enka insaat - when differentiation makes the difference · 2017-01-02 · recommendation. in dollar...

[email protected], DENI on Bloomberg

TURKEY | INDUSTRIALS

DECEMBER 16, 2016

Common ENKAI TIRecommendation BUYLast price TRY5.12Target price (from TRY5.06) TRY6.16Upside 20%Free float 13%

Market cap $6,087 mlnEnterprise value $3,458 mlnADT, 100 days $5.0 mlnPrices as of December 14, 2016

Key data 2015 2016E 2017E 2018EFinancials (IFRS), TRY mlnRevenues 12,384 10,892 12,150 12,481EBITDA 2,038 2,197 2,618 2,784EBIT 1,747 1,883 2,242 2,389Net income 1,440 1,886 2,133 2,247Adjusted EPS, TRY 0.34 0.45 0.51 0.53ProfitabilityEBITDA margin 16% 20% 22% 22%EBIT margin 14% 17% 18% 19%Net margin 12% 17% 18% 18%Price ratiosP/S 1.7 2.0 1.8 1.7EV/EBITDA 6.7 5.6 4.4 3.8P/E 15.0 11.5 10.1 9.6P/CF 17.5 12.1 10.1 9.1GrowthRevenues �3% �12% 12% 3%EBITDA 6% 8% 19% 6%Adjusted EPS �0% 31% 13% 5%

Price performance, %

1m 3m 6m YTDCommon 9.6 13.3 20.2 18.9Relative to BIST 100 6.1 13.5 18.4 11.0

Price performance, TRY

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

Dec '15 Feb '16 Apr '16 Jun '16 Aug '16 Oct '16 Dec '16

Share price Relative to BIST 100

Max 5.12 (Dec 14, ’16) Min 3.81 (Jan 21, ’16)

Source: Bloomberg, Deniz Invest Research

Enka Insaat When Differentiation Makes the Difference Enka Insaat offers a unique investment case thanks to its limited exposure to the Turkish economy, which is mired in macro volatility and has a dim growth outlook. We expect the stabilization in Russia’s macroeconomy to facilitate a turnaround in the profitability of the real estate segment, while the rebound in oil prices should help revive infrastructural activity in the MENA and CIS regions, thus potentially boosting the contribution of the contracting segment. The company’s $3.0 bln in net cash and almost 100% dollar�based revenue stream will also provide a cushion against the weak lira. Our 2017E EBITDA and net income estimates are 14% and 23% above the consensus and indicate 19% and 13% y�o�y growth. Our forecasts imply a 2017E EV/EBITDA of 4.4 and P/E of 10.4 in dollar terms, offering 25% and 20% discounts against peers and 30% and 13% discounts to their own three�year average multiples. We maintain our BUY recommendation and raise our target price from TRY5.01 per share to TRY6.16, which offers 20% upside.

█ Brighter macro outlook is positive for Russian real estate market. Russia is

showing signs of recovery thanks to Brent’s move back above $50/bbl, as well as

owing to the potential for more constructive relations between Russia and the US

following the election of Donald Trump. We expect a stronger ruble in 2017 (8%

y�o�y appreciation), lower inflation and therefore lower interest rates. This could

bring relief for rental and occupancy rates in the real estate market through

improved consumer sentiment.

█ New awards in contracting arm could be on the way. Enka Insaat’s backlog

has bottomed out at $1.6 bln, implying the lowest book�to�bill ratio in the last five

years of 1.2. This might compel the company to more aggressively pursue new

deals, for which the positive trend in oil prices will be an impetus. In this regard,

the company is eyeing $1.5 bln in new projects, including turn�key contracts for

two gas�fired power plants in Iraq, a hydroelectric power plant in Georgia and the

construction of new US Embassy buildings, which would all close in 1Q17.

█ We pencil in risk from transition to free market in power generation. The

termination of the BOO contract in 2019 will hamper the company’s stable dollar�

based cash generation ($260�300 mln in EBITDA annually). The move to market�

based generation will give the company lira exposure and is estimated to offer

around just half the return of the current agreement. Yet, our valuation for the

energy business is already quite cautious, at 50% below the market average.

█ Risks. Upside risks include more efficient use of the idle cash (via either value

enhancing acquisitions, hefty dividend payments or expansion of the current

share buyback program), higher than expected contracting awards, earlier

realization of new real estate investments in Russia and a better pricing

environment in the Turkish power market. Downside risks include a stronger

lira, weaker GDP growth in Russia and retreat of oil prices.

Alper Akalin +90 212 348 [email protected]

DECEMBER 16, 2016 ENKA INSAAT – WHEN DIFFERENTIATION MAKES THE DIFFERENCE

2 DENIZ INVEST RESEARCH

Valuation and Financial Review

Valuation

TARGET PRICE UPGRADED ON STRONGER DOLLAR, BUY MAINTAINED

We use a SOTP methodology to value Enka Insaat. We have increased our target price from TRY5.06

per share to TRY6.16 per share, which now offers 20% upside, and maintain our BUY

recommendation. In dollar terms, the stock is trading at a 2017E EV/EBITDA of 4.4 and 2018E

EV/EBITDA of 4.1, which imply respective discounts of 25% and 29% to the averages of comparable

peers operating in the contracting industry. On a P/E basis, Enka Insaat is trading at 10.4 for both

years, implying respective discounts of 20% and 15% to peers. In lira terms, the stock is also trading

at a 30% discount to its one�year�forward historical average EV/EBITDA of 5.8 and a 13% discount

to its one�year�forward historical average P/E of 11.6.

