We are upgrading our recommendation for Ford Otosan from Neutral to
Outperform on the back of an improving margin outlook and a pick-up in export shipments. With a slowdown in the domestic market now highly likely, we believe exporters will again take centre stage, especially with the European commercial vehicle market still on a growth course. Ford Otosan’s sterling export performance and escalation in margins should overshadow any weakness in local sales while an interim dividend this year and the prospect of a 4.9% dividend yield next year could be additional catalysts. We have revised our 2015/2016 EBITDA forecasts up by 14% and our new TP of TRY39.65/share indicates a lucrative 34% upside potential following the 20% absolute fall in the share price over the last 3 months (21% underperformance against Tofas).

Q2 results confirm improvement in margins. Ford Otosan surprised us with strong operating margins in 2Q15, beating our EBITDA margin forecast by 1pp. With 8.3% EBITDA margin in 2Q15, the company’s 1H EBITDA margin realized at 8.4% compared to just 7.0% in 2014. The reasons behind the strong operating margins in 1H15 were i) higher sales volume (+43%
YoY), ii) rising CUR (+15pp), iii) favourable sales mix, iv) lower input costs on weak Euro and v) cost reduction activities. Two consecutive quarters of strong margin generation should confirm the turnaround in margins after the doldrums of the investment period. We forecast a 2015 EBITDA margin of
8.0% and a long-term EBITDA margin at 8.3% (still very conservative) thanks to a higher CUR and efficiency improvements.
 A surge in export orders. Ford Otosan increased its export volumes by
23% YoY in 1H15 thanks to the completion of its product portfolio, a 13% rise in European commercial vehicle sales and Ford Europe’s stunning 33% sales growth performance, capturing 2pp of market share in Europe. With this impressive performance in 1H15 and a surge in orders for the rest of the year, the management has revised its 2015 export guidance up from 245k units to 262k units, marking 36% growth YoY. The company’s export volumes should continue to grow on the back of the rising use of commercial vehicles, Ford Europe’s aggressive market share strategy and the ramp-up of new products.
Stock data
Bloomberg / Reuters
12m expected total return (%)
52-week price range (TL/share)
Mcap (US$mn)
EV (US$mn)
FROTO TI/FROTO.IS
34
23.41-38.60
3,548
4,388
Trading data
Avg daily trading vol. (US$mn)
Weight in BIST100 (%)
Beta (3y, weekly returns)
Free float (%)
Foreign ownership (%)
Current
12m ago
Shareholder structure
4.6
1.2
0.8
18
66.6
69.3
Ford Motor Company
Koc Group
41%
41%
Free Float 18%
Company in brief
With a production capacity of 415,000 units, Ford
Otosan produces Light and Heavy commercial vehicles in Turkey. The company has been the market leader in Turkey for 12 consecutive years
(2002-2013) and is also Turkey’s largest auto exporter and producer.
Relative Performance to BIST100 (%)
80%
60%
64.1%
40%
14.5%
Financials
Revenues (TRYmn)
EBITDA (TRYmn)
Net profit (TRYmn)
2014 YoY 2015F YoY 2016F YoY
11,925 5% 17,124 44% 19,013 11%
831 12%
592 -8%
1366 64%
824 39%
1,551
1,028
14%
25%
2,754 23%
2014
3,277
2015F
19% 3,799
2016F
16%
EPS (TRY)
Key metrics
P/E (x) 15.0 12.6
EV/ EBITDA (x) 13.0 9.3
P/BV (x) 3.2 3.2
FCF yield (%) 3.6% -0.2%
Dividend yield (%) 2.0% 2.9%
Source: Company financials, FinansInvest estimates. *Average mcap used for past years
10.1
8.0
2.7
10.5%
4.9%
20%
0%
-20%
-5.0%
1M
-8.7%
3M
-1.1%
6M 1Y
5.1%
YTD 3Y
Ozgur Ucur
+90 212 336 7284 ozgur.ucur@finansinvest.com

Key estimates 2015E 2016E
(TRYmn)
Revenues
EBITDA
Net profit
Old New Chg. Old New Chg.
