Mixed bag of profit returns for industrial firms

Listed companies continue to release their financial results for the third quarter of 2017. Industrial companies performed better than expected in this period. However, real estate company Emlak Konut missed consensus expectations and posted a 51% decline in net income annually due to market conditions. Companies kept forward guidance for 2017 after 3Q17 results.

►YKB beats expectations but margins soured

Yapi Kredi Bank reported TRY 841 million net earnings in 3Q17 solo financials, corresponding to a 16% quarterly decline and 4% increase annually. The announced figure is 10% better than the consensus estimate. The bank posted 27% annual growth for its bottom line on a one-off revenue adjusted basis and posted 11.7% RoAE, down some 100 bps quarter-on-quarter. Compared to our estimates, slightly lower swap and provision expenses recorded in the quarter are the major factors for this. But NIM resilience looks a bit weaker in comparison with figures announced by peers to date. All other areas remain more or less in line but cost execution is slightly better than our expectation. We expect a slightly positive reaction to the results.

Higher deposit and swap costs weghed in financials

Yapi Kredi posted 3% growth in customer loans on a quarterly basis despite annual growth remaining buoyant, below the sector average of 6%, mainly driven by TRY business loans, while customer deposits edged up by 1%. The bank has a market share of roughly 6.5%. Although TRY loan spreads remained under pressure, alternative funding channel usage, a growing security book of which incremental revenue supported the bottom line and better FX loan spreads made the NIM resilient in the quarter. NIM and swap-adjusted NIM looks flattish quarter-on-quarter in 3Q17.

Net NPL additions continue heading south

NPL additions decelerated reminiscent of the previous quarter and sharply down 24% compared to 3Q16 as the new NPL ratio is around 1%, a tad higher than that of 2Q but significantly lower than those of the previous quarters. With the help of stronger collections throughout the year, specific CoR had started to come down in 2Q, but higher coverage led to 11 bps higher specific CoR at 163 bps. The betterment in group II and restructured loans relative to average loans were more eyecatching in 3Q17. On a quarterly basis, provision expenses edged up 4%.

Costs remain under control

Annual costs decreased by 1%, while being 4% lower on quarterly comparisons and staying under the inflation rate over the same period. That carried the bank’s C/I to 43%, a 39 bps drop quarteron-quarter. It seems that IT and optimization impact took their toll on cost growth, further lessening the cost burden over the bottom line in 3Q17.

Capital ratios remain in comfort zone

CET1 and CAR realized at 11.3% and 14.9%, respectively. The management stated that they are comfortable with the current capital ratios, and cited that recent pick up in eurobond yields would have insignificant impact on core capital ratios.

The bank has been delivering better results in asset quality although CoR still cruising high due to the aging impact. However, net NPL ratios and collections seem better on an annual basis. This quarter was marked by margin resilience and cost performance, with the latter more eye-catching.

►Ford Otosan 3Q17 results beat expectations

Ford Otosan reported a net profit of TRY 346 million in 3Q17, registering a massive growth of 99% year-on-year. The spectacular bottom-line growth was primarily attributable to superior operating performance on the back of stronger margins and volume increase. In line with our house call of TRY 5.5 billion, but higher than market estimate of TRY 5.1 billion, revenue came in at TRY 5.5 billion in 3Q17, up 43% year-on-year. Better than estimates, EBITDA was reported as TRY 491 million in 3Q17, up by 57% year-on-year.

Robust top-line growth

Ford Otosan attained 43% topline growth in 3Q17 thanks to 13% total volume growth, better pricing in domestic market and positive currency impact of export revenue. Domestic revenue grew to TRY 1.8 billion in 3Q17, up by 49% year-on-year, on the back of a 16% increase in domestic volumes and price increases. Per unit domestic revenue increased by 28% in 3Q17 in TRY terms due to better pricing and a favorable product mix. Export revenue increased to TRY 3.7 billion in 3Q17, up by 40% year-on-year, thanks to 12% growth in export volume and a positive currency impact. Per unit export revenue remained flattish in euro terms in 3Q17.

EBITDA margin improvement

Gross margin deteriorated to 11.4% in 3Q17, down by 0.5% year-on-year due to the higher input prices, but improved by 1.5% quarter-on-quarter thanks to the company’s price focus and a positive domestic sales mix. Operating expenses over revenue declined to 4.6% in 3Q17, down by 2.2% year-on-year and 0.5% thanks to strict cost control. Consequently, EBITDA grew to TRY 491 million in 3Q17, up by 57% year-on-year, ahead of topline growth, registering a margin of 9% in 3Q17, up by 0.8% yearon-year and 1.3% quarter-onquarter.

No change in 2017 sale volume targets

Ford Otosan increased its 2017 domestic automotive market expectation to 950,000100,000 units (a jump of 50,000). However, the company maintained its domestic sales volume target as 110,000-120,000 and export volume target as 290,000-300,000, pointing out a total sales volume target of 400,000-420,000 units for yearend 2017, up by 7% – 13% more than 2016. Production guidance was maintained at 365,000375,000 units, corresponding to 88-90% CUR for 2017.

►Aselsan posts strong growth on back of record high backlog

Aselsan recorded a net profit of TRY 264 million (up 72% yearon-year) in 3Q17, slightly higher than estimates (consensus: TRY 255 million). Net income exceeded estimates on the

back of stronger than expected project delivery. The company reported revenue of TRY 1.29 billion in 3Q17 (consensus: TRY 1.14 billion), up by 76% year-onyear on the back of a historically high backlog. EBITDA came in at TRY 248 million in 3Q17 (conservative: TRY 222 million), up by a significant 78% year-onyear, registering a margin of 19.2% (conservative: 19.4%), compared to 19% in 3Q16.