Enka Insaat NAV, $ mln

Companystake

Target EV

Target NAV

Weight Valuation method

Real estate 100% 2,531 2,531 31.5% DCF, cap rates, replacement value and book valueContracting 100% 1,145 1,145 14.1% DCF and peer multiplesPower generation 100% 996 996 12.4% DCFTrade and manufacturing 100% 337 337 4.2% DCFConsolidated net cash, end 2017 100% 3,042 3,042 37.9%Special dividend to company founders (85) PV of future attributable dividendsMinorities (61) Book value

Target NAV 7,904Target MCap (after 10% holding discount) 7,153

Target MCap, TRY mln 25,860Current MCap, TRY mln 21,504Target NAV discount �22%

6.165.12

Upside 20%

Target price, TRY per shareCurrent price, TRY per share

Source: Deniz Invest Research

1y fwd EV/EBITDA

3

4

5

6

7

8

9

10

2011 2012 2013 2014 2015 2016

1y fwd EV/EBITDA 3y average


1y fwd P/E

6

8

10

12

14

16

2011 2012 2013 2014 2015 2016

1y fwd P/E 3y average Source: Deniz Invest Research

ENKA INSAAT – WHEN DIFFERENTIATION MAKES THE DIFFERENCE DECEMBER 16, 2016

DENIZ INVEST RESEARCH 3

Peer multiples comparison

2017E 2018E 2017E 2018E

Tekfen Holding 4.3 3.3 6.2 6.0Hyundai Development 4.8 4.3 7.8 7.8Samsung Engineering 9.6 9.0 12.0 12.9Sinopec Engineering 4.0 3.4 10.3 9.6Vinci 8.0 7.5 14.2 13.2Eiffage 7.4 6.8 13.6 11.7Hochtief 7.8 7.3 23.4 21.8Technip 6.1 6.3 18.7 21.7Skanska 10.6 11.1 15.5 16.8Strabag 3.8 3.5 13.7 12.8Astaldi Spa 4.3 4.2 4.7 4.2Acs Actividades 5.5 5.4 12.5 11.7

Median 5.8 5.8 13.0 12.3

Enka Insaat 4.4 4.1 10.4 10.4Discount �25% �29% �20% �15%

EV/EBITDA P/E


RECENT RALLY IN DOLLAR, OIL AND RTS INDEX COULD NARROW THE GAP TO PEERS

The stock has outperformed the BIST 100 by 14% over the past 12 months, but most of this

outperformance has come in the past three months, with Enka Insaat falling 3% in dollar terms

versus a 14% drop on the BIST 100. Meanwhile, 35% of the company’s total NAV is comprised of

operations in Russia, and the RTS Index has increased 18% in the past three months. In addition,

infrastructure projects in oil�producing countries account for 65% of Enka Insaat’s contracting

backlog; given the 21% surge in oil prices over the last three months, there could still be room for

the stock to grow. The company’s revenues are heavily dollar�based, and it holds $3.0 bln in cash

on the balance sheet. Therefore, the dollar’s 17% appreciation against the lira could continue to

support the stock, despite it having gained a nominal 14% in the past three months in lira terms.

We expect the dollar to strengthen 7% against the lira in 2017.

Enka Insaat vs BIST 100 and RTS Index, dollar terms

40

60

80

100

120

Nov

�13

Jan�

14

Mar

�14

May

�14

Jul�

14

Sep�

14

Nov

�14

Jan�

15

Mar

�15

May

�15

Jul�

15

Sep�

15

Nov

�15

Jan�

16

Mar

�16

May

�16

Jul�

16

Sep�

16

Nov

�16

Enka Insaat BIST�100 RTSI$ Index


Enka Insaat vs dollar, ruble and Brent, lira terms

0

50

100

150

200

Nov

’13

Jan

’14

Mar

’14

May

’14

Jul ’

14

Sep

’14

Nov

’14

Jan

’15

Mar

’15

May

’15

Jul ’

15

Sep

’15

Nov

’15

Jan

’16

Mar

’16

May

’16

Jul ’

16

Sep

’16

Nov

’16

ENKAI usd/try Rub/try BRENT Source: Bloomberg, Deniz Invest Research

VALUATION METHODOLOGY

█ Real estate. For the real estate segment (which accounts for 31% of the NAV), we applied a blended

valuation methodology. This takes into account a DCF valuation, the capitalization rate (between 9.5%

and 10.5%) over our net operating income (NOI) projections for the next three years, replacement

costs, which are determined by the average cost of net leasable area (NLA) for the company’s previous

and planned investments, and the book value reported in the company’s financials. In our dollar�based

DCF valuation, we used a 4.5% risk free rate, an equity premium of 6.0% and a beta of 1.0 to reach a

10.5% cost of equity. Given the company’s 4�5% cost of debt, our WACC hovers around 9.5%.



