TOFAS. Company Update. Still offers potential value BUY. Rating. 19 February 2019

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1 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Company Update TOFAS Still offers potential value Tofas has been a laggard in the last one-year period, due to weaker exports than initially guided and downturn in the domestic market. We believe the gloomy outlook for the domestic and European automotive markets will continue to weigh on financials of Tofas and expect a 4% EPS decline in However, we maintain our BUY rating with TL24 per share price, due to the significant underperformance in shares, trading at 2019E P/E of 7.8x, at 24% discount to its 10-year average. A possible extension of the tax incentives in Turkey and potentially higher exports are upside risks to our forecasts. Furthermore, Tofas s BoD has proposed the distribution of TL1,76 DPS on March 19, implying an 8.8% dividend yield. Lackluster demand foreseen in export markets in Tofas recorded a dismal performance in exports in 2018, due to the deterioration in passenger car demand in Europe, particularly since the introduction of the WLTP regulation in Sep 18, enforcing stricter emission standards on passenger cars, and market share loss by the Fiat Group. We expect 220K units of exports, down 10%, in 2019 in line with the upper band of the management guidance, due to the termination of the GM contract and persisting weakness in regions where Tofas s exports are mainly channeled. However, upside risk to our forecasts remains, due to the launches of new versions of the Tipo family, primarily in Italy. Lowering forecasts on bearish guidance for the domestic market in 2019 Tofas provided guidance of K units for the domestic light vehicle market, down 36-39% and 40-45K units of domestic sales for Tofas, down 33-41% in We expect the sharp contraction in volumes to prevail in 1H19, while the tax incentives should have a limited effect, if not extended further. We believe the downtrend in interest rates and a more stable currency environment will be critical for demand creation in 2H19. We lower our forecast for the light vehicle market to 435K units from 466K units, implying a 30% contraction and estimate 48K units of domestic sales for Tofas in Details of the Doblo project might be announced in 2H19 - The management at the analyst conference call stated that the Company currently works on the production of new engines for the Tipo family and the development of the next generation Doblo. Discussions with Fiat Group regarding the Doblo project continue and the management might announce details in 2H19. Rating Target Price TL24 Return potential 21% Share Data Ticker: TOASO TI Share price (as of ) 19.9 Share price (52 week range) Market cap. (TL mn - USD mn) BUY 15.4 / ,950-1,880 # of shares (mn) & free float % Avg. trading volume 1M 3M 12M USD mn Price performance 1M 3M Y-t-D TL 10% 17% 18% USD 11% 18% 18% Rel. to BIST-100 7% 7% 6% Forecasts (TL mn) E 2020E Revenues 18,603 18,342 23,332 EBITDA 2,533 2,120 2,620 Net Earnings 1,330 1,279 1,725 Valuation E 2020E P/E 7.5x 7.8x 5.8x P/BV 2.7x 2.4x 1.8x EV/EBITDA 5.1x 6.0x 5.5x EV/Sales 0.7x 0.7x 0.6x Dividend Yield 8.0% 8.8% 4.4% TOASO (TRY) Rel. BIST-100 (rhs) Ece Mandaci, CFA ece.mandaci@tacirler.com.tr Please refer to the important disclosures at the end of this report.

2 Lackluster demand foreseen in export markets in 2019 Tofas recorded a dismal performance in exports in 2018, due to the deterioration in passenger car demand particularly since the introduction of the Worldwide Harmonized Light Vehicle Test Procedure (WLTP) on Sep 1, 2018, enforcing stricter emission standards on passenger cars and some types of light commercial vehicles. The law will apply to all models in light commercial vehicles on September 1, According to the ACEA data, passenger car sales contracted by 24% y/y in Sep 18, due to demand brought forward in Aug 18 and PC market registered 7-8% y/y decreases between Oct 18 and Dec 18. Passenger car demand remained flattish at 15mn units in Europe in The temporary decline in passenger car sales, due to the new regulation is likely to continue in 1H19, as the deliveries of some models yet to receive the certification have halted. Jan 19 data also points to 4.6% y/y decline in passenger car demand. A slightly better demand outlook is foreseen for 2H19, however, given the low base effect, compensating for the potential weakness in 1H19. Overall in 2019, flattish demand for the automotive market in Europe is forecasted. PC demand in Europe vs. Fiat market share LCV demand in Europe vs. Fiat market share Source: ACEA Source: ACEA Fiat Group has also struggled with the lackluster PC demand in Italy and Germany, where 43% of Tofas s exports were destined in 2018, and market shift from sedan to SUV sales, thus lost slight market share in the PC segment in Thus, exports of Tofas declined 10% to 244K units (5% decline once the effect of PSA contract, terminated in the end of 2017 is excluded) in The management expects an additional 10-18% decline in total exports to K units and 5-14% decline excluding the effect of GM contract in Note that the contract size with GM was 40K units and the contract terminated by the end of Total units delivered to GM were 11K units in Following the completion of the contract period with GM, we expect total volumes secured by take-or-pay contracts to shrink to around 260K units, representing 59% Company Update / TOFAS 2