15,616 17,124 10% 17,160 19,013 11%
1,202 1,366 14% 1,376 1,551 13%
841 824 -2% 896 1,028 15%
Source: Bloomberg, FinansInvest
Notes
We have raised our forecasts both for 2015 and 2016 due to rise in export volume forecasts and operating margins following the guidance provided post 2Q15 results.
Key estimates
(TRYmn)
Revenues
EBITDA
Net profit
Est.
Notes
17,124 15,195 13% 19,013 16,675 14%
We are more aggressive than the consensus both for
1,366
824
1,247
839
10%
-2%
1,551
1,028
1,455
968
7%
6%
2015 and 2016. We think that the consensus will also upgrade forecasts after incorporating higher export volumes and stronger Euro against Lira.
Source: Bloomberg, FinansInvest
Company
TOFAS TURK OTOMOBIL FABRIKA
DAIHATSU MOTOR CO LTD
KIA MOTORS CORPORATION
MARUTI SUZUKI INDIA LTD
MAZDA MOTOR CORP
RENAULT SA
SUZUKI MOTOR CORP
TOYOTA MOTOR CORP
HYUNDAI MOTOR CO
HINO MOTORS LTD
MAHINDRA & MAHINDRA LIMITED
FORD MOTOR CO
GEELY AUTOMOBILE HOLDINGS LT
Average
Median
FROTO
Premium / (Discount)
2015E
Cons. Diff.
2016
9.1
4.6
4.2
8.9
7.0
4.8
8.9
12.0
4.0
3.9
4.5
3.3
3.0
6.0
4.6
8.0
52%
EV/EBITDA
2015
10.3
4.9
4.7
14.5
4.4
4.3
5.0
9.5
7.4
5.4
11.3
3.8
3.7
6.9
5.0
9.3
58%
Est.
2016E
Cons. Diff.
2016
13.2
9.7
6.2
19.2
6.8
6.3
16.0
8.2
5.4
7.9
13.8
6.8
6.7
8.9
7.1
10.1
26%
2015
P/E
13.2
10.8
6.6
24.6
7.7
7.7
18.3
8.8
5.6
9.1
18.4
7.8
8.2
10.5
8.4
12.6
33%
(i) Continued positive trend in export shipments
(ii) A second dividend payment this year
i) Volatility in the Lira
(ii) Contraction in domestic commercial vehicle market
Source: FinansInvest, Bloomberg
Ford Otosan / 1 September 2015 2

Figure 6 – Valuation Summary for Ford Otosan
DCF-Driven Equity Value
Peer analysis implied Value
Blended Equity Value
12-month Target Value
12-month Target Price
Source Finansinvest
Figure 7 – DCF Valuation for Ford Otosan
2015
Domestic Sales Vol. (000 Units)
Export Sales Vol. (000 Units)
Total Sales Vol. (000 Units)
Revenues
Revenue Growth
EBIT
EBITDA
EBITDA Margin
Taxes
Inc./dec. in W/C
Capex
FCF
WACC
PV of FCFs
Terminal Growth Rate
Terminal Value
PV of TV
Value of Firm
Net Debt
Equity Value
Source: Finansinvest
2016 2017 2018 2019 2020 2021
TRYmn Weight
13,956 75%
6,952 25%
2022 2023
10,467
1,738
12,205
13,914
39.65
2024 2025
127
262
389
120
275
396
125
287
412
130
294
424
135
302
437
141
309
450
145
317
462
149
325
474
154
333
487
159
341
500
163
349
513
17,124 19,013 21,530 23,522 25,642 27,857 30,168 32,671 35,381 38,317 41,497
44% 11% 13% 9% 9% 9% 8% 8% 8% 8% 8%
980 1,127 1,316 1,452 1,598 1,750 1,910 2,085 2,276 2,485 2,779
1,366 1,551 1,769 1,936 2,115 2,300 2,497 2,710 2,941 3,191 3,460
8.0%
-39
-669
-675
-17
8.2%
-45
-119
-297
1090
8.2%
-53
-158
-318
1240
8.2%
-58
-125
-337
1417
8.2%
-320
-133
-356
1306
8.3%
-350
-139
-376
1436
8.3%
-382
-145
-397
1573
8.3%
-417
-157
-418
1718
8.3%
-455
-170
-441
1874
8.3%
-497
-184
-466
2045
8.3%
-556
-204
-737
1963
