Fixed Income Analysis /

Koç Holding: Initiation – Prepared for a rainy day

    Tellimer Research
    2 September 2019
    Published byTellimer Research

    We initiate coverage with a Hold. Koç Holding is a diversified conglomerate with exposure to energy, automotive, consumer durables and finance sectors. Its direct stakes in listed subsidiaries and joint ventures (JVs) amount to US$6.5bn. Sizable net cash position on the holding company (holdco) level, sustainable dividends from subsidiaries and mostly moderate leverage at consolidated, subsidiary and JV levels, make Koç Holding an attractive investment proposition. However, its remarkable credit fundamentals are reflected in bond prices, with KCHOL 23s and 25s indicated inside the sovereign curve. We don’t expect KCHOL to outperform the market unless there is a sell-off in Turkish credit and assign Hold recommendations to the bonds.

    High value investment portfolio generating consistent dividends. Koç Holding’s portfolio of investments includes controlling stakes and significant equity interests in the country’s leading listed companies like Arcelik, Aygaz, Ford Otosan, Otokar, Tofas, Tupras, Turk Traktor and Yapi Kredi. In 2014-2019, Koç Holding received annual average dividends of US$400mn from its investees and distributed on average US$200mn to the holdco’s shareholders over the same period. We estimate that in H1 19, Koç Holding received US$398mn in dividends and paid out US$180mn. A diversified investment portfolio with a high exposure to export-oriented industries and companies with US$-linked revenues help to mitigate the effect of TRY depreciation and increase dividend flows.

    Cash reserves fully cover debt at the holdco level. On a standalone basis, the holding company debt (which is not guaranteed by any of the operating subsidiaries or JVs) came to US$2.3bn and was represented by the three outstanding US$-denominated bonds – KCHOL 20s, 23s and 25s. In H1 19, the company disclosed that cash at the holdco level amounted to US$2.7bn fully covering debt and leaving the company with a US$0.4bn net cash position. Management views cash at the holdco level as both insurance for a rainy day and reserve for potential investment opportunities. When Koç repays US$750mn in 2020, the value of its investments in listed companies (assuming it remains unchanged) will cover holdco’s debt with a ratio of 4:1.

    Leverage and liquidity of portfolio companies. Koç Holding’s biggest subsidiaries and JVs demonstrate financial strength. Companies like Tupras, Ford Otosan, Tofas and Arcelik have low-to-moderate leverage, average-to-high interest coverage and significant cash reserves. Smaller listed subsidiaries and JVs are slightly more leveraged, but their total debt is relatively small. We believe that the “visible” subsidiaries of Koç Holding have strong financial metrics on a standalone basis and are unlikely to require the holdco’s direct support.

    Key risks include a material reduction in dividends received from subsidiaries and JVs, and deterioration in the value of investments. Two external factors could trigger these events: (1) a severe FX shock which will mainly affect asset values in US$-terms and, (2) falling crude oil prices and refining margins, which tend to reduce the profitability of Tupras – the highest dividend paying subsidiary.