3 Tofas s total capacity in The TOP contracts continue to provide a cushion against a downturn in exports, as Tofas receives the markup for the secured amount even if deliveries remain below the contract size. Nevertheless, we expect the additional markup received to decline in Tofas s management sounded cautious regarding the projection on exports for 2019, due to the miss in the guidance in However, the management also declared that the deliveries in Egea/Tipo model might increase during the year to cover the missing sales of the Fiat Punto model phased out in In order to capture the missing sales of the Fiat Punto model (30K units in 2018), Tofas has launched the entry level version of Tipo in Italy and the sports version is planned to be introduced with affordable pricing within the year. We factored in 220K units of exports in 2018, in our model, in line with the upper band of the management guidance. Capacity secured by take-or-pay contracts Breakdown of deliveries to Europe Source: Tofas and Tacirler Investment Source: Tofas The management at the analyst conference call stated that the Company is currently working on two new projects: 1) production of new engines for the Tipo family in compliance with the new EU regulations, 2) development of the next generation Doblo. Discussions with Fiat Group regarding the Doblo project continue and the management plans to announce details no earlier than 2H19. We believe a potential agreement with the Fiat Group with a contract size larger than the current amount would provide an impetus for growth. Company Update / TOFAS 3

4 Lowering forecasts on bearish guidance for the domestic market in 2019 Light vehicle market in Turkey closed 2018 with around 620K units, down 35%, due to the market downturn particularly after May 18. The market would experience a harsher contraction, if the tax incentives were not introduced in November, resulting in a 10-15% decline in retail prices. Recall that for cars with TL120K base price or below, SCT was reduced by 15% and for commercial vehicles VAT was lowered to 1% from 18% until year end. Later the incentives were extended until the end of Mar 19, however Jan 19 data still implied a 59% y/y contraction, while Tofas s aggregate sales declined by 50% y/y. We believe the financially distressed position of auto leasing companies (22% of PC sales in 1H18), diminishing purchasing power and deteriorating macro backdrop will continue to weigh on automotive demand in 2019E. Tofas provided guidance of K units for the light vehicle market, down 36-39% and 40-45K units of domestic sales of Tofas, down 33-41%. We expect the sharp contraction in volumes to prevail in 1H19, while the incentives should have a limited effect, if not extended further. We believe the downtrend in interest rates and a more stable currency environment will be critical for demand creation in 2H19. We lower our forecast for the light vehicle market and expect 435K units of sales, down 30%, versus our earlier guidance of 466K units. We factor in a recovery of 30% to 565K units in 2020, touching the 26-year average. As for Tofas, we factor in 48K units of domestic sales in 2018, down 29% slightly above the management guidance, assuming slight market share gain for Tofas. For 2020, we also expect a 30% growth in Tofas s volumes. Light Vehicle Market (Kunits) Growth in LV market vs. Tofas s domestic LV sales Source: ADA and Tacirler Investment Source: Tofas and Tacirler Investment The domestic market contraction coupled with TL depreciation against EUR have resulted in a major decline in the revenue share of Tofas s domestic revenues to 23% in 2018 from 32% in We expect domestic revenues to represent only 19% of Company Update / TOFAS 4

5 consolidated revenues in 2019, due to weaker volumes to be realized in the domestic market and depreciation of TL against EUR. Summary of Sales Performance K Units E 2020E 2021E Total Domestic PC LCV Egea/Tipo & Linea Imports Doblo Minicargo- Fiat PSA Imports Exports PC LCV Egea/Tipo & Linea Doblo Doblo- Fiat Opel Vauxhall Ram ProMaster Minicargo Minicargo- Fiat PSA Growth volume % 0% -21% -14% 10% 3% Domestic 9% -45% -29% 30% 5% Export -3% -10% -10% 6% 3% Revenues (TLmn) 17,468 18,606 18,342 23,332 26,270 Domestic 5,409 3,938 3,566 5,451 6,256 Export 11,888 14,455 14,776 17,881 20,014 Growth - Revenue % 23% 7% -1% 27% 13% Domestic 26% -27% -9% 53% 15% Export 21% 22% 2% 21% 12% EURmn E 2020E 2021E Revenues 4,246 3,282 2,741 2,964 3,054 EBITDA Profit Before Tax Net Earnings Growth % Revenues 0% -23% -16% 8% 3% EBITDA 19% -8% -29% 5% 0% Profit Before Tax 25% -24% -16% 15% 1% Net Earnings 7% -25% -19% 15% 1% EUR/TL average EUR/TL close Source: Tofas and Tacirler Investment Company Update / TOFAS 5

