Ford Otosan (FROTO), a JV between Ford and Turkish conglomerate Koc Holding established in 1959, increased its exports by 2% y/y to 333,734 units last year, just below its 2019 guidance of 335,000-345,000 units, Vladimir Bespalov of VTB Capital said on January 13 in a 2019 auto exports research note entitled “Neutral for our views on Tofas (Buy) and Ford Otosan (Hold)”.

Tofas (TOASO), a JV between Fiat and Koc established in 1968, endured a 20% y/y decline in exports to 194,107 units in 2019, lower than its guidance of 200,000-210,000, data from the Turkish Automotive Manufacturers Association (OSD) showed.

VTB said that Tofas’ weak export result “does not affect export cashflows due to take-or-pay arrangements”.

“According to agreements signed with Fiat, PSA and Opel/Vauxhall, Tofas can charge fixed costs, borrowing costs and a mark-up where lower than agreed upon units are demanded by contracted parties. Accordingly, even in environments of contraction, Tofas can increase profitability… the company is currently break-even in agreed units, and thus no additional margin is derived by the take-or-pay contract in upcoming years,” Seker Invest noted on January 14 in its equity strategy for January entitled “Quietly Optimistic”.

Tofas is a steady dividend payer; it has been steadily distributing dividends since FY2005, Seker added.

Dividend Payments and Bonus Issues for 2019
	Annual				Gross	Net			2010-2018
	Net	Total		Gross	Dividend	Dividend		Dividend	9 years
	Profit	Bonus	Bonus	Dividend	per	per		Yield		Yield
	TRY	TRY	share	TRY	Share	Share	Payment	Last	Paid	Average
	mn	mn	%	mn	TRY	TRY	Date	%	Years	%
TOASO	1,330			880	1.76	1.50	19-Mar	9.97	9	5.66
TAVHL	1,455			758	2.09	1.77	20-Mar	7.93	8	3.83
KRDSA	292			68	0.35	0.30	25-Mar	2.76	-	-
OTKAR	164			72	3.00	2.55	25-Mar	2.91	9	3.72
AYGAZ	228			372	1.29	1.09	28-Mar	14.17	9	7.86
TUPRS	3,713			3,794	15.15	12.88	28-Mar	12.03	8	6.97
FROTO	1,683			853	2.43	2.07	1-Apr	4.24	9	5.29
KCHOL	5,537			1,009	0.40	0.34	1-Apr	2.41	9	1.97
TBORG	428			537	1.66	1.41	2-Apr	21.12	-	-
TEKFN	1,403			422	1.14	0.97	2-Apr	4.34	8	3.07
SAHOL	3,830			612	0.30	0.26	3-Apr	3.66	9	1.83
CLEBI	205			129	5.30	4.51	16-Apr	6.22	7	4.30
ENKAI	1,582			750	0.15	0.14	17-Apr	2.82	9	1.51
EREGL	5,598			4,830	1.38	1.25	8-May	18.06	9	8.03
VESBE	623			567	2.98	2.54	15-May	21.02	-	-
BRSAN	283			116	0.82	0.70	16-May	10.37	8	3.70
GOODY	126			24	0.09	0.08	27-May	3.42	9	2.51
AEFES	97			300	0.51	0.43	31-May	2.59	8	1.61
ANACM	451			90	0.12	0.10	31-May	4.24	6	1.71
CCOLA	327			300	1.18	1.00	31-May	4.24	9	1.18
SISE	2,326			400	0.18	0.15	31-May	3.33	9	2.07
SODA	1,556			345	0.35	0.29	31-May	4.74	-	-
TRKCM	958			170	0.14	0.12	31-May	4.64	8	2.40
BIMAS	1,250			365	1.20	1.02	12-Jun	2.99	9	1.54
TCELL	2,021			1,010	0.46	0.39	18-Jun	3.62	4	3.32
ASELS	2,318			174	0.15	0.13	19-Jun	0.80	9	0.81
PETKM	872	462	28	-	-	-	19-Jun	28	5	3.08
KRDMA	172			63	0.13	0.11	26-Jun	5.93	3	1.71
KRDMB	85			31	0.13	0.11	26-Jun	5.90	3	1.71
KRDMD	557			205	0.13	0.11	26-Jun	5.62	3	1.71
BIMAS	1,250	304	100	274	-	-	24-Jul	100	9	1.54
TCELL	2,021			1,010	0.46	0.39	31-Oct	3.62	4	3.32
BIMAS	1,250			365	0.60	0.51	18-Nov	2.99	9	1.54
FROTO	1,683			432	1.23	1.05	21-Nov	1.90	9	5.29
KRDMA	172			63	0.13	0.11	27-Nov	5.93	3	1.71
KRDMB	85			31	0.13	0.11	27-Nov	5.90	3	1.71
KRDMD				205	0.13	0.11	27-Nov	5.62	3	1.71
BIMAS	1,250			243	0.40	0.34	11-Dec	1.70	9	1.54
Source: Seker Invest

