Tofas - Adjusting to Better Margin Outlook

Tofas has managed to beat our profitability forecasts for two quarters in a row on the back of a rising share of sales to retail customers in the domestic market and reduced expenses. In the conference call following the 2Q17 results, the management cited these two factors to provide assurance that margins will comfortably be sustained at the 1H17 levels going forward. In light of the Tofas's stronger than expected 1H17 performance, we are raising our 2017 EBITDA and net income estimates by 9% and 11%. Our new forecasts point to a 2017E EV/EBITDA of just 8.6 for Tofas versus 10.4 for EM peers, despite the company's better growth prospects. Hence, we keep our BUY recommendation on the stock and raise our target price to TRY37.50 per share. Tofas shares have underperformed the market by 7% since the company published 1Q17 results and cut its export guidance for 2017. However, we believe that the 2Q17 results and the management's remarks from Friday's conference call will ease concerns over the company's sales and profitability prospects, leading to upward revisions in analysts' estimates. The company's plans to expand into new markets still present upside risk to our forecasts.