6 Valuation Our DCF valuation incorporate the major changes in operational figures and WACC assumptions of 16% risk-free-rate, 5.5% ERP, 0.7 Beta and terminal growth rate of 8%. Our valuation suggests TL24 per share target price. Tofas trades at E P/E, at an 24% discount to its 10-year average. Note that Bloomberg estimates on the graph next page are based on consensus estimates, which do not fully reflect the bearish guidance of the management. Tofas Discounted Cash Flow Analysis TL mn 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Revenues 18,342 23,332 26,270 31,608 34,914 39,198 43,805 48,955 54,709 61,140 y/y growth -1% 27% 13% 20% 10% 12% 12% 12% 12% 12% EBITDA 2,120 2,620 2,849 3,423 3,781 4,245 4,744 5,302 5,925 6,622 EBITDA Margin 11.6% 11.2% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% EBITDA adjusted 1 1,923 2,464 2,778 3,340 3,697 4,136 4,631 5,175 5,783 6,463 EBITDA Margin 10.5% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% Taxes on EBIT in Working Capital Chg. in NWC/Revenues 1.1% -2.0% -0.7% -0.6% -0.7% -0.6% -0.6% -0.6% -0.6% -0.6% Capital Expenditures -1,023-2,516-2,641-1,617-1,397-1,568-1,752-1,958-2,188-2,446 Capex/Revenues -5.6% -10.8% -10.1% -5.1% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% Free Cash Flow ,111 1,592 1,756 1,961 2,191 2,449 2,736 Free Cash Flow Margin 5% -4% -2% 4% 5% 4% 4% 4% 4% 4% discount factor Discounted FCF PV of Free Cash Flow 4,576 PV of Terminal 8% 7,231 WACC 17.1% Estimated EV 11,807 Risk Free Rate 16.0% - Net Debt (2018) 3,063 Equity Risk Premium 5.5% + Real Estate Investment 61 Beta Deferred Tax Asset 942 Cost of Equity 19.9% Fair Value 9,747 12M Target Value 11,969 Number of Shares (mn) 500 Target Price (TL) 24.0 Current Price 19.9 Upside Potential 21% Source: Tacirler Investment, 1 EBITDA adjusted includes other income and expense. Company Update / TOFAS 6

7 Consensus versus Tacirler Investment Estimates Estimates Tofas Consensus Tacirler Difference TLmn 2019E 2020E 2019E 2020E 2019E 2020E Net Sales 21,777 26,405 18,342 23,332-16% -12% EBITDA 2,589 3,091 2,120 2,620-18% -15% Net Income 1,575 1,816 1,279 1,725-19% -5% EBITDA Margin 11.9% 11.7% 11.6% 11.2% -0.3pp -0.5pp Target Price (TL per share) % Source: Bloomberg and Tacirler Investment Sensitivity Analysis EUR/TL 2019E Average Source: Bloomberg and Tacirler Investment EBITDA Margin 2019E 9.7% 10.1% 10.5% 10.9% 11.3% % -16% -5% 4% 14% % -13% -3% 7% 18% % -11% 0% 11% 21% % -9% 3% 14% 25% % -6% 6% 17% 29% Tofas- 12M Forward Looking P/E Tofas- 12M Forward Looking EV/EBITDA Source: Bloomberg Source: Bloomberg Company Update / TOFAS 7

