vk.com/id446425943

Tupras

Tupras operates some of the most advanced and flexible refineries in the region. We believe it is well positioned to benefit from both structural growth in fuel demand in Turkey, and our expectations of a pick-up in global demand for middle distillates, following the tightening of bunker fuel specification standards in 2020. Reaping the benefits of its recent $3bn RUP investment, we forecast low levels of capex and high levels of FCF, with a near-90% dividend payout ratio and a sustainable dividend yield of above 10%. We maintain our BUY rating with a revised TP of TRY200 (from TRY176).

Attractive fundamentals

Tupras operates some of the most advanced and flexible refineries in the region. We believe it is well positioned to benefit from both structural growth in fuel demand in Turkey and our expectations of a pick-up in global demand for middle distillates, following the tightening of bunker fuel specification standards in 2020. Tupras benefits from the highest net refining margin in the sector due to its access to cheaper sources of crude oil, low transportation costs and attractive product slate, which is dominated by higher-margin diesel output.

Company update

BUY (maintained)

TP: TRY200.0 (previously TRY176.0)

Oil & Gas Turkey

Report date:	14 December 2018
Current price, TRY		122.4
Upside/downside, %		63.4
MktCap, TRYmn		30,651.4
Average daily volume, TRYmn		171.9
Free float, TRYmn		15,019.2
Bloomberg		TUPRS TI

Summary valuation and financials, TRYmn (unless otherwise stated)

	2017	2018E	2019E	2020E
Revenue	54,833	91,250	100,789	103,666
EBITDA	5,431	5,748	9,790	10,175
Net income	3,812	4,204	6,606	7,283
Net debt	6,249	10,712	7,050	5,812
EPS, TRY	15.2	16.8	26.4	29.1
DPS, TRY	13.6	13.4	21.1	23.3
EV/sales, x	0.8	0.5	0.4	0.4
EV/EBITDA, x	7.6	7.2	4.2	4.1
P/E, x	8.0	7.3	4.6	4.2
Net debt/EBITDA, x	1.2	1.9	0.7	0.6
Dividend yield, %	11.1	11.0	17.2	19.0
FCF yield, %	10.1	6.5	19.1	15.4
RoIC, %	27.8	26.6	45.8	45.3

Source: Company data, Renaissance Capital estimates

High FCF and dividend yields, a TRY/$ hedge

Following the completion of the $3bn RUP project in 2015, we forecast low levels of capex and high levels of FCF, with a near-90% dividend payout ratio and substantial 2019E FCF and dividend yields of 19.1% and 17.2%, respectively. Tupras is a dollarbased business, which we believe provides a natural hedge against TRY/$ volatility.

Valuation and risks

We value Tupras based on a DCF/EVA model and a WACC of 18%. Key risks stem from commodity prices and refining margins, as well as any change in what we view as the company’s highly attractive dividend policy.

Figure 141: Price performance – 52 weeks TRY TUPRS TI

160

140

120

100

80

Jan-18

Mar-18

May-18

Jun-18

Jul-18

Dec-17

Feb-18

Apr-18

Aug-18

Sep-18

Oct-18

Nov-18

Dec-18

Source: Bloomberg

vk.com/id446425943

Renaissance Capital

14 December 2018

Tupras

Figure 142: Tupras current shareholding structure

Figure 143: Tupras – model refining margin, $/bl

Publicly	Enerji
Traded	Yatirimlari A.S.
49%	51%

					5Y range			Margin
16
14
12
10
8
6
4
2
0	February	March		May	June	July	August	September	October
January			April							November	December

Source: Company data

Source: Thomson Reuters Datastream, Bloomberg

Figure 144: Tupras – share price performance ($) vs model refining margin ($/bl)							Figure 145: Tupras – sources and uses of funds, $mn
			Refining Margin (30-day moving average)		TUPRS TI Equity RHS		CFFO		Divestments
14						40	Capex and investments		Dividends
							Interest		FCF to equity

12											35	2,000
10												1,500
												1,000
											30
8												500
											25	-
6												(500)
4											20	(1,000)
												(1,500)
2			Jun-17						Jun-18		15	(2,000)
Dec-16	Feb-17	Apr-17		Aug-17	Oct-17	Dec-17	Feb-18	Apr-18		Aug-18	Oct-18	(2,500)
												2013	2014	2015	2016	2017E	2018E	2019E	2020E	2021E

Source: Thomson Reuters Datastream, Bloomberg Source: Company data, Renaissance Capital estimates