Valuation for real estate, $ mln

Fair value Weight

DCF 2,714 40%Capitalization 2,347 20%Replacement value 2,776 20%Book value 2,103 20%Weighted average 2,531


Class A office investment costs

Cost, $ mln

NLA,

’000 m2

Unit cost,

’000 $/m2

Vernadskogo 55.0 20.0 2.8Leningradsky 88.0 22.0 4.0Kuntsevo 465.0 90.0 5.2Average 4.0

Source: Company, Deniz Invest Research

Shopping mall investment costs

Cost, $ mln

NLA,

’000 m2

Unit cost,

’000 $/m2

Sergeiv Posad 59.0 25.0 2.4Kashirskaya 262.0 73.0 3.6Marina Roscha 338.0 80.0 4.2Average 3.4


█ Contracting. For the contracting segment (14% of the NAV), we assigned 50% weights to DCF

and peer group multiples valuations. We have a five�year forecast period for the DCF valuation,

from 2017 to 2022. Our risk free rate is 6.5%, risk premium 5.0% and beta 0.8. This yields a

10.0% WACC for the forecast period. We expect that $1.0 bln will be added to the backlog in the

short term, to eventually reach $1.25 bln in the long term.

█ Energy. For the energy segment (12% of the NAV), we used a DCF valuation with a forecast period

that extends through the lifetime of the natural gas power plants, the operations of which are

expected to end in 2031 (assuming a 30�year lifetime). Our DCF valuation is lira�based, as the

company will not receive guaranteed dollar�based income after 2019, when the build�operate�own

(BOO) contract ends and free market conditions start to prevail. We derive a 15.0% WACC, based

on an 11.0% risk free rate, 5.0% equity risk premium and 0.8 beta. The BOO scheme provides

front�loaded cash flows, and the company books any revenues beyond the average revenues

recorded in the financials as deferred revenues. This means the company’s EBITDA was actually

higher than reported in the first few years of the contract but has diminished over time. The

company’s deferred revenues from the BOO contract stand as TRY1.1 bln, which is treated as debt

in our valuation and is discarded from our EV calculation based on reported EBITDA.

█ Trade and manufacturing. Enka Insaat sells and services international brands of machinery and

construction equipment in its trade and manufacturing segment (4% of the NAV). We apply a

DCF valuation for this arm, using the same WACC as for the contracting segment.

Financial review and market comparison

OUR NEAR�TERM FINANCIAL FORECASTS ARE MORE OPTIMISTIC THAN THE MARKET’S

We expect the company to close 2016 with TRY2,197 mln in EBITDA and TRY1,886 mln in net

income, which implies TRY567 mln and TRY500 mln, respectively, for 4Q16. We expect EBITDA

growth of 35% y�o�y for 4Q16, thanks to dollar and ruble strength versus the lira, which also

explains our 63% y�o�y net income growth forecast, through additional financial gains. Our 4Q16

EBITDA estimate is 11% above the Bloomberg consensus of TRY510 mln, and our 4Q16 net

income estimate is 70% above. However, a comparison might be misleading here, as the

consensus top�line forecast appears to neglect the top�line contraction in the energy segment

stemming from the decline in gas prices.

For 2017, we expect EBITDA to increase 19% y�o�y and net income to climb 13%, thanks to a

recovery in Russia’s economic outlook and, therefore, the local real estate market, as well as

dollar strength against the lira. Our expectations are above the consensus, by 14% for EBITDA

and 23% for net income. We are significantly above the consensus on 2018 estimates as well,

by 10% and 15%, respectively.



Our forecasts vs Bloomberg consensus, TRY mln

9m15 2016E 2016C E/C 2017E 2017C E/C 2018E 2018C E/C

Revenues 7,928 10,892 12,010 �9% 12,150 12,470 �3% 12,481 13,520 �8%EBITDA 1,630 2,197 2,140 3% 2,618 2,290 14% 2,784 2,540 10%

EBITDA margin 20.6% 20.2% 17.8% – 21.5% 18.4% – 22.3% 18.8% –Adjusted net income 1,386 1,886 1,680 12% 2,133 1,730 23% 2,247 1,960 15%


4Q16 forecasts, TRY mln

4Q15 1Q16 2Q16 3Q16 4Q16E Q�o�Q y�o�y 4Q16C E/C

Revenues 3,004 2,660 2,716 2,552 2,965 16% �1% 4,082 �27%EBITDA 421 580 507 544 567 4% 35% 510 11%

EBITDA margin 14.0% 21.8% 18.7% 21.3% 19.1% – – 12.5% –Net income 306 540 506 340 500 47% 63% 294 70%

Net margin 10.2% 20.3% 18.6% 13.3% 16.9% – – 7.2% – Source: Bloomberg, Deniz Invest Research

OPERATING INCOME IN ENERGY SEGMENT SET TO FALL STARTING IN 2019 WITH END OF BOO CONTRACT

We expect the company to post TRY2,298 mln in EBITDA in 2019, down 17% y�o�y due to the

expiry of BOO contracts with natural gas plants, which had more favorable terms for Enka Insaat

than are currently available on the free market. The energy segment currently contributes 42% of

total EBITDA, but we expect it to contribute half that by 2020. This explains the lower upside in our

SOTP valuation, which is focused on the long term, compared with our discounted valuation against

peer and historical EV/EBITDA multiples, which is focused on the short term. We are also more

cautious about our valuation for the energy segment. We estimate an EV of $996 mln, about half of

the $2,003 mln estimated by the consensus.

It is also important to note that Enka Insaat’s EBITDA will become partially exposed to the lira once

the BOO contract ends, as it has guaranteed dollar returns.