8 Projected Financials Balance Sheet E 2020E 2021E Income statement E 2020E 2021E Cash 3,239 2,385 3,761 4,283 3,448 Revenues 17,468 18,603 18,342 23,332 26,270 Accounts receivables 7,726 7,088 8,308 10,365 10,339 Gross profit 2,026 2,516 2,276 2,867 3,162 Inventory 1,056 1,077 1,076 1,369 1,546 Operating expenses ,044 1,171 Other current assets -5,635-4,739-5,993-7,420-7,023 Operating profit 1,305 1,758 1,411 1,823 1,990 Current assets 7,726 7,088 8,308 10,365 10,339 EBITDA 2,001 2,533 2,120 2,620 2,849 Financial investments 1,197 1,016 1,000 1,529 1,755 Other income, net Net fixed assets 2,350 2,248 2,436 3,468 4,537 EBITDA adjusted 1,761 1,955 1,923 2,464 2,778 Intangible assets 1,704 1,579 1,705 2,393 3,106 Financial income, net Other non-current assets 899 1,071 1,078 1,355 1,518 Earnings before taxes 1,229 1,291 1,279 1,725 1,911 Non-current assets 6,149 5,914 6,220 8,744 10,916 Tax expense Total assets 13,875 13,002 14,528 19,109 21,254 Net earnings 1,283 1,330 1,279 1,725 1,911 Short-term financial loans 2,606 2,477 3,164 3,630 3,811 Cashflow statement Accounts payables 3,866 3,294 3,348 4,339 4,907 EBITDA 1,761 1,955 1,923 2,464 2,778 Other short-term payables Taxes Paid Current liabilities 6,845 6,098 6,835 8,379 9,180 Capital expenditures ,023 2,516 2,641 Long-term financial loans 3,231 2,971 3,365 5,052 5,307 Chg. in NWC Other long-term payables Free cashflows to firm Non-current liabilities 3,447 3,198 3,588 5,336 5,626 Shareholders' equity 3,583 3,707 4,105 5,395 6,448 Growth & margins Parent company 3,583 3,707 4,105 5,395 6,448 Revenues 22.7% 6.5% -1.4% 27.2% 12.6% Minorities EBITDA 46.5% 26.5% -16.3% 23.6% 8.8% Total liabilities & equity 13,875 13,002 14,528 19,109 21,254 Net earnings 32.2% 3.7% -3.9% 34.9% 10.8% Gross margin 11.6% 13.5% 12.4% 12.3% 12.0% Net debt 2,597 3,063 2,768 4,399 5,670 Operating margin 7.5% 9.4% 7.7% 7.8% 7.6% Net working capital 247 1, ,333 1,522 EBITDA margin 11.5% 13.6% 11.6% 11.2% 10.8% Net working capital (Operating) 4,916 4,871 6,036 7,395 6,977 EBITDA margin adj. 10.1% 10.5% 10.5% 10.6% 10.6% Invested Capital 4,301 4,909 5,019 7,194 9,165 Net margin 7.3% 7.2% 7.0% 7.4% 7.3% Free cashflow margin 4.6% 1.5% 4.6% -3.8% -1.7% Ratios Profitability Per share (TL) ROE 39.2% 36.5% 32.7% 36.3% 32.3% EPS Net margin 7.3% 7.2% 7.0% 7.4% 7.3% BVPS Asset turnover 1.4x 1.4x 1.3x 1.4x 1.3x DPS Leverage 3.9x 3.7x 3.5x 3.5x 3.4x ROA 10.0% 9.9% 9.3% 10.3% 9.5% Valuation ROIC 24.3% 30.5% 22.7% 23.9% 19.5% P/E 7.8x 7.5x 7.8x 5.8x 5.2x P/BV 2.8x 2.7x 2.4x 1.8x 1.5x Leverage EV/EBITDA 6.3x 5.1x 6.0x 5.5x 5.5x Financial debt/total assets 42% 42% 45% 45% 43% EV/EBITDA adjusted 7.1x 6.6x 6.6x 5.8x 5.6x Net debt/equity EV/Sales 0.7x 0.7x 0.7x 0.6x 0.6x Net debt/ebitda Dividend Yield 3.5% 8.0% 8.8% 4.4% 8.6% Free cashflow yield 8.1% 2.8% 8.4% -8.8% -4.4% Source: Tacirler Investment * All figures are stated in millions of TL unless otherwise stated. EBITDA adjusted is including other income/expense. Company Update / TOFAS 8

9 Important Disclosures Rating Methodology Stock ratings are based on absolute return potential of the stock, which is defined as the percentage change in target price from the current share price. All recommendations and target prices are set with a 12-month horizon. Target prices are set by using one or more of the following methodologies: DCF, Net Asset Valuation, sum of the parts model and multiple comparison. Rating Definition Strong Buy: The stock is expected to generate a return of more than 25% in TL terms. Buy: The stock is expected to generate a return of 15-25% in TL terms. Hold: The stock is expected to generate a return of less than 15% in TL terms. Sell: The stock is expected to generate a negative return within the forecast horizon. Disclaimer This document was produced by Tacirler Yatırım Menkul Değerler A.Ş. ( Tacirler Investment ), solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. This document does not constitute an offer of, or an invitation by or on behalf of Tacirler Investment to any person to buy or sell any security. The information contained herein has been obtained from published information and other sources which Tacirler Investment considers to be reliable. Tacirler Investment does not accept any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Recipients of this document are urged to base their investment decisions upon their own appropriate investigations that they deem necessary and they should make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment and their risk-tolerance. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and Tacirler Investment accepts no liability for any such loss or consequence. Not all investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. Tacirler Investment may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or their derivative securities thereon either on their own account or on behalf of their clients. Tacirler Investment may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates presented in this document. Company Update / TOFAS 9