Free market prices temporarily lost attractiveness!

Transcription

1 15- Mar AK ENERJI POWER GENERATION NEUTRAL Free market prices temporarily lost attractiveness! Ticker: AKENR Price per share Mcap mn PT Upside Beta 52-week range D. Vol mn TL 17.2 $11.3 $740 TL % 0.61 TL $4.2 Results (mn $) 3q09 4q A 2009A 2010E 2011E Price Performance TL; Relative Revenues Daily -1% ; -1% EBIT Month 0% ; -2% EBITDA Y to D 23% ; 24% Adjusted EBITDA Net Income Year 191% ; 31% EPS ($) % ; 20% Net Debt Dividend Yield n.a. Shr. Equity Rebased Assets 847 1, ,009 1,231 1, Minority Interest Revenues Δ y/y -54.2% -41.3% 27.7% -36.2% 6.6% 37.5% EBITDA Δ y/y -67.9% n.m -19.4% -46.4% 35.3% 153.0% 275 Net Income Δ y/y -37.3% n.m -68.7% n.m. n.m. n.m. 225 EBIT Margin 4.6% 0.2% 10.6% 7.2% 6.8% 20.1% 175 EBITDA Margin 12.0% 8.4% 15.8% 13.3% 16.8% 31.0% 125 Net Margin 15.8% -6.5% 15.5% 12.5% 15.6% 30.0% 75 P/E (T12) 22.6x 47.4x n.m. 47.4x 36.2x 11.1x 25 EV/EBITDA (T12) 31.7x 27.4x 14.7x 27.4x 20.3x 8.0x P/BV x 1.5x 1.1x 1.0x BVPS - $ AKENR Relative to ISE Dividend Yield n.a. n.a. n.a. n.a. Note: EBITDA is adjusted for 2% TRT fund on direct and indirect sales. We lower our price target for AKENR from the previous TL18.3 per share to TL15.3 per share, implying an 11% downside potential. Hence we downgrade our recommendation for AKENR from BUY to NEUTRAL. Lower DUY (free electricity market) price expectations for the year 2010 is the main factor behind our downward revision in our target price for AKENR shares. The introduction of new pricing mechanism in the DUY market in Dec 09 (please see below for more explanation) and a higher supply from hydroelectric power plants (a rainy winter caused water levels in the dams to rise substantially) are resulting in price pressures in the electricity market. Please also note that AKENR has decided to increase its paid-in capital by 475.5% in cash from the current TL65mn to TL375.8mn, implying TL4.75 per share cash capital increase. The exact timing of this capital increase has not been announced yet. Privatization issues in the electricity sector continue to be focal points Privatization strategy in the Turkish energy industry has finally been concluded. Accordingly, 45 state-run power plants with total installed capacity of 16k MW, which accounts for 37% of total installed capacity in Turkey, are planned to be privatized under 9 portfolios. PA aims to initially finalize the privatization of 4 state-run power plants with total installed capacity of 3,000MW by the end of We expect strong interest from AKENR in the tenders of both state-run power plants and distribution companies. Introduction of hourly pricing mechanism is expected to bring more efficiency and thus lower DUY prices It has been observed that the introduction of hourly price setting mechanism in DUY market in Dec 09 has brought some pressure on DUY prices as free market has become more efficient in comparison to 3-hourly price setting mechanism. This implies lower DUY prices if supply/demand imbalances remains tame for the Turkish power market. However, under high growth scenarios for the Turkish economy, it will be highly likely again for the economy to face power shortages, which will eventually drive DUY prices up, unless required energy investments is completed ahead of occurrence of possible power shortages. Gokhan Canitez gcanitez@terabrokers.com