Consolidated EBITDA, TRY mln

0

500

1,000

1,500

2,000

2,500

3,000

2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

Real estate Contracting Power generation Trade and manufacturing Source: Deniz Invest Research

EV valuations for energy segment, $ mln

2,003

996

0

500

1,000

1,500

2,000

2,500

Consensus Deniz Invest


EBITDA breakdown by segment, 2015

31%

24%

42%

3%

Real estate

Contracting

Power generation

Trade andmanufacturing

Dollar�based

BOO agreement provides guaranteed dollar payments

Dollar�based Dollar�based, but

indirectly affected by the ruble, as rental rates were fixed at a lower rate during the ruble's sharp depreciation


EBITDA breakdown by segment, 2020E

47%

26%

21%

6%

Real estate

Contracting

Power generation

Trade andmanufacturing

Under free market conditions, returns will be lira�linked




INEFFECTIVE USE OF IDLE CASH MIGHT BE A DISCOUNT FACTOR FOR THE STOCK VALUATION

The steady cash flow coming from Enka Insaat’s various business arms, which give the stock a

defensive nature, has helped the company’s net cash increase from $1.7 bln at end 2011 to nearly

$3.0 bln today. However, the company has neither used this cash for a major value�enhancing

acquisition, nor used it to pay out high dividends. We do not expect the company to acquire any

assets that would diversify its business further in the near term. As far as dividends go, the

company’s average payout ratio over the past five years has been 30% of net income, implying an

average yield of around 2.5%. If the company were to pay out 100% of net income for the next five

years, it would still be able to retain a net cash position of about $2.0 bln, which illustrates how

promising the current situation is for dividends. However, we expect the company to pay out only

40%, implying a slightly better dividend yield of around 4.0%. It is important to note that the

company’s net financial income (NFI) as a share of cash allocated for financial investments has

averaged 5% over the past five years, which is significantly lower than the 10.0% cost of equity we

use for the company. This shows that keeping cash below the holding level does not cover the

investor’s opportunity cost, which could lead to a discounted valuation for NAV going forward if the

company continues to pay out low dividends and pursue a conservative investment policy.

In July this year, the company initiated a buyback program for 8.4 mln shares (a negligible 0.2% of the

total capital) with a maximum allocation of TRY60 mln. Given its low free float of 12%, we do not think

the company will be aggressively allocating its idle cash to buy back shares to improve stock liquidity.

Net cash vs dividend and NFI yields

�3%

0%

3%

6%

9%

0

1,000

2,000

3,000

4,000

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

20

19

E

20

20

E

20

21

E

Net cash, $ mln Dividend yield (rhs) NFI yield (rhs) Source: Deniz Invest Research

Sensitivity analysis

VALUATIONS BECOME MORE SENSITIVE TO ENERGY MARKET CONDITIONS

As the BOO contract with the Turkish government ends in 2019, we see potential volatility in power and

gas prices having a more material impact on valuation. Despite a limited impact on near�term EBITDA, a

10% increase in electricity prices would yield an 11% higher target price. By contrast, 10% higher gas

prices would lower our target price by 10%. The fact that the company’s energy business will generate

lira�based returns once operating in the free market and that gas prices are indirectly exposed to the

dollar limits the impact of the stronger dollar on our valuation. A 10% stronger USD/TRY adds 8%

upside to our target price. We also see the weak ruble as a threat to Enka Insaat’s real estate operations in

Russia, as it could drive a deterioration in consumer sentiment and purchasing power, which would also

limit the increase in dollar�based rental rates. A 10% stronger ruble versus the dollar would increase our

target price by 3%. Meanwhile, each 10% increase to our annual backlog increase assumption of $1.0�

1.25 bln would bring additional 1% upside to our target price. Or, in other words, each $100 mln

addition to the backlog above our estimate would increase our target price by TRY 0.06 per share.



EBITDA sensitivity to 10% increase in operating factors over 2017�19

7%

�3%

10%

�3%

5%

2%

�4%

�2%

0%

2%

4%

6%

8%

10%

12%

Powerprices

Naturalgas prices

USD/TRY USD/RUB Rentalrates

Backlogaddition


Target price sensitivity to 10% increase in operating factors

11%

�10%

8%

�3%

3%1%

�15%

�10%

�5%

0%

5%

10%

15%

Powerprices

Naturalgas prices

USD/TRY USD/RUB Rentalrates

Backlogaddition




Overview of Operating Markets

Real Estate

A BETTER YEAR AHEAD FOR THE RUSSIAN ECONOMY AND REAL ESTATE MARKET

Poorer macroeconomic conditions following the collapse in the oil price and sanctions from Western

countries have resulted in increasing vacancy and tumbling rental rates in the Russian real estate

market over the last two years. The CBR has kept monetary policy tight in order to stabilize the ruble

and control inflation, but this has made consumer loans expensive and driven the population to save

more. As a result, consumption has declined sharply, which led retail rental rates to fall more drastically

than office space rental rates. However, conditions have improved recently thanks to Brent’s move

back above $50/bbl following OPEC’s decision to cut output and the potential for better relations

between Russia and the US following President�elect Donald Trump’s victory. This means that we

could see the Russian economy improve in the near future; a higher oil price means a stronger ruble,

lower fiscal deficit and lower inflation. Importantly, this could prompt the CBR to start cutting rates

earlier. The Sberbank CIB economics team expects 100 bps of cuts in 2017, which would stimulate

consumption and therefore create more favorable conditions for the real estate market. Given the

positive correlation between the return on real estate and bond yields, capitalization rates should come

down with interest rates, which would push asset prices up from today’s lows.