11.4% 11.7% 11.9% 12.1% 12.2% 12.3% 12.4% 12.5% 12.6% 12.6% 12.6%
8389
4%
23662
7540
15929
1973
13956
Ford Otosan / 1 September 2015 3

Income statement
Revenues
Gross profit
EBITDA
Depreciation
EBIT
Net other income
Income from investing activities
Net financial income
Profit from associates
Profit before taxes and minorities
Taxes
Net income
Balance sheet
Current assets
Cash equivalents
Trade receivables
Inventories
Other current assets
Non-current assets
Tangibles
Intangibles
Other non-current assets
Total assets
Current liabilities
Short-term loans
Trade payables
Other current liabilities
Non-current liabilities
Long-term loans
Other non-current liabilities
Minority Interest
Shareholders' equity
Total liabilities and equity
Key metrics
Growth
Revenue growth
EBITDA growth
Net income growth
Margins
EBIT margin
EBITDA margin
Net margin
Return on equity (ROE)
Net debt / Equity
Source: Ford Otosan, FinansInvest estimates
2012
9,768
1,087
764
141
623
8
3
20
0
654
31
685
2012
414
4,647
1,633
364
1,120
149
1,018
896
2,438
302
1,231
678
227
2,209
1,556
238
122
0
1,996
4,647
2012
-6%
-12%
3%
6.4%
7.8%
7.0%
35%
0.48
2014
11,925
1,131
831
305
527
15
-6
-148
0
387
204
592
2014
628
7,235
2,972
990
1,796
185
1,509
1,360
2,958
577
1,606
585
190
4,277
3,128
520
149
0
2,754
7,235
2014
5%
12%
-8%
4.4%
7.0%
5.0%
24%
0.64
2013
11,405
1,128
744
186
558
112
-4
-213
0
452
189
641
2013
901
5,991
2,397
1,072
1,182
143
1,358
1,220
2,443
238
1,451
564
190
3,548
2,231
415
138
0
2,237
5,991
2013
17%
-3%
-6%
4.9%
6.5%
5.6%
30%
0.92
2016E
19,013
2,061
1,551
425
1,127
35
0
-31
0
1,131
-104
1,028
2016E
716
9,090
3,642
1,053
2,322
267
1,649
1,446
4,240
383
2,344
1,161
352
4,850
3,417
716
203
0
3,799
9,090
2016E
11%
14%
25%
5.9%
8.2%
5.4%
29%
0.56
2015E
17,124
1,833
1,366
387
980
44
1
-122
0
903
-79
824
2015E
671
8,510
3,481
1,137
2,095
250
1,752
1,562
3,767
279
2,111
1,047
330
4,743
3,408
664
190
0
3,277
8,510
2015E
44%
64%
39%
5.7%
8.0%
4.8%
27%
0.74
2017E
21,530
2,360
1,769
453
1,316
40
0
-47
0
1,309
-136
1,173
2017E
759
9,626
3,896
987
2,626
283
1,572
1,357
4,879
539
2,654
1,313
373
4,747
3,272
716
215
0
4,158
9,626
2017E
13%
14%
14%
6.1%
8.2%
5.4%
29%
0.43
Ford Otosan / 1 September 2015 4

We employ a relative scale in our rating system (i.e. Market Outperform, Neutral, Underperform ) in order to better present relative value propositions and more actively pursue long vs. short ideas at the BIST. The relevant benchmark is the broader Turkish stock market, using the BIST-100 index as a basis. The ratings also incorporate a certain degree of relativity within the analyst’s own stock coverage universe due to asymmetric return expectations among the industries under our BIST coverage. The rating system combines analysts’ views on a stock relative to the sectors under coverage, and the sector call relative to the market, together providing a view on the stock relative to the market.
