Aton - KAMAZ: Rev the Engine - Jun 21, 2010.
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According to KAMAZ, the company sold about 5,600 trucks in 1Q10, implying 11% YoY growth.
We view this as quite healthy considering that this market usually demonstrates its strongest performance in the middle of the economic cycle. We believe that the truck market may this year, nevertheless see an attractive recovery bearing in mind that in 2009 Russian truck sales weakened by 70-75% YoY compared to a fall of about 50% YoY for the passenger car market. On the back of the recovery in the Russian truck market observed in the first few months of 2010, KAMAZ management in May revised its production plan for the third time this year, increasing it to 34,000 vehicles. This implies an increase of more than 30% compared with actual sales in 2009. Management also expects to return to precrisis revenue levels of about $4bn in 2013, with a further long-term revenue target of $6-$7bn. We expect KAMAZ to show a revenue CAGR of about 20% for 2010-12E and about 80% for EBITDA.
KAMAZ reported far better 2009 IFRS results than we had expected. Most notably, strong total revenue of $1.9bn was $262mn above our forecast. At the same time, KAMAZ demonstrated a net loss that was half our estimate. This was mainly due to reported income tax benefits arising from a reversal of provisions for prior tax exposures. We believe that notwithstanding the company's negative operating result and significant net loss, the reported numbers are encouraging, particularly given the challenging year for the overall industry.
In our revised DCF model we factor in KAMAZ's better-than-expected FY09 IFRS figures, the company's production plans for 2010 and its target of returning to precrisis revenue levels in 2013. As a result of these adjustments, our 12M fair value for KAMAZ rises 25% to $2.36 per share from $1.89 previously. Our new 12M fair value offers less than 10% upside potential, implying that the company is already trading close to its fair value. Hence we upgrade KAMAZ from SELL to HOLD.
Adjustments to Model Assumptions
We have made the following adjustments to our KAMAZ model to incorporate the company's better-than-expected FY09 IFRS results and the truck market's recovery in Russia as well as management's positive plans for 2010 and its long-term targets:
- We have increased our KAMAZ production and sales forecasts for 2010 to 34,000 vehicles following management's revised targets. This is one of the main reasons for the significant improvement in our revenue, EBITDA and net income expectations;
- We have reduced the company's effective interest rates to incorporate the fall in rates seen in the broader Russian economy. This in turn decreased KAMAZ's interest expenses and materially improved its forecast bottom line;
- We have also somewhat increased the company's total capex spend for 2010-15, spreading it more evenly within the period. Figure 2 below illustrates the changes made to our KAMAZ model and shows how this compares with our previously published forecasts.
DCF Model Assumptions
We have recalculated our WACC estimate following our strategy team's lowering of our Aton country-specific equity risk premium from 4.2% to 3.7% due to the contraction in Russia's CDS spreads. We have also reduced KAMAZ's debt premium from 10% to 8% to take account of an overall improvement in credit terms for automakers and the company's own stable financial position. We have increased our estimate of KAMAZ's liquidity premium from 3% to 4% on the back of its very narrow free float and lowered the company's tax rate from 24% to 20% following changes to Russian tax regulations. Consequently, our WACC for the company has increased from 17% to 17.1%.
International Valuation Comparison
We have used our own estimates for KAMAZ and Bloomberg consensus figures for peers to perform international comparisons, as presented below. Our comparison with Asian and European/US market automakers reveals a mixed picture on a 2011E-12E P/E basis, with KAMAZ trading at a premium on 2011E earnings and at a discount on 2012E earnings. In terms of EV/EBITDA ratios KAMAZ trades in line with the sector peers on 2011E EBITDA, but at a discount on 2012E EBITDA. At the same time, its EBITDA margins are generally lower than the sector average. Additionally, our calculations show KAMAZ may achieve a revenue CAGR of about 20% in 2010E-12E, which would be among the highest in the sector.
We believe that our international comparative valuation broadly supports our DCFbased results and our rating upgrade to HOLD. Investors should also bear in mind that KAMAZ stock has very low liquidity due to its narrow free float, which may add to the overall share price volatility. This is particularly important given that such key shareholders as Germany's Daimler AG and Russia's Rostechnology are looking to increase their stakes in the truck-maker through share purchases from another KAMAZ shareholder, Troika-Dialog.
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