İş Yatırım Menkul Değerler Brokerage

Transcription

1 OYAK SECURITIES Company Update İş Yatırım Menkul Değerler Brokerage April 22, 2014 Not just a bet on brokerage ISMEN maintains its leading position in brokerage, but bottom line is now relying less on brokerage revenue thanks to balanced support from a promising set of subsidiaries The parent company, Is Yatirim (henceforth The House ) is leading the competition in equity and derivative trading with volume shares of 8.4% and 13.5% as of 2013 respectively. Among 95 licensed brokerage houses, it has the third highest volume share in fast growing FX brokerage with 11.7% share and the highest corporate finance revenue as of 9M13, according to most recent comparative data published by Turkish Capital Markets Association. Additionally, the subsidiaries, Is Asset Management, Is Private Equity and Efes NPL Asset Management are each situated in growth sectors and serve as important revenue diversifiers. The net income contribution from these three subsidiaries grew at a rate of 37% between 2010 and 2013 and made up 40% of net income in The House will feel the pressure of declining trading volumes at historically low commission rates in 2014 We predict the operating revenue for the House to be realized at TRL194mn in 2014 (up 0.6% YoY). This is based on our expectation of increased contribution of FX brokerage commission (2014E TRL33.3mn vs TRL29.0mn) and equity margin trading (2014E TRL33.8mn vs. TRL26.0mn) offsetting the decline in non-fx brokerage commission fee (2014E TRL67mn vs TRL73mn) and corporate finance (2014E TRL16mn vs TRL24mn). We see OPEX to grow 8% YoY to reach TRL158mn and net income contribution of the House to ISMEN s bottomline to go down 19% YoY to TRL33mn. Contribution of subsidiaries to net income will be flat YoY in 2014, but expect strong upside potential going forward We predict net income contribution of the subsidiaries in total to be at TRL26.8mn in Contribution of Is AM will continue to increase fuelled by the growing asset size of ANHYT pension funds. We do not expect any sale or acquisitions by Is PE in 2014 that would boost the bottom line as it did in Yet, we believe the track record of 26% IRR on USD terms achieved since 2004 is a good proxy for future performance. With NPL on the rise, coming off a low base, we expect Efes NPL AM to demonstrate improved performance and post a net income contribution of around TRL5mn in OUTPERFORM Maintained Bloomberg/Reuters Code ISMEN TI / ISMEN.IS Current Price 1.25 Target Price 1.75 Previous Target Price 2.00 Upside Potential 40% Expected Dividend Yield 5% Market Cap ($mn) 182 Free Float (%) 28.0% 12M high/low 1.08 / 1.55 DTV (3M avg. $mn) $0.1mn Estimates E 2015E Operating Revenue Net Income RoE Dividends % payout ratio % dividend yield 5.2% 6.3% 5.5% 4.6% P/E P/B Rel. Performance 1M 3M YTD 12M -5% 0% -3% 1% Barring recession in the economy, we see trading volumes and corporate finance activity to pick up by Quicker recovery in the markets and positive impact of new regulations to be in effect in mid-2015 are major upside risks to our valuation We expect recovery in the bottom line for 2015, with better net income figure resulting from higher contribution of corporate finance, brokerage and Is PE. We operate on the assumption that the commission rates will not decline further in nominal terms and the economy will not fall into recession in A quicker recovery will be a major upside risk to our valuation. Also, we do not factor in the impact of the Capital Markets Board of Turkey (CMB) regulation that stipulates brokerage houses to raise their capital to TRL25mn by July If exits and consolidation in the market ensue, it will imply higher volume share and commission rates for the House. We will wait to hear further details on implementation to reflect the possible upside for ISMEN in our valuation. We lower our target price from 2.00 to 1.75, but maintain our OUTPERFORM rating for the company We believe ISMEN offers an attractive risk/reward outlook with relatively low beta, and high dividend yield averaging 5.1% in the past three years within the universe of Turkish financials. The ratio of XBANK P/B to ISMEN P/B stands at 1.74 which is far above its three year average of 1.39, pointing to a discount of 25%. A recovering market will reflect positively on ISMEN s bottom line through higher commission fee generation. Yet, in the contrarian case of sustained high rates, ISMEN will take support from higher revenues from margin trading and NPL asset management business. Aykut Ahlatcıoğlu aykut.ahlatcioglu@oyakyatirim.com.tr is a member of Group Please see the important disclosures at the end of this report