Individual ratings reflect the expected performance of the stock relative to the broader market over the next 6 to 12 months. The assessment of expected performance includes a function of near-term company fundamentals, industry outlook, confidence in earnings estimates and valuation, and other factors.
An essential element of our rating methodology involves benchmarking a 12-month expected return against the cost of equity. We set a required rate of return for each stock, calculated from our risk-free rate and equity risk premium assumptions. The price target for a stock represents the value that the stock is expected to reach or sustain over the performance horizon of 12 months, according to the view of the analyst.
We have separated the stocks under our coverage into two groups, mainly with respect to their liquidity (market cap, free float market cap and historical average daily trading volume) as small-cap stocks exhibit different risk/return characteristics to more-liquid large-caps. For the purposes of the relative stock rating, however, stocks within each group will be considered on an unweighted basis with regard to their market capitalization.
For a stock to be assigned an Outperform rating, the implied return must exceed the required rate of return by at least 5 percentage points over the next 12 months for our larger-cap stock coverage, or by 10 percentage points for the small-cap group. For a stock to be assigned an Underperform rating, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months. Stocks between these bands will be classified as Neutral .
When the potential upside of an average stock in our coverage exceeds its required rate of return (i.e. the market upside exceeding the implied average cost of capital), a greater number of stocks would fall into the aforementioned Outperform (Buy) category, illustrating the significance of the “relative return” concept (vis-à-vis absolute return) in picking better investment ideas with a positive alpha. The same holds true when the potential upside of an average stock in our coverage falls short of its required rate of return.
In this regard, as a supplemental methodology, we rank the stocks in our coverage according to their notional target price with respect to their current market price, and then categorise the top group (approximately 40-50% of the companies under coverage) as Outperform, the next 40-50% as Neutral and the lowest 10-20% (and no less than 10%) as Underperform.
It should be noted that the expected returns on some stocks may at times fall outside the relevant ranges of the applicable respective rating category because of market price movements and/or other short-term volatility or trading patterns. Such interim deviations from specified ranges are permitted but becomes subject to review.
Also note that the analyst’s short-term view may occasionally diverge from the stock’s longer-term fundamental rating.
Outperform.
We expect the stock to outperform the BIST-100 over the next 6 to 12 months.
Neutral (Market Perform).
We expect the stock to broadly perform in line with the BIST-100 index over the next 6 to 12 months. (Although we would normally have a neutral assessment of stocks in this category, if a stock has gone through a period of market underperformance, it would be an indication that the stock may be expected to improve its performance relative to market averages in the coming period, and vice versa).
Underperform.
We expect the stock to underperform the BIST-100 over the next 6 to 12 months.
N/R.
Not Rated.
U/R.
Under Review.
The following analysts hereby certify that the views expressed in this research report accurately reflect their own personal views regarding the securities and issuers referred to therein and that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report: Ozgur
Ucur.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
All information enclosed in this document has been obtained from sources believed to be reliable. While FINANSINVEST has spent reasonable care in verifying the accuracy and completeness of the information presented herein, it cannot be held responsible for any errors, omissions or for consequences arising from the use of such information.
This document is published for purposes of providing information to investors who are expected to make their own investment decisions without undue reliance on this report.
Therefore, no article or statement can be construed as an investment advice or a solicitation to buy or sell the securities mentioned herein. The affiliates, officers, partners and employees, including persons involved in the preparation or issuance of this material may have a direct or indirect position in any security mentioned in this report.
For U.S. persons only: This research report is a product of Finans Yatirim Menkul Degerler A.S. (“FINANSINVEST”), which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
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Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.
Ford Otosan / 1 September 2015 5