Figure 146: Tupras – 2018E FCF bridge, $mn													Figure 147: Tupras – 2019E FCF bridge, $mn
1,200													1,800
1,000
													1,600
800
													1,400
600													1,200
													1,000
400
													800
200
													600
-
													400
(200)
													200
(400)													-
														CFFO 2018	WC	Other	CFFO 2019		Capex	FCF 2019	Interest	Dividends
		CFFO 2017	WC	Other	CFFO 2018		Capex	FCF 2018	Interest		Dividends
						Source: Company data, Renaissance Capital estimates												Source: Company data, Renaissance Capital estimates

68

vk.com/id446425943

Renaissance Capital

14 December 2018

Tupras

Figure 148: Tupras – operating and financial summary, TRYmn (unless otherwise stated)

Operating statistics	2015	2016	2017	2018E	2019E	2020E
Crude oil production, mnt	-	-	-	-	-	-
Gas production, bcm	-	-	-	-	-	-
Total hydrocarbon production, mn boe	-	-	-	-	-	-
Refining throughput, mnt	28.8	29.6	30.4	27.4	29.5	29.5
Income statement	2015	2016	2017	2018E	2019E	2020E
Gross revenue	37,128	35,370	54,833	91,250	100,789	103,666
Operating expenses	(34,304)	(32,854)	(49,741)	(85,892)	(91,457)	(94,007)
EBITDA	3,223	2,898	5,431	5,748	9,790	10,175
EBITDA margin	9%	8%	10%	6%	10%	10%
EBIT	2,824	2,516	5,092	5,358	9,333	9,659
EBIT margin	8%	7%	9%	6%	9%	9%
Financial items	(599)	(572)	(618)	(709)	(1,779)	(1,331)
Profit before tax	2,225	1,944	4,474	4,649	7,553	8,328
Net income	2,550	1,793	3,812	4,204	6,606	7,283
Average number of shares outstanding, mn	250	250	250	250	250	250
EPS, TRY per share	10.2	7.2	15.2	16.8	26.4	29.1
DPS, TRY per share	6.5	6.2	13.6	13.4	21.1	23.3
Payout ratio, %	64	87	89	80	80	80
Growth rates, %
Total hydrocarbon production	-	-	-	-	-	-
Revenue	361	(10)	87	6	70	4
EPS	75	(30)	113	10	57	10
DPS	na	(5)	119	(1)	57	10
Balance sheet	2015	2016	2017	2018E	2019E	2020E
Current assets	8,742	13,667	20,366	28,444	33,526	34,326
Non-current assets	16,728	17,551	17,797	19,182	19,847	20,574
Total assets	25,470	31,218	38,163	47,626	53,374	54,900
Current liabilities	8,828	12,660	17,676	25,154	27,330	26,877
Long-term liabilities	8,273	10,391	10,010	14,456	14,456	14,456
Minorities	63	79	104	81	81	81
Equity	8,305	8,088	10,373	7,936	11,507	13,486
Total equity and liabilities	25,470	31,218	38,163	47,626	53,374	54,900
Cash-flow statement	2015	2016	2017	2018E	2019E	2020E
Net income	2,550	1,793	3,812	4,204	6,606	7,283
DD&A	486	541	574	668	797	899
Other	511	(1,324)	1,094	557	1,440	948
Changes in working capital	(3,855)	1,723	(2,152)	(1,350)	756	(15)
Cash flow from operations	(308)	2,734	3,327	4,079	9,599	9,115
Cash flow used for investments	(889)	(842)	(1,030)	(1,102)	(1,462)	(1,625)
Cash flow used for/from financing	(249)	202	(188)	(6,426)	(4,475)	(6,252)
Effect of exchange rate changes	420	709	461	4,766	-	-
Cash flow for the year	(1,026)	2,804	2,570	1,317	3,662	1,238
Key data	2015	2016	2017	2018E	2019E	2020E
Net debt/(cash)	6,892	6,084	6,249	10,712	7,050	5,812
Net debt/equity, %	2.1	2.1	1.2	1.9	0.7	0.6
RoE, %	30.7	22.2	36.7	53.0	57.4	54.0
RoIC, %	18.5	17.1	32.9	26.6	45.8	45.3
RoACE, %	24.4	18.0	23.7	34.3	31.6	29.4

Source: Company data, Renaissance Capital estimates

69

vk.com/id446425943

Petkim

We upgrade Petkim to BUY (from Hold) following a more stable outlook on European petrochemical margins, the recent launch of its 18%-owned STAR refinery and the completion of Petkim’s 60day shutdown. A 23% drop in Europe’s ethylene prices during

2018 has caused a 12% narrowing of the NEW LLDPE/naphtha spread and a 49% decline in Petkim’s dollar share price. We view high ethylene prices in Europe as a cause for concern, particularly in light of Petkim’s high share of thermoplastics output. The launch of the STAR refinery in late 2018 should strengthen the supply chain and provide substantial synergies to Petkim from 2019. We calculate Petkim trades at 2019E FCF and dividend yields of -10.9% and 7.7%, respectively.

