Otokar: Priced for perfection, despite headwinds (downgraded to SELL)

We have updated our Otokar model and revised our earnings forecasts, reflecting our new KPI and FX assumptions. As a major supplier of military and commercial vehicles, Otokar has not secured sizeable domestic or export contracts ytd, and is faced with some headwinds, as continued concerns about the COVID-19 pandemic take their toll on both Turkish and EU economies. In our view, despite the low interest rate environment, the deteriorated European/Turkish tourism industries, rising budget deficits (COVID-19 stimulus) and weaker oil/natural gas demand will undermine the spending budgets of Otokar’s key clientele (militaries, municipalities, tourism industry) in 2H20E, while the outlook for a major improvement in 2021E remains uncertain. Nevertheless, considering Otokar’s strong commercial and R&D competencies, and its prominent position in the military/bus segments, we have incorporated cautiously optimistic growth assumptions (new contract wins) in our Otokar model beyond 2020E. However, after the 22% rally in the stock price over the past month, our revised 12M price target (PT) of TRY 137.8 offers 21% downside potential. We have downgraded our rating on Otokar to SELL, from Buy.