2 Surprisingly lower DUY prices in 4q09 resulted in poor financial performance AKENR posted $15.7mn net income in 2009, down 77% y/y and worse than market estimates. The company revenues and EBITDA declined by 36.1% y/y and 46.3% y/y in 2009, respectively, missing the market estimates widely by the respective rates of 10% and 26%. While AKENR s average electricity sale price increased 1.4% y/y to reach TL per kwh in 2009 from TL per kwh in 2008, a 19% y/y decline in the company s power sales volume led to lower revenue generation in spite of a 10% increase in regulated tariffs as AKENR sold most of its power to DUY system. It is also interesting to note that this is the first time since the introduction of free market system for DUY prices to remain below regulated tariffs (16% below in 4q09). In response to easing DUY prices, AKENR have been aiming to reduce its high exposure to DUY system by switching to bilateral contracts with its customers. This would not only bring more stable sales prices to the company, but also provide some guarantee on its sales. However, it is also important to keep it mind that below-regulated tariffs DUY prices will be a temporary issue, if the Turkish economy starts to rebound strongly and to grow at a faster pace, which would be detrimental for supply/demand imbalances, but positive for DUY prices. In our opinion, AKENR s worse-than-expected financial performance is mainly be attributable to overestimation of average DUY prices in 4q09, which exhibited a 13% q/q decline in the same period. The underlying reason behind lower DUY prices were partly rainy weather conditions in the last quarter, which were very positive for hydro-power plants to generate more power and thus positive for the supply side, and partly the introduction of hourly pricing mechanism in Dec 09, whose impact was, however, felt only for one-third of the quarter. As a result of aforementioned factors, AKENR s EBITDA margin fell significantly to 8.1% in 4q09 from 12% in 3q09, but remained substantially above last year same period s 3% thanks to the combination of higher average electricity price and lower natural gas prices in comparison to previous year s averages. 1q09 2q09 3q09 4q q10e 2q10e 3q10e 4q10e 2010e Total Sales (TLmn) Steam Sales (TLmn) Steam Sales (000ton) Steam Price (TL/ton) Power Sales (TL mn) Power Sales (kwh mn) AKENR's Average Price DUY - % share in Power Sales 80% 83% 73% 73% 78% 70% 67% 63% 60% 64% Direct - % share in Power Sales 18% 12% 10% 9% 12% 10% 10% 10% 10% 10% Indirect - % share in Power Sales 2% 5% 17% 18% 10% 20% 23% 27% 30% 26% Electricity Tariffs (TL/1000 kwh) Average DUY Prices Electricity Tariffs for direct cust Electricity Tariffs for indirect cust Premium for DUY over general tariffs 39% 4% 6% -16% 8% -20% -15% -8% -7% -12% Discount rate for direct customers 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Discount rate for indirect customers 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Power Sales - Breakdown (kwh mn) Sales to DUY System Sales to Direct Customer Sales to Indirect Customer Power Sales - Breakdown (TLmn) Sales to DUY System Sales to Direct Customer Sales to Indirect Customer Source: Company reports, Tera Estimates

3 Quarterly Financial Forecasts for the year 2010 In general, we have not made any major changes to our key valuation assumptions for AKENR over our forecast period extending to However, in particular for the year 2010, we have assumed DUY prices to remain below our expected regulated tariffs throughout the year with gradual convergence to tariff levels towards the end of the year. As rainy winter caused substantial increase in water levels in the dams, it is reasonable to assume DUY prices to remain under pressure throughout Nevertheless, beyond 2010, we continue to assume DUY prices to remain slightly above regulated tariffs as we believe, from a longer point of view, lower DUY prices is a temporary issue considering supply/demand dynamics of the Turkish power industry. Although we expect AKENR to face a very poor operating profitability in 1q10 due to lower DUY prices, possible recovery in DUY prices starting from 2q10 and the completion of hydro-power plants (HPP) towards the end of 2q10 will save the EBITDA margin for the full year TLmn 1q09 2q09 3q09 4q q10e 2q10e 3q10e 4qe e Sales Cost of Sales NG Plant Costs Raw Material Natural Gas Other Material Depreciation General Production Cost Labour Cost HPP Plant Costs WPP Plant Costs Gross Profit Total Operating Expenses R&D General Administrative General Administrative (Excl. Depr.) Depreciation in Op. Exp EBIT Adjusted EBIT Depreciation Depreciation in COGS Depreciation in Operating Expenses Depreciation in Idle Capacity Exp Other Recurring Expenses EBITDA EBITDA Margin 16% 15% 12% 8.1% 13% -1% 4% 27% 21.8% 16% Adjusted EBITDA Adjusted EBITDA Margin 15.4% 14.7% 11.2% 7.5% 12.9% -1.6% 3.7% 26.1% 21.0% 15.3% Source: Company reports, Tera Estimates Note: EBITDA is adjusted for 2% TRT fund on direct and indirect sales High financing needs led to capital increase decision On the date of December 31 st, 2010, AKENR s board of directors decided to increase its share capital by TL310.5mn from the current TL65.3mn to TL375.8mn through rights issue. Recall that AKENR has huge financing needs owing to its ongoing investments and acquisition of distribution company SEDAS. Meanwhile, the company s target to reach a total installed capacity of 3,000MW from its current active installed capacity of 373MW is expected to exacerbate its financing needs further in the near future. In our financial model, we assume an additional capital increase almost at the same size through rights issue within 1-2 years.

