Tekfen Holding: Cheap, despite COVID-19 headwinds (stays BUY)

Following its 1Q20 results and management’s recent FY20E guidance cut, we have updated our earnings estimates and revised our SOTP-driven valuation for Tekfen Holding (TH). Although, after the COVID-19 pandemic, Tekfen’s flagship engineering and contracting (E&C) business is facing headwinds, due to clients’ capex cuts, we believe that, at its current price level, the stock has already priced in the negatives and offers significant upside potential, due to its rich-cash position, relatively more defensive agri-business exposure and a predominantly USD revenue stream. We note that the stock price is down 25% ytd (lagging the BIST100 index by 18%) and, despite the deteriorated E&C outlook, we believe the stock’s underperformance is unjustified as TH remains abundantly cash rich (1Q20 net cash equivalent to 65% of its current market cap), it has not suspended its cash dividend payments (unlike some Turkish and EMEA peers), and its business portfolio remains FCF generative in 2020E (adjusted for the recent USD 100m minority stake acquisition in SOCAR Polymer) and beyond. Post our model revision, we have cut our 12M price target (PT) to TRY 21.60/share (from TRY 28.72), but we reiterate our BUY rating.