Tofas’ 24.6% stake was listed on the Borsa Istanbul while free-float shares amounting to 37.9% in the company were held by foreigners, according to Seker.

The automaker is in VTB’s view better exposed to the recovery of the domestic market, while the forthcoming announcement of the New Doblo contract might serve as another potential share price trigger.

Tofas’ domestic light commercial vehicle (LCV) sales rose by 8% y/y to 78,692 in 2019, beating its guidance for 70,000-75,000 as well as the 23% y/y market contraction.

Tofas has updated its overall LCV sales target for 2019 to 470,000-490,000 units from the previous 380,000-400,000.

Ford Otosan's export sales rose by 4% y/y to 29,948 units in December alone after three consecutive months of decline “which the company explained earlier [as caused] by supplier issues”.

This might indicate that these issues have been resolved, according to Bespalov.

Ford Otosan's domestic retail sales were down 28% y/y to 49,973 units in 2019, close to the upper end of the guidance range of 40,000-50,000.

VTB said Ford Otosan might benefit from future cooperation between Ford and Volkswagen, as well as its plans to boost exports of heavy trucks.

In particular, the company plans to increase the geographic footprint for its truck sales from 43 countries in 2019 to 81 countries by 2024.

Nevertheless, VTB saw Ford Otosan as fairly valued at the moment.

Ford Otosan has distributed regular dividends since 2004 with an average pay-out ratio of 50-60%. In FY2019, it distributed Turkish lira (TRY) 3.66 of dividends per share with a dividend yield of 5.0% through 2018 net income, according to Seker.

“Ford Otosan’s cost + plus type agreements, which are also denominated in Euro, help to limit the foreign exchange risk that the Company is exposed to. Ford Otosan’s foreign exchange risk stems from imported cars to the extent that TRY depreciation might not be fully reflected in sales prices,” Seker added.

Seker appreciated Ford Otosan’s business structure, which is settled on exports, and its profit orientation on the domestic market.

Although the Istanbul-based brokerage takes an optimistic approach towards the business structure of Ford Otosan, it considers the company’s laudable performance already priced in.

Yet growth in the business (organic growth + partnership with VW), being a regular dividend payer and having a natural FX hedge lead Seker to think that Ford Otosan should feature in long-term portfolios to mitigate the potentially negative effects of Turkey’s political and economic fluctuations.

Ford Otosan’s 20.5% stake was listed on the Borsa Istanbul with free-float shares equivalent to 41% of the company held by foreigners, according to Seker.

Ford Otosan managed to up its profit by 28% y/y to TRY454mn in Q3 (market expectation: TRY431mn). That contrasted with the 4% y/y decline to TRY298mn (market expectation: TRY311mn) reported by auto producer Tofas.