Enka Insaat operations in Moscow

1 – Leningradsky

2 – Kuntsevo Plaza

3 – Marina Roscha

4 – Kashirskaya

5 – Sevastopolsky

6 – Vernadskogo

7 – Belyaevo

8 – Podolsk

9 – Orekhovo–Zuevo

10 – Sergiev Posad

11 – Pionerski (@ St Petersburg)

12 – Nab Tower

13 – Paveletskaya

14 – MKH

15 – MOSENKA

Moscow city border before July 1, 2012 Extended Moscow city border

3

9

8

2

1

5

6

4

15

14

12

13

1011

Note: Green designates Class A offices, orange designates shopping malls.

Source: Company

Enka Insaat operates several prime office and shopping centers in Moscow, with 330,000 m2 of Class A office space, a five�star hotel and 215,000 m2 of retail space.



Bond rates vs real estate rental yields

0%

3%

6%

9%

12%

15%

2010 2011 2012 2013 2014 2015 2016 2017E 2018E

10y sovereign bond yield, $ terms 10y sovereign bond yield, R termsRetail rental yields Office space rental yields

Note: Real estate yields are for prime Moscow assets.

Source: Cushman and Wakefield, Deniz Invest Research

Wage growth

�15%

�10%

�5%

0%

5%

10%

15%

20%

Jan

’11

Jul ’

11

Jan

’12

Jul ’

12

Jan

’13

Jul ’

13

Jan

’14

Jul ’

14

Jan

’15

Jul ’

15

Jan

’16

Jul ’

16

Nominal wage growth Real wage growth

The stabilization in the economy helped real wages start to grow again…


Real wages vs private consumption

�15%

�10%

�5%

0%

5%

10%

15%

20%

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

10

M1

6

Real wage growth Private consumption growth

… which could boost private consumption in the near future.


EXPECTED BOUNCE IN RETAIL TRADE TO IMPROVE MARKET CONDITIONS OF RETAIL REAL ESTATE

In the Russian real estate market, rental rates have fallen significantly and many FX�based rates have

been converted to ruble�based rates amid higher vacancy, which has been driven by an increase in the

supply of new properties coupled with the downturn in the economy. That said, vacancy rates stabilized

in 2016 despite the launch of several large new properties, as occupancy started to grow. Although

increasing competition in malls puts pressure on landlords to shift from fixed�payment rental rates to a

percentage of sales, Enka Insaat protects its revenues through guaranteed minimum payments.

Over the long term, we believe decreasing ruble volatility will improve consumer sentiment and

make Moscow an attractive market for modern�format retail. The market is not yet oversupplied,

and the number of retailers entering the Russian market has exceeded those leaving, even during

economic downturn. Many players are starting to actively expand, taking advantage of the current

attractive rental rates, which should bring mall owners higher visibility.



M2 of quality mall space per 1,000 inhabitants

210

210

225

264

285

320

380

390

420

443

580

650

650

670

700

0 200 400 600 800

BarcelonaLondon

RomeIstanbul

HamburgBerlin

MadridAmsterdam

MilanMoscowHelsinki

ParisPrague

StockholmWarsaw

The Moscow retail real estate market is not oversupplied.


Retailers entering and exiting the Moscow market

2617

57 52

28 32

(11) (7) (1)

(20)

0

20

40

60

80

2011 2012 2013 2014 2015 2016

Entered Left

The number of retailers entering the market exceeds those leaving.

Source: Jones Lang LaSalle

New construction vs vacancy rates, retail space

4%

6%5%

3%

2%

3%

6%

8%

10%

9%8%

0

200

400

600

800

0%

3%

6%

9%

12%

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

New retail construction, ’000 m2 Retail vacancy rate

Increasing occupancy eases pressure on vacancy rates…

2

Source: Cushman and Wakefield

Enka Insaat average rental rates

0

10,000

20,000

30,000

40,000

0

200

400

600

800

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

Average dollar rate, $/m2 Average ruble rate, R/m2 (rhs)

… which should result in a turnaround in rental rates.

2 2

Note: Rates are annual.


QUALITY PRIME PROPERTIES GIVE ENKA INSAAT A CUSHION AGAINST VOLATILITY IN THE OFFICE MARKET

Office space in Moscow remains the most oversupplied segment of the real estate market, with a

vacancy rate of around 25%. This is nevertheless much lower than the 31% rate in 2015, thanks to

slowing growth in new construction and a more stable macroeconomic environment. Between 2013

(when rates peaked) and 2016, dollar�based rental rates fell 18% per year due to oversupply and

ruble depreciation. Enka Insaat saw a more limited fall of just 10% per year thanks to higher�quality

assets with longer�term leases. We think the continued imbalance of supply and demand will prevent

rental rates from recovering rapidly. In addition, many independent real estate research groups argue

that lease agreements with ruble�denominated rents or special provisions for dollar�denominated

rents will increase in the coming years. This is reflected in the change in the ratio of Class A rental rates

denominated in dollars versus rubles; it was close to 65:35 in 2015 and has completely reversed since

then. That said, we think Enka Insaat’s dollar�denominated rates will be supported in the short to

medium�term by the ruble’s strength and the premium quality of rental assets.