2 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 ISMEN / Company Update April 22, 2014 Trailing - Price / Earnings ISMEN ISMEN Average P/E XBANK Index Trailing - Price / Operating Revenue ISMEN ISMEN Avg. Price/Operating Revenue Trailing - Price / Book Value ISMEN ISMEN Average P/B XBANK Index Source: Company Data, Bloomberg, Oyak Sec. 1yr Forward Looking - Price / Earnings ISMEN ISMEN Average P/E 1yr Forward Looking - Price / Operating Revenue Price / Operating Revenue 3yr Average 1yr Forward Looking - Price / Book Value ISMEN 3yr Average Source: Company Data, Bloomberg, Oyak Sec. 2

3 Net Income Contribution of the House and Subsidiaries (TRLmn) E 2015E House Inv Trust Is AM Is PE Efes AM Total House Inv Trust Is AM Is PE Efes AM Total House Inv Trust Is AM Is PE Efes AM Total House Inv Trust Is AM Is PE Efes AM Total Total Operating Revenue OPEX Operating Profit Net Financial Income Profit/Loss For The Period Minority interest Equity Holders Of the Parent Operational Revenue Breakdown for the House (TRLmn) Equity Commission Derivative Commission FX Commission Other Commission* Deduction from Commissions Equity Margin Trading Deposit Arbitrage Corp Finance Prop Trading Other** E 2015E % 12% -8% 10% % 8% -10% 10% % 9% 15% 15% % 0% -2% 10% % 12% -2% 12% % 0% 30% -10% % -23% 10% 10% % 100% -30% 30% % -86% 10% 20% % 18% -8% 12% * Other Commission includes commission fees from fixed income, repo, investment fund brokerage. ** Other includes commission fees from asset management and other operating income. 3

4 VALUATION ISMEN E 2015E 2016E Total Assets 4,166 4,935 5,639 6,268 6,949 Equity ,110 1,224 Equity Parent Profit After Tax Net Income No of shares EPS Dividend Dividend pay-out ratio DPS P/E P/BV ROAE 16.0% 14.5% 11.1% 12.9% 13.1% ROA 3.8% 2.8% 1.8% 2.2% 2.0% Long Term ROE Target 13.0% Risk free rate 9.00% Risk premium 4.50% Beta 0.8 Cost of equity 12.6% Growth 5.0% Adjusted P/BV 1.05 Target P/BV 1.05 Target Mcap 587 Discount Factor 1.13 Adj. Target Mcap 522 Dividend 21 Target mcap TRLmn 543 Current mcap TRLmn 388 Upside 40% Number of shares (mn)* 311 Target Price (TRL) 12M 1.75 Current Price (TRL) 1.25 Upside (TRL) 12M 40% * ISMEN applied to CMB to increase capital to TRL332mn from TRL311mn via a bonus issue on We use Gordon growth model for ISMEN that results in a 12 month TRL1.75 target price, pointing to an upside potential of 40%. We use COE derived from a 9% risk free rate and adjust it with a 4.5% equity risk premium. We use a 0.8 beta for the company. We end up with a cost of equity of 12.6%. We maintain our OUTPERFORM rating as the company trades with 6.5x 2014E P/E and 0.7x P/B offering 40% upside potential. 4

