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IS Investment - Company Report: PRKME_Initiation_Coverage
Breathless growth to continue
We are initiating our coverage for Park Elektrik with OUTPERFORM recommendation and target price of TL8.32/share, implying a rewarding 84% upside potential from current levels. We base our optimistic stance for the stock on capacity expansions at copper and asphaltite businesses which will boost production volumes, increasing penetration in growing energy sector, buoyant outlook for copper prices and bargain multiples compared to international peers. At current levels the stock trades at 4.6x 2012E EV/EBITDA and 5.7x 2012E P/E versus international peers median of 5.0x and 11.7x respectively, i.e 9% and 51% discounts.
Increasing copper prices to support profitability. After reaching all time high levels around US$10,160/tons in February, 2011 copper prices fell as low as to US$6,800/tons in the fourth quarter of 2011. Yet, prices are again in an uptrend since the beginning of the year. Copper prices rose by 6% month to date in March reading at US$8,300/tons. Acting conservatively we kept copper prices constant throughout the forecast horizon, to say at US$8,000/tons. Therefore increase in the prices will definitely be in favor of the company both in terms of operations and the stock performance, since Park Electrik shares move in tandem with the copper prices with a correlation of 80%. Note that 15-month forward copper price hovers around US$8,500/ton currently.
Capacity investments pave the way for higher production. Park Elektrik increased its concentrated copper capacity in Madenkoy to 1.2mn tons/year from 750K tons/year in October 2011. On top of that, new capacity expansion to 1.8mn tons/year which is planned to be completed in 2013 will further increase the total concentrated copper production to c.130K dmt in 2013 from 86K dmt in 2012. Secondly, Park Elektrik sells all produced 400K tons of asphaltite to another group company, Silopi Electricity Production, with a fixed price and with the increasing capacity of Silopi Electricty from 135MW to 405MW in 2015 Park Elektrik will triple its asphaltite production.
Energy investments are on the cards. The company plans to build 50.5MW "run of river type" of HEPP in Diyarbakır with total capital expenditure of US$60mn for which the production licence will be valid for 49 years. Construction of the HEPP is expected to start in 2013 and will take approximately three years for the plant to generate revenues.
Aluminum production may be the long term catalyst. Although not included in our valuation, the company has operating licences for aluminum production in Gaziantep. Management underlined that aluminum projects take a back seat compared to copper production and no guidance for the short-term is provided.
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