European petrochemical margins have stabilised

European petrochemical margins have corrected during 2018 following an extended three-plus years of favourable cycle, as evidenced by the high level of European ethylene prices (over 2x above US levels) and above-average ethylene-naphtha spreads. A 23% drop in Europe’s ethylene prices during 2018 has caused a 12% narrowing of NEW LLDPE/Naphtha spread to the last three months average of $665/tonne, which is 24% below the historical average of $880/tonne, benefiting more recently from a weaker oil price.

STAR refinery synergies from 2019

Petkim recently acquired an 18% stake in the nearby STAR refinery, which was launched in October 2018. Petkim targets annual synergies from STAR of $50-60mn from logistical costs savings, higher production yields and simplified product flow (all of which should start in 2019, we think), with additional savings possible over the medium term from shared services and infrastructure. Petkim expects its first dividend payment from STAR in 2021.

Dividends still at risk, but outlook has improved

The remaining cash payment for the STAR ($240mn in 1Q19) will pressure Petkim’s

FCF and raise net debt/EBITDA towards 3.3x by 3Q19 (from 2.6x as of 3Q18), close to the covenant limit (4.0x) and suggesting that 2018 cash dividends may be at risk, we think. While dividend risk remains, we believe a combination of stabilised European petrochemical margins, forthcoming STAR-related synergies and low valuations provide an overall stronger outlook for Petkim’s share price in 2019.

Upgrading rating

BUY (previously Hold)

TP: TRY7.70 (previously TRY8.00)

Oil & Gas Turkey

Report date:	14 December 2018
Current price, TRY		5.13
Upside/downside, %		50.1
MktCap, TRYmn		7,695.0
Average daily volume, TRYmn		289.9
Free float, TRYmn		3,770.5
Bloomberg		PETKM TI

Summary valuation and financials, TRYmn (unless otherwise stated)

	2017		2018E		2019E	2020E
Revenue	7,364		10,275		11,053	11,754
EBITDA	1,822		1,972		1,635	2,368
Net income	1,402		1,375		1,295	1,976
Net debt	1,492		4,674		5,322	4,780
EPS, TRY	0.93		0.85		0.79	1.20
DPS, TRY	0.36		-		0.39	0.60
EV/sales, x	1.7		1.2		1.1	1.1
EV/EBITDA, x	6.8		6.3		7.6	5.2
P/E, x	5.5		5.6		5.9	3.9
Net debt/EBITDA,	0.8		2.4		3.3	2.0
x
Dividend yield, %	7.0		-		7.7	11.7
FCF yield, %	8.2		(7.3)		(10.9)	12.7
RoIC, %	29.7		24.4		21.9	30.6
Source: Company data, Renaissance Capital estimates
Figure 149: Price performance – 52 weeks
TRY			PETKM TI

9

8

7

6

5

4

3

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Jul-18

Oct-18

Dec-17

Aug-18

Sep-18

Nov-18

Dec-18

Source: Bloomberg

vk.com/id446425943

Renaissance Capital

14 December 2018

Petkim

Figure 150: Petkim current shareholding structure		Figure 151: STAR refinery current shareholding structure
			The Republic
			of Azerbijan
	SOCAR	Petkim	40%
		18%
Publicly	Turkey
Traded	Petrokimya	Socar Turkey
49%	A.S.
		42%
	51%

Source: Company data Source: Company data

Figure 152: Petkim – share price performance ($) vs ethylene-naphtha spread ($/T) Figure 153: Petkim – sources and uses of funds, $mn