5 Upside/Downside risks to our valuation: Major downside risk to our valuation would be further deterioration in the market conditions that could extend beyond Our assumptions are on the conservative side as we use our in-house 12M target price on BIST 100 indicating an upside of less than 5% (the price level is significant for trading volume realizations) and benchmark rate estimate of 11%. Major upside risk is the positive impact of the regulation. If the new CMB regulation indeed results in exits/consolidations once in full effect by mid-2015, we would expect volume gains as well as higher commission rates for ISMEN. We prefer not to reflect this on our valuation at this point and will wait to see more details on the implementation. 5

6 Company Overview Is Yatirim established in 1996 is the leading domestic brokerage house in Turkey, active in all major investment banking business lines banking directly or through its subsidiaries. Brokerage, prop trading and corporate finance are conducted directly within Is Yatirim 1, while the other main lines of business are conducted through the subsidiaries listed below. Exhibit 1: Is Yatirim Subsidiaries Business Line Company Name BIST Ticker ISMEN's % Share Asset Management IS Asset Management N/A 70.0% Investment Fund IS B Type Investment Trust ISYAT 27.9% Private Equity Is Private Equity ISGSY 29.1% NPL Asset Management Efes NPL Asset Management N/A 74.0% OUTLOOK ON THE HOUSE AND ITS SUBSIDIARIES The House Brokerage: 2014 is going to be a tough year in a declining trading volume environment We predict 7% YoY growth in equity brokerage operating revenue as equity margin trading revenues will offset the decreasing contribution of commission income in 2014 Is Yatirim is the leading house in equity trading brokerage with market share of 8.4% in trading volume in Despite being down from 28% in 2011, equity brokerage business still constituted 19% of operating revenue in 2013 and is the biggest revenue item for the company. The two main revenue streams for Is Yatirim s equity brokerage business are commission income and interest earned through margin trading. The House let clients use credit at an average rate of 10% in 2013, funded fully through equity. As such, 40% of the equity brokerage revenue came from margin trading. Below, we analyze the two revenue channels in further detail. Commission Income: Total trading volume for the equity market is historically highly correlated with the average BIST free float Mcap on a quarterly basis. Between 2008 and 2013, the free float Mcap grew at an annualized rate of 14.9% while the equity trading volume grew at a rate of 14.6%. We estimate the average free float Mcap to go down 8% YoY. This is based on our estimate of average index price level in 2014 be down 10% YoY and the public offerings to contribute only 2% towards free float Mcap growth, below its historical average contribution of 4.3%. 1 The House is also managing a small portion of funds, but except a discretionary fund of TRL400mn, they are all in the process of being transferred to Is Asset Management. 6

7 Chart 1: Trading Volume vs. BIST Free Float Mcap Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q Equity Trading Volume (TRL bn, LHS) BIST Free Float Mcap (TRL bn, RHS) We expect 8% YoY contraction in equity trading volumes for 2014 and no change in commission rates resulting in 8% decline in equity commission revenue. Source: TSPB, Borsa Istanbul, Oyak Securities The average commission rates stands at 0.035% for the sector and 0.025% for Is Yatirim as of 3Q13 according to latest data announced by the Association of Capital Market Intermediary Institutions of Turkey (TSPAKB). This is pointing to a decline of 46% and 57% for the sector and ISMEN respectively since 1Q08. Note that, Is Yatirim s lower commission rate is reflective of the higher share of prop trading in trading volume. We do not expect further declines in the commission rates as the rates are already below breakeven point for most brokers. Hence, we expect 8% YoY contraction in equity commission revenue for 2014 in line with decline in trading volumes. Margin Trading: Sector credit volume has been growing steadily and reached TRL1.2bn as of 3Q13. We expect that Is Yatirim s average lending rate realized at around 10% to go up to 15%, while estimate that the decline in credit volume will be limited at 5%. The decline is lower than the decline in free float Mcap as share of credit tend to increase in declining markets. This is evidenced by the chart below which demonstrates that the credit volume growth has been less volatile than the growth in trading volume. Chart 2: Credit Volume vs. Equity Trading Volume We expect that higher lending rates along with increasing proportion of credit positions in declining markets will lead to 30% increase in margin trading income Q13 2Q13 1Q13 4Q12 3Q12 2Q12 1Q12 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 1Q10 4Q09 3Q09 2Q09 1Q09 4Q08 3Q08 2Q08 1Q08 Equity Trading Volume (TRL bn, LHS) Sector Credit Volume (TRL bn, RHS) Source: TSPB, Oyak Securities 7

