Alarko was founded in the 1950s by the Alaton and Garih families as a manufacturer of heating, cooling and air conditioning systems. The two families currently hold 35% and 34% stakes in the company, respectively, and the free float rate stands at 26%. While the contracting business was the focus of the company for several decades, the contribution of the energy segment has grown, and now comprises more than 50% of total revenues, thanks to the acquisition of the Meram distribution grid in October 2009. The contracting segment generated 29% of total sales during the first three quarters of 2012. The company operates in four other sectors as well: real estate, trade and industry, tourism and seafood. Alarko’s holdings include Altek (99.9%- owned, power generation), Alsim (99.8%-owned, contracting), Attas (99.8%-owned, tourism) and Alarko REIC (51.2%-owned, real estate), ALCEN (49.9%- owned, power distribution), Alarko Carrier (43.2%- owned, trade), Alarko Deyaar (49.9%-owned, real estate), MosAlarko (50%-owned, real estate) and Alfarm (50%-owned, seafood).
In contrast with its peers, Enka and Tekfen, Alarko has historically undertaken projects in Turkey with lower margins but which are supported by government guarantees. In an attempt to shift toward the international market, Alarko has been seeking projects abroad over the past several years. Nevertheless, the company failed to add any domestic or international projects in 2009 or 2010. As a result, the backlog had eroded from $1.3bn at the end of 2008 to $450m by the end of 2010, which weighed on the share price performance.
The management’s business development efforts bore fruit in 2011, when Alarko was awarded projects valued at $630m, followed by a further $1.1bn in 2012. We believe two of these deals offer good future prospects for the company’s contracting business: first, penetration of a new country (Morocco); and second, building expertise in a new contracting field (mining in Kazakhstan). As a result, the backlog size had picked up to $1.6bn by the end of 2012.
Altek is a power generation company with total installed capacity of 177 MW (164 MW natural gas and 12.5 MW hydro). Alarko will also add a 76-MW hydroelectric power plant to Altek’s ownership by 2015 as part of a $100m investment, which we expect to boost the electricity generation earnings before interest, taxes, depreciation and amortisation (EBITDA) margin to over 30%. Furthermore, Alarko will construct a 1320-MW power plant in Karabiga to be fired by imported coal, as part of a joint venture with Cengiz Group. The facility is expected to enter into operation by 2017, and is not included in our forecasts. The total investment amount is estimated at $1.5bn, with a 30:70 equity-debt ratio. The financing should be finalised during the second half of 2013, following the completion of the port design, which is likely to occur in the first half of the year.
We expect the declining trend in global coal prices to be sustainable thanks to the increasing shale gas supply. Karabiga will contribute $400m to Alarko’s top line and $160m to its EBITDA.
We maintain our 12-month target share price of TL7.08 (€3.06), implying upside potential of 32%.
Alarko trades at a 20% discount to its contracting and utility peers based on 2013/14 multiples, and a 15% discount to its historic averages. The stock’s 9% outperformance between December 2012 and March 2013 barely compensates for its underperformance since 2010. The current share price does not reflect the backlog recovery to $1.6bn or the contribution from electricity generation investments that are expected to become operational after 2014.
We expect Alarko’s top line to increase at a compound annual growth rate (CAGR) of 26%, with EBITDA rising at a 28% CAGR from 2012 to 2014 (54% EBITDA and 45% earnings per share growth in 2013).
The stock trades at an estimated price/earnings ratio of 8.7x and enterprise value/EBITDA of 5.3x.
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