New construction vs vacancy rates, office space

13%

24% 23%

17%

15%

18%

24%

31%

25%24% 23%

0

200

400

600

800

0%

10%

20%

30%

40%

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

New office space construction, ’000 m2 Office space vacancy rate

Limited new supply could relieve vacancy and rental rates.

2

Source: Cushman and Wakefield

Enka Insaat average rates vs the market

906 827 871

944 991 1,000

780 715 740 755

729 645

733 790

867 772

549 475 515 535

0

200

400

600

800

1,000

1,200

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

Enka Insaat average rate, $/m2 Average market rate, $/m2

Enka Insaat's average rate is above the market average by about $200/m2.

2 2

Note: Rates are annual.


ENKA INSAAT WAITING FOR RIGHT CONDITIONS TO EXPAND IN BOTH OFFICE AND RETAIL MARKETS

Enka Insaat currently operates 330,000 m2 of Class A office space, a five�star hotel and 215,000 m2 of retail space, nearly all of which are located in Moscow. We expect that the company will accelerate its expansion in the real estate market as consumer sentiment in particular and the Russian economy in general recover. The company’s plans for growth in the retail market, which has lower vacancy rate than office spaces, are a bit more developed. It has already started demolition of the Kashirskaya shopping mall, which previously had 21,000 m2 of net leasable area (NLA). After the completion of the $262 mln investment, which should be finished in 2018, NLA will increase to 73,000 m2. Enka Insaat also intends to demolish the 23,000 m2 Marina Roscha mall in 2018. It will invest $340 mln into expanding NLA to 80,000 m2 and expects to reopen the mall by 2020. The new malls will increase the NLA of the retail portfolio by about 40%. We only include Kashirskaya in our valuation right now.

Meanwhile, the company is waiting for oversupply in the office space segment to be absorbed by the market before it initiates new building projects. That said, it intends to add 40,000 m2 of NLA to its office space portfolio (an expansion of 12%), which will cost around $140 mln in total.

Planned expansion plans in Moscow real estate market

Type Net leasable area, '000 m2

Investment cost, $ mln

Construction start date

Construction finish date

Kashirskaya Retail 73 262 4Q15 2Q18Marina Roscha Retail 80 338 2Q18 3Q20Vernadskogo Office 20 55 n/a n/aPravoberezhnaya Office 22 88 n/a n/a

Source: Company

Contracting

BACKLOG VOLUME AT HISTORICAL LOW BUT SET TO RECOVER WITH RECENT REBOUND IN OIL PRICES

Currently, Enka Insaat has a contracting backlog of $1.6 bln, for a book�to�bill ratio of 1.2, the lowest in the last five years. The current backlog volume is $1.0 bln lower than the company’s historical average of $2.6 bln. Since the company’s main target markets are oil�producing countries, the decreasing backlog volume over the last two years may be attributable to sluggish oil prices. We expect the rebound in prices to increase construction and infrastructure activity in the MENA and CIS regions, which combined make up around 65% of the current backlog. The company plans to add around $1.5 bln of new volume over the next couple months, including turn�key contracts for two gas�fired power plants in Iraq, as well as a hydroelectric power plant in Georgia and construction of new US embassy buildings in various regions. We think the company will add $1.0 bln of new projects annually over the next few years and expect this number to reach $1.25 bln in the long term.



Enka Insaat’s contracting backlog, $ mln Projects Segment Start Finish Total size Enka's Share Backlog Total share in backlog/description

US 475 29%US embassies Public buildings Various 2018 1,200 100% The construction of US embassy buildings in the Netherlands,

Russia, Afghanistan and Turkmenistan.

Sabine Pass LNG Terminal (Train 5)

Oil & gas, petrochemicals

2016 2017 200 100% Supply of materials, spooling, fabrication, heat treatment, NDE, painting, bundling, containerizing and FCA delivery of carbon and stainless steel piping.

Iraq 316 19%West Qurna Initial Oil Train Facility


2015 2017 430 52% Turn�key contract for design and engineering, procurement, construction, testing and commissioning, start�up for the Initial Oil Train (IOT) Project.

Dohuk Combined�Cycle Power Plant

Power plants 2013 2018 400 100% Turn�key project of Mass Group Holding Ltd to switch its Dohuk Independent Power Project (IPP) in the Kurdistan Region from simple�cycle to combined�cycle technology.

Bismayah Combined�Cycle Power Plant

Power plants 2014 2017 555 100% Design, engineering, procurement, construction, commissioning and testing of a 1,500�MW gas�fired combined�cycle power plant in Bismayah.

Russia 260 16%Kashirskaya Shopping Center Civil works 2015 2017 262 100% Renovation of shopping mall owned by ENKA TC.

Kosovo 194 12%Prishtine – Hani I Elezit (Route No. 6) Motorway

Infrastructure 2014 2018 690 50% Construction of 65 km of the motorway (under a 50:50 JV with Bechtel).

Georgia 144 9%South Caucasus Pipeline expansion


2014 2018 542 50% Construction of a 16�km access road, two 120�MW compressor stations and pressure reduction and metering station.