4 New HPP investments are on the way As part of a long-term target of reaching 3,000MW installed capacity, AKENR continue to be in the quest of new investment opportunities with taking over an energy company named İckale Enerji, which has two HPP (hydro-power plants) projects with a total capacity of 163MW, corresponding to 44% of total installed capacity of AKENR s previously announced and its ongoing investments in HPP projects (373MW). As the transfer of the shares is subject to the approvals of the energy watchdog EPDK and the Competition Board, we do not incorporate this newly announced investment into our financial model. Recall that HPP operates at an EBITDA margin of around 80%, thus any increase in the weight of HPPs in total asset portfolio would bring more value to the company.

5 Valuation Model for AKENR The impact of Hydro Power Plants (216MW), which will be operational towards the end of 2q10, on operating profitability is expected to be curbed by lower DUY prices in However, full impact of HPPs on profitability will be felt in The impact of 900MW NG power plant: Higher revenues will be generated starting from $ mn 2010/12e 2011/12e 2012/12e 2013/12e 2014/12e 2015/12e Revenues , , ,218.5 GRM EBIT Other Income/Exp Fin. Inc/Exp Income Before Tax from cont. Op Taxes Net Income from Cont. Op Minority&Monetary Net Income EBITDA Gross Margin 13.0% 26.3% 23.0% 20.5% 19.9% 18.9% EBIT Margin 6.8% 20.1% 16.3% 17.7% 16.9% 15.6% EBITDA Margin 16.8% 31.0% 29.0% 23.3% 22.7% 21.7% Adjusted EBITDA Margin 15.6% 30.0% 26.5% 22.2% 21.7% 20.9% Pre-tax Income 6.4% 15.3% 12.6% 13.0% 11.9% 11.2% Net Income Margin 6.4% 15.3% 12.6% 13.0% 11.9% 11.2% Chg in Reveneus 7% 38% 10% 156% 0% -1% Chg in EBITDA 35% 153% 3% 105% -3% -5% Chg in Net Income 31% 227% -9% 164% -8% -7% Free Cash Flows ($mn) 2010/12e 2011/12e 2012/12e 2013/12e 2014/12e 2015/12e Adjusted EBITDA Capex Taxes on EBIT Δ in WC Free Cash Flow Terminal growth rate 1.5% Terminal Value Calculation $mn EBITDA after tax Sum of FCF x (1+ Long-term growth ) 1.02 Terminal Value Equals:Terminal Net Oper. Profit EV Less:Normalized CapEx 74.4 Total Debt Minus: Incremental WC 5.0 Cash Equals: Terminal Cash Flow Net Debt (-) x (1/(r-g)) 13.5 Minority Interest (-) 1.6 x PV factor 0.65 Subsidiary Fair Value (+) 1.3 Equals: Terminal value 1,242.4 Estimated Fair Value for Sedas (45% of fair value) 297 Cash outflow for Sedas (45% of $300mn) 135 Estimated Fair Value Current Mcap $mn Current Price $ 11.3 Target price $ 10.1 Upside potential -10.9%

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