8 Combining our volume and rate expectations, we see approximately 30% YoY increase in credit margin trading revenue for This increase in revenue will be fully reflected in operating income as the company funds the lending fully through equity. We anticipate the derivative commission revenue to decrease 10% YoY from its current level of TRL32.9mn in line with the decrease in trading volumes Is Yatirim serves domestic and international clients in both local as well as international derivative markets. Its success in dominating the international derivatives market trading for local investors has led Is Yatirim to have commission rates above sector averages as seen at the chart below. We expect a 10% contraction in derivatives trading revenue for 2014 in line with decreasing trading volumes. However, we believe Is Yatirim s derivative brokerage business has strong long term prospects. In particular, ability to serve domestic clients for international markets will continue to shield Is Yatirim, from the fiercer competition for derivative brokerage at Borsa Istanbul. This is best reflected at the chart below showing how Is Yatirim managed to keep the commission rates steady, while the average rates for the sector plunged 49% from 1Q08 to 3Q13. Chart 3: Derivative Trading Commission Rates 0.04% 0.03% 0.03% 0.02% 0.02% 0.01% 3Q13 2Q13 1Q13 4Q12 3Q12 2Q12 1Q12 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 1Q10 4Q09 3Q09 2Q09 1Q09 4Q08 3Q08 2Q08 1Q08 Sector Avg. Commission Rate ISMEN Avg. Commission Rate Source: TSPB, Borsa Istanbul, Oyak Securities The FX trading business in Turkey is still in the growth stage, and under our baseline case, we see Is Yatirim to increase its revenues by another 15% YoY reaching TRL 33.3mn The FX trading business has been growing at a breakneck speed in Turkey. The FX market has grown at a quarterly rate of 26% on volume basis and 19% on revenue basis from 4Q11 to 3Q13. Yet, Is Yatirim was not able to increase its FX brokerage revenues at a similar rate. This is expected to an extent, as high profitability of the business led other houses to get into to the lucrative business of FX brokerage. We do not expect a further decline of Is Yatirim s market share. The current share of around 10% is consistent with the House s share in the other markets. Additionally, the management decided to allocate a bigger marketing budgeting to this segment to get back some of the lost ground. Therefore, revenue growth should be in line with the sector growth which will be in mid-teens according to our conservative estimates. 8

9 Chart 4: FX Trading Market in Turkey and ISMEN's Share % 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 0.0% ISMEN % Revenue Share (RHS) FX Trading Revenue in Turkey (TRL mn, LHS) Source: TSPB, Oyak Securities As of 9M13, 61% of the registered brokerage houses do not satisfy the capital requirement to be a full brokerage house, but make up 28% of trading volume in equities, 26% in derivatives, and 57% in FX. The new CMB regulation that will be in full effect by July 2015 is introducing more stringent capital requirements for brokerage houses and will lead to a better competitive environment for Is Yatirim s brokerage business Low barriers to entry, and relatively low fixed cost nature of the brokerage business in Turkey led to a market where around 100 houses participated in a race to the bottom in commission rates. As a result, the average ROE stands at -5.8% as of 2012 according to the latest full year data announced by TSPAKB. With the recent regulation introduced in December 2013 by the CMB, the brokerage houses would need to raise their capital to TRL25mn to obtain license for full brokerage house activities by July As of 9M13, 61% of the 95 registered brokerage houses do not satisfy this capital requirement. The average shareholder equity for these houses stands at TRL5.7mn well below the threshold. Yet, they make up 28% of trading volume in equities, 26% in derivatives, and 57% in FX. We believe the new regulations will benefit Is Yatirim with higher market share and higher commission rates as; (1) Exits and consolidation in the market is likely. This is a stated goal of the new regulation. We expect that a significant number of brokers (currently around 100 in total) will either exit the market altogether or merge with other houses. (2) Some will choose to operate as introducing brokers, as the capital requirements are much less stringent for this category. The introducing brokers will not have the license to send orders directly to the exchange. They will have to pay fees to houses such as Is Yatirim who have the full license to act as intermediaries. (3) Higher capital requirements will put pressure on already depressed ROE and make it harder for houses to survive at low margins. Higher margin expectation is likely to raise commission fees, as the sector has already gone through a cost-cutting cycle. 9