Kazakhstan 124 8%Crude shipment capacity New Tank Project


2014 2018 300 50% Addition of new crude storage tanks, switching manifolds and installation of export pumps and multi�well pads under Senimdi Kurylys CSC EPC Offshore Contract

Kashagan Oil Field development


2015 2016 190 50% Chartering of Kashagan project�owned vessels to charterers for the Kashagan and Filanovsky fields

Others 134 8%

Total backlog volume 1,647


Backlog volume, $ mln

0

1,000

2,000

3,000

4,000

Sep

’11

Mar

’12

Sep

’12

Mar

’13

Sep

’13

Mar

’14

Sep

’14

Mar

’15

Sep

’15

Mar

’16

Sep

’16

Backlog Average


Book�to�bill ratio and revenues

0

1

2

3

4

5

0

500

1,000

1,500

2,000

2,500

Sep

’11

Mar

’12

Sep

’12

Mar

’13

Sep

’13

Mar

’14

Sep

’14

Mar

’15

Sep

’15

Mar

’16

Sep

’16

LTM revenues, $ mlnBook�to�bill ratio (rhs)Historical avg book�to�bill ratio (rhs)


EBITDA margin

0%

5%

10%

15%

20%

25%

30%

Sep

’11

Feb

’12

Jul ’

12

Dec

’12

May

’13

Oct

’13

Mar

’14

Aug

’14

Jan

’15

Jun

’15

Nov

’15

Apr

’16

Sep

’16

LTM EBITDA marginHistorical avg EBITDA margin


Energy

FREE MARKET CONDITIONS AFTER FEBRUARY 2019 WILL BE LESS FAVORABLE THAN THE CURRENT BOO SCHEME

Enka Insaat owns three gas�fired combined�cycle power plants – in Gebze (1,554 MW), Adapazari

(777 MW) and Izmir (1,523 MW), with a total installed capacity of 3,854 MW. The plants are

operated under a build�own�operate (BOO) model with 16�year take�or�pay agreements with the

Turkish Electricity Trading and Contracting Company (TETAS) which are set to expire in October

Backlog volume is at a historical low

Profitability has been hampered by the downward trend in oil prices

Low book�to�bill ratio signals need for new projects



2018 for Gebze and Adapazari and February 2019 for Izmir. Under the current scheme, natural gas

is a pass�through item, so Enka does not incur any price risk. Hence, the company will be able to

post EBITDA of $260�300 mln per year until the termination of the BOO arrangement.

However, starting in 2019, Enka Insaat will begin to operate in a free market environment where

spark spreads (the difference between spot electricity prices and gas costs per unit) are much lower

than guaranteed tariffs. Despite the higher efficiency of Enka Insaat’s NG plants, the low spark

spreads will likely place these assets behind renewable energy and local coal�fired plants in the new

merit order of the Turkish power generation market in 2019. This should exert extra pressure on the

CUR, which is close to 95% currently. We estimate that the company will only be able to generate

around $130 mln in EBITDA annually in a free market, or about half the current amount.

Current merit order of Turkish power generation market

BOO/BOT CCGTs

17%

RORHEPPs

8%

1,354 MWHEPPs

212 MWWPPs

450 MWTufanbeyli

TPP

936 MW BanIand 611 MWBanII CCGTs

Min

imum

dem

and:

16

GW

Ave

rage

dem

and:

30

GW

Peak

dem

and:

42

GW

ReservoirHEPPs18%

Wind4%

Lignite13%

Imported coal15%

Private CCGTs21%

Fuel oil/diesel3%

Cos

t of g

ener

atio

n

Supp

lyst

ack

Source: Sabanci Holding, Deniz Invest Research

Merit order of Turkish power generation market from 2019

RORHEPPs

8%

1,354 MWHEPPs

212 MWWPPs

450 MWTufanbeyli

TPP

936 MW BanIand 611 MWBanII CCGTs

Min

imum

dem

and:

16

GW

Ave

rage

dem

and:

30

GW

Peak

dem

and:

42

GW

ReservoirHEPPs18%

Wind4%

Lignite13%

Imported coal15%

Private CCGTs38%

Fuel oil/diesel3%

Cos

t of g

ener

atio

n

Supp

lyst

ack

FormerBOO/BOT

CCGTs

Source: Sabanci Holding, Deniz Invest Research



Spark spreads under BOO and a free market, $/kWh

0.8

1.0

1.2

1.4

1.6

0

3

6

9

12

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

20

19

E

20

20

E

20

21

E

Market price BOO price NG cost Spark spread (rhs)

Free market

BOO


Enka Insaat’s CUR under BOO and a free market

95%

70%

0%

20%

40%

60%

80%

100%

BOO (2010�18E) Free market (2019E�31E)

We expect the current 95% CUR to fall to 70% after the move to afree market.