Highlights of the quarter

Aselsan’s backlog was flat at $6.4 billion as of end-3Q17. The new project awards in the quarter were limited at $380 million, edging the year-to-date additions to c. $1.37 billion (including $214 million in additions since end3Q17). However, the project additions in the first nine months are still behind our $2.4 billion assumption for FY17.

Guidance remians unchanged

The management expects a TRY based top-line growth of at least 25% with an EBITDA margin of 18-20% in 2017. Mind that the revenues grew by 60% in 9M17 with an EBITDA margin of 19.2%, implying a significant upside risk to the management’s highly conservative guidance.

►Easing financial expenses drive CCI’s income

Coca-Cola Icecek (CCI) posted 3Q17 net income of TRY 241 million, (up 56% year-on-year), better than the consensus of TRY 214 million, which was mainly driven by easing financial expenses from TRY 100 million in 3Q16 to TRY 76 million in 3Q17 (mainly on lower year-on-year FX losses). These figures were also boosted by improving operational performance, with consolidated EBITDA surging by 24% year-onyear to TRY 517 million in 3Q17, broadly in line with estimates of TRY 510 million. Consolidated revenue at TRY 2.75 billion, up by 23% year-on-year, driven by 5.6% growth in consolidated volumes, price adjustments and positive FX conversion impact of international operations, came in line with estimates of TRY 2.73 billion.

Turkey operations: Highest 3Q growth in sparkling category

Net sales of Turkey operations grew 11% year-on-year to TRY 1.33 billion, exceeding the 3.7% year-on-year volume growth on favorable volume mix reflecting a higher share of immediate consumption packages (IC) and 3% growth in the sparkling category. The EBITDA margin of Turkey operations improved considerably by 0.8% year-onyear to 16.9% in 2Q17, mainly on a 2.1% improvement in gross margin to 38% on a rising share of IC packages. However, postponement of marketing expenses in 2Q17 to 3Q17 limited the EBITDA margin impact.

International operations: Strong recovery in Central Asia

Revenue growth at international operations slightly exceed volume growth and grew 8.8% in the FX-adjusted base as revenue per unit improved by 2.1% yearon-year. International sales growth in TRY terms, on the other hand, was at 29% year-on-year to TRY 1.42 billion in 3Q17, resulting from 15.8% year-on-year depreciation of TRY against USD on average. The gross margin of international operations eroded slightly by 10 basis points to 31.5% due to the dilutive impact of Iraq and Turkmenistan.

►Emlak Konut falls 16% short of expectat ons

Emlak Konut REIT posted TRY 440 million net profit in its 3Q17 financials, corresponding to a 44% quarterly increase and a 51% decline annually. The announced figure is 16% lower than the consensus estimate, mainly due to a limited contribution of net other income and a higher net financial expense figure. REIT announced net sales of TRY 1.435 million, beating market expectations of TRY 1.171 billion by 22%, yet down 20% by annual comparisons. In line with the estimates, EBITDA was reported as TRY 536 million in 3Q17.

Highlights of the quarter: robust top-line growth

Emlak attained 169% top-line growth in 3Q17 thanks to starting deliveries in five RSM projects and the TRY 695 million income coming from the sale of land stock. However, its gross margin deteriorated to 43.6% in 3Q17, down by 11% year-on-year and 22% quarter-on-quarter due to higher land costs of the RSM sales. EBITDA grew to TRY 536 million in 3Q17, up by 81% quarter-on-quarter, yet down by 42% annually. The EBITDA margin also narrowed down to 37.3%, 14.2% lower year-on-year.

From net cash to net debt

The company carries a net debt of TRY 173 million as of 3Q17 compared to net cash of TRY 467 million in 2Q17. Increasing leverage owing to campaign financings and payments to state housing authority (TOKI) have been propping up the financial expenses within the last couple of the quarters. With the lower cash figure, mainly due to payment of TRY 500 million to TOKI, the company posted lower financial income this quarter. On a quarterly basis, financial expenses turned negative reaching TRY 83 million from a net interest income of TRY 80 million recorded in 2Q17.

No change in 2017 target

The company expected to reach its year-end TRY 1.8 billion net profit target. Deliveries will likely intensify in the last quarter of the year and support overall earnings in that respect.

►Better FX environment determines Kardemir’s results

Kardemir announced a net income of TRY 76 million in 3Q17 compared to a net loss of TRY 20 million in 3Q16. The announced figure is better than our net income estimate of TRY 59 million and consensus estimate of TRY 68 million. The company posted an EBITDA of TRY 176 million in 3Q17, up by 80% year-on-year, which is in line with a consensus expectation of TRY 179 million. 3Q17 EBITDA margin stayed almost intact.

►Positive contribution from strong sales prices and weak TRY for Eregli

Eregli Demir Celik announced a net income of TRY 792 million in 3Q17 compared to TRY 496 million in 3Q16. The announced figure is in line with the consensus call of TRY 799 million. The same applies for EBITDA. The company posted an EBITDA of TRY 1.16 billion in 3Q17, up by 44% year-onyear, in line with the consensus expectation of TRY 1.17 billion, yet worse than our expectation of TRY 1.23 billion. 3Q17 EBITDA margin declined by 3.3% yearon-year due to an increase in raw material costs.

►TTRAK reports TRY 79 million net income

Turk Traktor (TTRAK) reported TRY 79 million net income in 3Q17, up by 27% year-onyear, driven by strong top-line growth despite weaker operating margins. Broadly in-line with expectations, the company generated revenue of TRY 1.01 billion in 3Q17, up by 48% yearon-year, whereas EBITDA came in at TRY 123 million in 3Q17, up 11% year-on-year, slightly below the consensus estimate of TRY 128 million but much lower than our house call of TRY 135 million.