Reiterating Hold. Conservative cash management at the holdco level will support Koç Holding in 2020 when dividends from subsidiaries are expected to decline on the back of Tupras’s decision not to reward the shareholders for 2019. However, we expect Koç Holding to retain at least US$1.5bn cash after repaying US$750mn of bonds that mature this year and concluding the acquisition of 9% of Yapi Kredi. Koç remains one of the strongest credits in Turkey. We reiterate our Hold recommendations on the KCHOL 23s and 25s.
Acquisition of Yapi Kredi to reduce liquidity in 2020. In 2019, Koç Holding agreed to buy 9% in Yapi Kredi form Unicredit. Koç Holding and Unicredit together owned 82% of the bank through a 50:50 joint venture. According to Koç management, net cash outflow for the transaction will be cUS$200mn. This amount can be easily funded from the cash reserves of the holdco, which amounted to US$2.7bn at end-19, according to the management presentation. Koç Holding’s direct and indirect stake in Yapi Kredi will increase from 41% to 50%.
Lower dividends from subsidiaries in 2020. Most of Koç Holding's listed subsidiaries have reported their FY 19 financial results. After a year of weakening oil prices, tightening refining margins and sluggish domestic demand, Tupras decided not to distribute dividends in 2020. In 2016-19, Tupras accounted for c50% of the dividends received by Koç Holding from its subsidiaries and associates. However, Arcelik, Ford Otosan and Tofas demonstrated resilient performance in 2019 (Table 2 page 2). In 2020, we expect Koç Holding to receive lower dividends and face higher-than-usual outflows.
Strong liquidity at the holdco level to be maintained. According to management, the holdco’s net cash position amounted to US$427mn (excluding US$225mn Yapi Kredi AT1 bonds) at end-FY 19. Debt was unchanged at US$2.25bn and cash reserves were also flat at US$2.7bn. We estimate that cash outflows at the holdco level would be at least at US$1.2bn, which includes repayment of US$750mn bonds, interest payments and estimated G&A and other holdco expenses. Hence, the holdco’s cash could decline to US$1.5bn. This estimate could increase if the holdco retains some of the dividends up-streamed by the subsidiaries or decrease if the holdco incurs unexpected expenses.
Holdco’s investment portfolio comfortably covers gross debt. We estimate that the value of the holdco’s direct investments in its listed subsidiaries and associates amounted to US$7.4bn, having increased by 3% since 8 November 2019, when the company reported its Q3 19 results. The estimate does not include an additional 9% stake in Yapi Kredi. The value of the holdco’s investments in listed companies covers its debt at a ratio of 3.3:1.