Major Borsa Istanbul Companies: Q3 Financials
		Net
	Market	Sales	y/y	EBITDA	y/y	Profit	y/y	Profit	y/y
TRYbn	Value	9-mo	%	9-mo	%	9-mo	%	Q3	%	P/E	P/B
Koc Holding	51.1	113.6	11	8.12	-20	3.28	-14	1.08	-15	10.24	1.42
Garanti BBVA	40.9	13.8	8	-	-	4.94	-11	1.30	-22	6.82	0.79
Akbank	39.2	11.1	5	-	-	4.09	-12	1.40	5	7.63	0.76
Tupras	30.9	68.0	7	3.10	-54	0.34	-83	-0.16	-	14.67	2.41
Turkcell	28.8	17.6	19	7.88	16	2.49	115	0.80	232	8.58	1.66
Isbank	27.8	14.2	9	-	-	3.76	-18	1.35	9	4.66	0.51
BIM	27.3	29.7	28	2.35	71	0.91	2	0.34	-5	21.59	6.75
Erdemir	25.3	21.0	8	4.76	-26	3.09	-21	0.78	-41	5.31	0.88
Turk Telekom	24.3	17.4	16	8.25	30	1.86	-	1.12	-	5.97	2.71
Ford Otosan	23.5	27.7	19	2.37	17	1.34	6	0.45	28	13.4	5.09
Aselsan	21.6	7.6	47	1.56	44	1.98	14	0.64	-19	8.45	1.81
Yapi Kredi Bank	21.1	11.1	10	-	-	3.34	-7	0.98	-12	4.78	0.53
Turkish Airlines	18.8	56.2	21	8.90	-9	2.59	-37	3.71	-6	7.37	0.5
Isdemir	18.5	12.6	9	2.76	-32	1.90	-36	0.43	-59	6.09	1.22
Sabanci Holding	17.8	13.8	17	6.87	-8	2.90	-15	0.95	-19	5.36	0.56
Arcelik	12.6	23.6	21	2.52	36	0.68	20	0.24	-4	13.11	1.4
Anadolu Efes	12.3	18.2	27	3.21	38	0.84	-	0.59	-	11.54	1.02
Tofas	11.9	13.4	-3	1.82	-4	1.03	3	0.30	-4	8.79	2.99
Vakifbank	11.7	8.4	2	-	-	1.52	-51	0.50	-49	4.57	0.38
Koza Altin	11.3	1.9	72	1.27	97	1.26	28	0.53	9	7.8	2.15
Sisecam	10.1	13.2	19	2.82	14	1.36	-34	0.43	-58	6.26	0.73
TAV Airports	9.9	3.7	26	1.84	38	0.95	-16	0.56	-16	7.77	1.49
Coca Cola Icecek	8.3	10.0	16	2.05	19	0.97	484	0.56	1,795	7.38	1.32
Enerjisa	8.2	14.6	17	2.97	24	0.79	3	0.33	25	10.63	1.25
Petkim	7.7	8.9	22	1.22	-15	0.71	-23	0.24	-43	11.55	1.61
Pegasus	7.6	8.5	36	3.07	140	1.31	103	1.20	62	6.52	1.59
Ulker	7.1	5.7	36	0.96	46	0.74	29	0.25	15	8.2	1.73
Halkbank	7.1	6.8	11	-	-	0.92	-58	0.31	2	5.73	0.24
Soda	5.7	3.1	25	0.72	-1	0.81	-45	0.15	-82	6.37	1.06
Sasa	5.2	2.0	22	0.14	-58	0.96	134	0.47	224	4.56	2.11
Emlak REIT	4.9	3.6	34	0.37	-67	0.20	-82	-0.15	-	13.02	0.37
Trakya Cam	3.8	4.9	16	0.87	2	0.49	-36	0.17	-37	5.65	0.65
Source: Seker Invest

In Q4, Ford Otosan’s exports declined by 4% y/y to 86,529 units while Tofas’ exports fell by 14% y/y to 43,790, according to calculations by Reuters.

In 2019, Turkish carmakers exported 86% of their overall production while exports fell by 5% y/y to 1.25mn units and overall production fell by 6% y/y to 1.46mn.

Oyak Renault, a JV between Renault and local conglomerate Oyak, was the largest vehicle exporter in Turkey at 295,275 passenger car units in 2019 while Toyota exported 227,019 passenger cars and Hyundai Assan 169,803 units.

Turkey's Vehicle Industry
(units)	Dec	y/y	2019	y/y
P. Cars Production	94,991	16%	982,642	-4%
Total Production	135,775	10%	1,461,244	-6%
P. Cars Sales	70,829	16%	387,256	-20
Total Sales	92,847	16%	491,909	-23
P. Cars Imports	40,333	5%	230,078	-29%
Total Imports	49,125	4%	277,070	-30%
P. Cars Exports	71,937	11%	828,744	-5%
Total Exports	106,349	7%	1,252,586	-5%
P. Cars Exports (USD mn)	1,123	13%	11,865	-5%
Total Exports (USD mn)	2,589	3%	31,232	-3%
Tractor Production	1,997	39%	23,899	-37%
Grand Total	137,772	11%	1,485,143	-7%
Source: osd