Ownership structure Enka Insaat IFRS financials, TRY mln Tara family 50.2%Gulcelik family 31.4%Enka Spor Egitim 5.9%Free float 12.6%

2015 2016E 2017E 2018E 2019E 2020E 2021EINCOME STATEMENTRevenues 12,384 10,892 12,150 12,481 12,026 13,194 14,303 COGS (10,277) (8,559) (9,406) (9,579) (9,644) (10,567) (11,431)Gross income 2,108 2,333 2,744 2,903 2,382 2,627 2,872Gross margin 17.0% 21.4% 22.6% 23.3% 19.8% 19.9% 20.1% SG&A (360) (450) (502) (516) (497) (545) (591)EBITDA 2,038 2,197 2,618 2,784 2,298 2,508 2,723Adjusted EBITDA 2,038 2,197 2,618 2,784 2,298 2,508 2,723EBITDA margin 16.5% 20.2% 21.5% 22.3% 19.1% 19.0% 19.0% DD&A 291 313 375 396 410 424 438EBIT 1,747 1,883 2,242 2,389 1,888 2,084 2,284 Interest income 210 257 288 311 341 382 431 Forex gain 110 (17) 5 8 (1) (1) (1) Revaluation gain – – 1 2 3 3 3 Other gains (185) 310 216 189 197 222 251 Exceptionals – – 1 2 3 3 3EBT 1,882 2,434 2,751 2,897 2,426 2,688 2,965 Income tax (427) (511) (578) (608) (509) (564) (623) Minority interest (16) (36) (41) (43) (36) (40) (44) Discontinued operations – – 1 2 3 3 3Net income 1,440 1,886 2,133 2,247 1,883 2,086 2,301Adjusted net income 1,440 1,886 2,133 2,247 1,883 2,086 2,301Net margin 11.6% 17.3% 17.6% 18.0% 15.7% 15.8% 16.1%EPS, TRY 0.34 0.45 0.51 0.53 0.45 0.49 0.55Adjusted EPS, TRY 0.34 0.45 0.51 0.53 0.45 0.49 0.55

BALANCE SHEETAssets Cash and equivalents 5,014 5,505 6,337 6,640 7,401 8,286 9,331 Receivables 1,535 1,385 1,545 1,587 1,529 1,678 1,819 Inventories 679 938 1,030 1,049 1,056 1,158 1,252 Other current assets 592 393 438 450 434 476 516 Total current assets 7,819 8,220 9,351 9,727 10,420 11,597 12,918 Total non�current assets 12,955 15,930 17,931 19,402 20,546 22,229 23,974Total assets 20,774 24,151 27,282 29,129 30,966 33,826 36,892Liabilities Short�term borrowings 119 216 241 248 239 262 284 Payables 1,251 1,142 1,255 1,278 1,287 1,410 1,525 Other current liabilities 1,404 1,533 1,685 1,715 1,727 1,893 2,047 Total current liabilities 2,773 2,891 3,181 3,242 3,253 3,565 3,857 Long�term borrowings 303 519 579 595 573 629 682 Other non�current liabilities 2,644 2,520 2,124 1,538 1,484 1,623 1,755 Total non�current liabilities 2,947 3,040 2,703 2,134 2,058 2,252 2,437 Total liabilities 5,721 5,931 5,884 5,375 5,311 5,817 6,294 Minority interest 151 193 234 277 313 353 397 Equity 15,054 18,219 21,398 23,753 25,656 28,009 30,598Total liabilities and equity 20,774 24,151 27,282 29,129 30,966 33,826 36,892Net debt/(cash) (8,157) (9,585) (10,273) (11,179) (12,362) (13,984) (15,714)CASH FLOW STATEMENTNet income 1,440 1,886 2,133 2,247 1,883 2,086 2,301 Minority interest 16 36 41 43 36 40 44 DD&A (291) (313) (375) (396) (410) (424) (438) Working capital change 247 (218) (140) (38) 59 (126) (120) Other assets change (744) (189) (226) (238) (247) (255) (264)Operating cash flow 1,234 1,793 2,143 2,367 2,106 2,129 2,355 Maintenance capex – – – – – – – Expansionary capex – – – – – – – Other investments (1,115) (460) (765) (377) (305) (343) (379)Investing cash flow (1,594) (460) (765) (377) (305) (343) (379) Change in debt (203) 314 85 22 (31) 79 75 Dividends paid (580) (600) (754) (853) (898) (752) (833) Share issues/(purchases) – – – – – – – Other 36 (577) (83) (1,044) (377) (600) (578)Financing cash flow (747) (863) (753) (1,875) (1,306) (1,273) (1,336)Forex effects 601 – – – – – –Net change in cash (506) 471 625 115 494 512 640RATIOSP/E 15.0 11.5 10.1 9.6 11.5 10.4 9.4EV/EBITDA 6.7 5.6 4.4 3.8 4.1 3.1 2.3P/BV 1.8 1.5 1.4 1.2 1.1 1.1 1.0Net debt/EBITDA neg neg neg neg neg neg negTotal debt/EBITDA 0.2 0.3 0.3 0.3 0.4 0.4 0.4ROE 10.6% 11.3% 10.8% 10.0% 7.6% 7.8% 7.9%ROIC 8.2% 8.8% 8.5% 8.0% 6.0% 6.1% 6.1%Dividend per share, TRY 0.14 0.14 0.18 0.20 0.21 0.18 0.20Dividend yield 2.7% 2.8% 3.5% 3.9% 4.2% 3.5% 3.9%P/S 1.7 2.0 1.8 1.7 1.8 1.6 1.5P/CF 17.5 12.1 10.1 9.1 10.3 10.2 9.2Revenue growth �3% �12% 12% 3% �4% 10% 8%EBITDA growth 6% 8% 19% 6% �17% 9% 9%EPS growth �0% 31% 13% 5% �16% 11% 10%




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enka insaat - when differentiation makes the difference · 2017-01-02 · recommendation. in dollar...

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