		LDPE vs Naphtha spread			PETKM TI Equity RHS			CFFO					Divestments
								Capex and investments					Dividends
	1,100						3
								Interest					FCF to equity
	1,000							600
	900							400
							2
								200
	800
								-
	700							(200)
							1
	600							(400)
	500							(600)
	400						0	(800)
								2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E
	Dec-16	Apr-17	Aug-17	Dec-17	Apr-18	Aug-18	Dec-18
				Source: Thomson Reuters Datastream, Bloomberg								Source: Company data, Renaissance Capital estimates
	Figure 154: Petkim – 2018E FCF bridge, $mn							Figure 155: Petkim – 2019E FCF bridge, $mn
	400							400

300

200

200

100

-

-

(100)

(200)

(300)

(200)

CFFO 2017

WC

Other

CFFO 2018

Capex

FCF 2018

Interest

Dividends

CFFO 2018

WC

Other

CFFO 2019

Capex

FCF 2019

Interest

Dividends

Source: Company data, Renaissance Capital estimates

Source: Company data, Renaissance Capital estimates

71

vk.com/id446425943

Renaissance Capital

14 December 2018

Petkim

Figure 156: Petkim – operating and financial summary, TRYmn (unless otherwise stated)

Operating statistics	2015	2016	2017	2018E	2019E	2020E
Crude oil production, mnt	-	-	-	-	-	-
Gas production, bcm	-	-	-	-	-	-
Total hydrocarbon production, mn boe	-	-	-	-	-	-
Petrochemical throughput, mnt	2.2	2.3	2.6	2.4	2.5	2.5
Income statement	2015	2016	2017	2018E	2019E	2020E
Gross revenue	4,533	4,533	7,364	10,275	11,053	11,754
Operating expenses	(3,919)	(3,687)	(5,541)	(8,303)	(9,418)	(9,386)
EBITDA	614	845	1,822	1,972	1,635	2,368
EBITDA margin	14%	19%	25%	19%	15%	20%
EBIT	505	729	1,654	1,752	1,215	1,900
EBIT margin	11%	16%	22%	17%	11%	16%
Financial items	69	53	7	(61)	365	509
Profit before tax	574	782	1,661	1,690	1,580	2,410
Net income	626	726	1,402	1,375	1,295	1,976
Average number of shares outstanding, mn	1,500	1,500	1,500	1,613	1,650	1,650
EPS, TRY per share	0.418	0.484	0.935	0.852	0.785	1.198
DPS, TRY per share	0.315	0.400	0.360	-	0.393	0.599
Payout ratio, %	75	83	39	-	50	50
Growth rates, %
Total hydrocarbon production	n/a	n/a	n/a	n/a	n/a	n/a
Revenue	10	(0)	62	40	8	6
EPS	6,371	16	93	(9)	(8)	53
DPS	n/a	27	(10)	(100)	na	53
Balance sheet	2015	2016	2017	2018E	2019E	2020E
Current assets	2,768	2,660	4,208	9,723	9,108	9,682
Non-current assets	2,693	3,609	3,580	4,678	6,682	7,425
Total assets	5,461	6,269	7,789	14,401	15,790	17,107
Current liabilities	1,584	1,797	2,347	4,479	4,572	4,560
Long-term liabilities	1,071	1,402	1,588	5,287	5,287	5,287
Minorities	64	68	60	47	47	47
Equity	2,741	3,002	3,794	4,589	5,884	7,213
Total equity and liabilities	5,461	6,269	7,789	14,401	15,790	17,107
Cash-flow statement	2015	2016	2017	2018E	2019E	2020E
Net income	626	726	1,402	1,375	1,295	1,976
DD&A	109	117	169	223	421	467
Other	(72)	(93)	94	1,022	(485)	(593)
Changes in working capital	197	(288)	(493)	(850)	61	(44)
Cash flow from operations	860	461	1,172	1,769	1,292	1,807
Cash flow used for investments	(735)	(405)	(766)	(2,052)	(1,624)	(325)
Cash flow used for/from financing	319	(310)	(201)	2,040	(316)	(940)
Effect of exchange rate changes	194	179	(11)	561	-	-
Cash flow for the year	639	(74)	193	2,319	(648)	542
Key data	2015	2016	2017	2018E	2019E	2020E
Net debt/(cash)	(60)	1,164	1,492	4,674	5,322	4,780
Net debt/equity, %	(0.1)	1.4	0.8	2.4	3.3	2.0
RoE, %	22.8	24.2	37.0	30.0	22.0	27.4
RoIC, %	19.2	15.8	29.7	24.4	21.9	30.6
RoACE, %	18.2	15.5	24.4	16.9	12.5	15.9

Source: Company data, Renaissance Capital estimates

72