Turkey - TOASO - Main Takeaways from our Call with TOASO Management

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TOASO - Main Takeaways from our Call with TOASO Management

Since the ramifications of Covid-19 thread is more visible particularly for the manufacturing / industrial sector and deterioration in supply chains for almost all industries, as well as auto sector, we discussed that issue with TOASO management. Although covid-19 thread took its toll on auto industry in terms of production and supply chain, we discussed TOASO’s Take or Pay agreements, supply chain management and domestic market expectations.

Below you may find the key takeaways from our conference call and our approach on current situation.

 TOASO management strictly underlines that take or pay agreements are valid in all circumstances. As a result, expected cash-flow from export shipments will not be hurt due to the potential decline in export units. Recall that TOASO grabs EBITDA of the units that it is not able to export to FCA.

 In Italy, there could be an incentive package for the automotive industry in the coming months, which may be supportive for auto sector as well as FCA.

 TOASO is one of the few European factories where FCA has not stopped production. In case a recovery in European auto market after 1Q20 and/or 2Q20, we believe FCA may increase its orders from TOASO, if some European plants cannot start production soon and/or cannot meet the expected production level.

 First 2.5-month was quite strong for TOASO in terms of domestic sales. We consider that we may see some normalization in the market in the coming months. Recall that domestic auto market dramatically grew by 90% YoY to 74k units in 2M20.

 The Company has 0.45x net debt/EBITDA ratio as of Dec19 which does not threat company’s balance sheet in the short-midterm. (Dec18: 1.4x) Despite the Company faced with a weak domestic and export outlook in 2018 and 2019, free-cash-flow generation was quite strong stemming from well-disciplined OpEx and NWC management coupled with the profitability oriented sales mix strategy.

 Around 80% of TOASO’s COGS are comprised of direct material cost and imported vehicles’ cost. Thus, a slowdown in demand does not have a significant negative impact on margin due to low fixed cost.

As a result;
We have not yet seen any deterioration in the financial outlook of TOASO, which underperformed the BIST around 11% in the last month. We think that TOASO does not have a company-specific situation which should put pressure on company stocks relative to the BIST index.
According to our base case scenario, we have a BUY recommendation for TOASO with 12M target price TL35.00, which trades at 3.9x 1y fwd EV/EBITDA, having more than 40% discount according to its global peers.
According to our worst case scenario*, TOASO still has a c. 35% upside potential with a 12M target price of TL23.00.
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* 40% YoY decline in domestic market in 2020 and 10 year CAGR in the market was kept as the same level as base case scenario
No growth in export shipments in the model period - ToP contract assumption: 200k units per year
Peer multiples were declined by 50% due to the global pressure on stock exchanges
No change in WACC approach (in a range between 15.0-16.5%).