Aselsan: no defence windfall here (downgraded to HOLD)

Following Aselsan’s 1H22 results, and our review of the next 6-12 months’ catalysts and sector outlook, we have revised our valuation model and earnings estimates, and downgraded our rating to HOLD (from Buy), with a new 12-month price target (PT) of TRY 27.46/share (up 29%). Although the company’s 2Q22 revenues/EBITDA were 8%/15% above the consensus, this was not sufficient to offset the weak 1Q22. Moreover, post 1H22, management reiterated its conservative FY22E guidance (+25% revenue growth vs. the 55% delivered in 1H22 and a CPI of c.80%). What is more concerning for us is that, despite a predominantly hard currency orderbook (83% of the 1H22 backlog), providing close to four years of forward revenue cover, the company posted a 17% top-line contraction in USD terms in 1H22, while its new contract bookings were also down 31% yoy (in USD terms), resulting in a 14% yoy lower backlog of USD 7.9bn as of 1H22. With no sizeable deals (to reverse the declining backlog trend) in Aselsan’s near-term pipeline and considering the Turkish government’s rising fiscal deficit, we believe Turkey’s largest defence contractor may suffer from a temporary slump in the Turkish military’s modernisation programme until the 2023 elections are out of the way (while we expect strong exports growth, this is unlikely to change the big picture due to its limited revenue contribution). This, paradoxically, places Aselsan as an outlier amongst its global defence and aerospace peers, which are set to benefit from accelerating defence spending, especially by EU/NATO governments, due to the geopolitical paradigm shift created by the war in Ukraine.