Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of İş Investment. (www.isinvestment.com)

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