10 % Change in Commission Rates ISMEN / Company Update April 22, 2014 We prefer not to reflect the effect of the regulation on our valuation at this point and will wait to see more details on the implementation. The table below demonstrates the results of an approximate analysis for the sensitivity of the target price to change in market share and commission rates. Sensitivity Analysis for the CMB regulation Change in Market Share Target Price (TRL) -2.0% 0% 2.0% % % % * Our base case scenario is no change in ISMEN's volume share or in the commission rates. 10

11 Trading: Deposit arbitrage will continue to be profitable Is Yatirim has been running a successful arbitrage business which exploits temporary spreads between interest rates at different markets. The company booked operating income of TRL30.4mn through deposit arbitrage, 9% of the total operational income in We think that the interest rate volatility is going to continue in the foreseeable future and estimate that the arbitrage desk will contribute to operating income at similar levels. Corporate Finance: Expect 30% YoY decline in 2014 Is Yatirim advises companies in M&A, debt instrument offerings as well as equity IPOs. In 2013, the revenue shares of these lines of business within corporate finance division were realized roughly equal to each other. On the M&A side, the company advises group companies such as Trakya Cam as well as small and mid-cap domestic companies. Is Yatirim is leading the market in debt instrument offerings, with an offer size of TRL12.7bn in On the equity side, Pegasus IPO conducted by Is Yatırım raised TRL650mn and made up 46% of the total revenue raised in 2013 through IPOs. With the change in market sentiment starting from May 2013, the corporate finance revenue took a plunge and was realized at TRL8.5mn in 2H13 down from TRL15.0mn in 1H13. As some big ticket planned IPOs of 2014 are postponed, added to curbed enthusiasm of corporates taking on debt in an increasing rates environment, we expect corporate finance revenues to be at a similar level to 2H14 and forecast 30% YoY decrease in revenues. Is Asset Management Is Yatirim is managing TRL14.4bn as of end of 2013 primarily through its subsidiary Is Asset Management. On the pension side, ANHYT funds are managed. These funds are crucial for the prospects of the asset management business not only because of the higher AUM growth compared to the mutual fund side, but also because of higher commission rates charged. In 2013, roughly 70% of the commission income came from pension fund management. Yet, these funds only made up 31% of the total AUM. Based on our ANHYT growth estimates, we predict AUM growth of 27% on the pension side. On the non-pension side, we estimate a 5% increase YoY consistent with the recent growth trend. Overall, we predict commission revenue to grow by another 16% in 2014 and consider growth rates at mid-teens will be sustainable going forward. 11

12 Chart 5: AUM and Commission Revenue E AUM-Mutual Funds (TLR bn, LHS) AUM-Pension Funds (TRL bn, LHS) Total Asset Management Commissions (TRL mn, RHS) Source:Company Data, Oyak Securities Is Private Equity Is PE successfully sold its 20% stake Aras Kargo (acquired for TRL17.5mn on ) to Post 206 Beteiligungs GmbH for TRL100mn. This led to record net income contribution of TRL19.9mn to Is Yatirim in This is the 11 th exit that the company had made since its establishment in Although return for Aras Kargo should be taken as an exception, the IRR for the exits so far is still quite high at 26.5% on USD basis according to management calculations. Currently, the company holds four companies in its portfolio, with a total carrying value (inflation adjusted, but not marked to market) of TRL73mn, as of end of The majority of the investments are in the retail sector, with remaining 25% in telecom and healthcare sectors. The NAV amounting to TRL260mn is comprised of investment in treasuries, corporate bonds, and cash in addition to the investments in the four companies. We do not anticipate any new sales or new investments in 2014 and expect net income contribution of TRL5.5mn due to interest revenue generated through bond and cash holdings. 12

13 Chart 7: NAV breakdown of IS Private Equity Cash&Other Short Term Investments 30% Numnum 11% Nevotek 3% Toksöz 10% Ortopro 4% Corp. Bond 22% Treasuries 20% Source:Company Data, Oyak Securities Is Investment Trust The investment fund with NAV of TRL234.8mn as of 1Q14 holds around 40% corporate bond (mostly FRN), 40% treasuries with the rest in equities. The fund is actively managed and the asset class weights are adjusted depending on market conditions. Based on our expectations of asset performances in 2014, we predict investment fund s net income of contribution to equal to TRL6.5mn up from TRL1.2mn in 2013, a year at which the trust suffered capital loss on its bond hold holdings. Efes NPL Asset Management Efes Asset Management has been established at the beginning of 2011 as a new entrant to the NPL Asset Management business which has a short history going back to 2008 in Turkey. The NPL portfolio that the company holds doubled from 2012 to 2013 and stands at TRL83.9mn as of 4Q13. This is still less than 3% of the total portfolio that the domestic NPL management sector holds. Coming off a low base, we expect to see high growth performance and contribute to net income at around TRL4.9mn in 2014 up from TRL1.4mn in

14 Balance Sheet (TRLmn) E 2015E 2016E Current Assets 2,979 4,018 4,785 5,474 6,087 6,750 Cash and cash equivalents 1,776 2,218 2,666 3,121 3,464 3,827 Financial investments Trade receivables 640 1,004 1,296 1,433 1,590 1,765 Non-current Assets Financial investments Investments accounted for under equity method Tangible fixed assets Intangible fixed assets TOTAL ASSETS 3,063 4,166 4,935 5,639 6,268 6,949 Current Liabilities 2,373 3,241 3,908 4,517 5,014 5,565 Financial liabilities 1,816 2,320 2,754 3,044 3,379 3,751 Other financial liabilities Trade payables ,433 1,590 1,765 Non-current Liabilities Provisions related to employee benefits EQUITY ,110 1,224 Shareholders Equity Paid-in capital Retained earnings Net profit / (loss) for the period Minority Interest Total Liabilities and Shareholders' Equity 3,063 4,166 4,935 5,639 6,268 6,949 Income Statement (TRLmn) E 2015E 2016E Trading Interest and derivative income / (loss) from operating activities (net) Income from services (net) Other operating income / (expenses) (net) Total Operating Revenue Marketing, sales and distribution expenses (-) General administrative expenses (-) Research and development expenses (-) OPEX Gross Profit Other operating income Other operating expenses (-) OPERATING PROFIT / (LOSS) Share in net profit / (loss) of investments accounted for under equity method Finance income Finance expenses (-) PROFIT / (LOSS) BEFORE TAXATION FROM CONTINUED OPERATIONS Tax benefit / (charge) from continued operations PROFIT / (LOSS) FOR THE PERIOD Minority interest EQUITY HOLDERS OF THE PARENT Dividend

15 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Feb-14 Mar-14 OP OP ISMEN / Company Update April 22, 2014 ISMEN Relative Performance Chart Rec. Date Recommendation 12-Nov-13 OP OP: Outperform 20-Aug-13 OP MP: Marketperform 10-Apr-13 OP UP: Underperform 20-Mar-13 UR UR: Under Revision OYAK SECURITIES is a member of Group