Foreword -
Further to recently releases of the USA's Q2 'earnings season', the important implication for American and global economic growth - and the vital role that out of favour 'smoke-stack' 'blue-chips' must play - this article (with relevant alterations) remains in place given its broad prescience.
Introduction -
Ford Motor Company, like its cross-town competitor GM, presently sits in what could be viewed as a stock-market quagmire. A mixture of ongoing investor caution and retracted global growth outlook mean that its share price has only recently seen an upturn from a previous ongoing slide, which previously 'bottomed' at $8.84, rebounded momentarily to $9.10 and slipped thereafter to close on Friday's at $9.00 exactly..
Ford's Recent Standing -
As seen with the recent investment-auto-motives web-log which featured the 'coupled ratios' assessment of the global 11 VMs in Q1 2012, Ford appeared to perform relatively under-par vs the best of its American European, Japanese and Korean rivals across various measures. All except for its singular apparent 'great achievement' in Q1 2012 profitability,
In the Market Valuation Ratios terms, the firm appears highly attractive with a P/E near x2, (relative to others in the x3,x4,x5 and above), but its P/B level of near x2.5 far exceeded its peers which sat around, if not well under, the standard demarkation of x1.
As for the Profitability Ratios, Ford shone, beating all others by a fantastic gap, with 14% profit margin, and approximately 200% return on equity. However, this performance was very much boosted by an extra-ordinary tax deferral in the period, so could not be taken as a conventional reading; with instead Daimler, BMW, Hyundai and VW showing a scale of best conventional results.
Regards Liquidity Ratios, Ford faired badly, with a relatively high current ratio measure and low operational cashflow measure versus the majority of its international competitors; only Daimler and PSA posting lower cashflows (because of very different positive and negative reasons). However, importantly Ford's low cashflow showing – like Daimler – highlights its dedication to CapEx investment in EM regions, illustrating a desire to be ahead of the slowed global market, ready for its healthy return to be best seen in BRICs and CIVETS in future years.
Debt Ratios conveyed that Ford sits just on the margins of acceptability; as rated as 1:4 total cash vs total debt. This bettered by a small degree the likes of Toyota, Daimler, BMW and PSA; but critically was itself slightly worse than suffering Renault, and well beaten by Hyundai, Honda and VW on a 1:3 standing, FIAT on 1:2 and (critically for domestic investors) GM within the 1:1 rating; results of the Chapter 11 sequence and successful previous IPO fund raising.
Reading between the lines of the measures' results, it is inferred that Ford is ultimately in advance of GM regards proportionate global investment programming, this itself a consequence of its ability to leverage its more standardised yet technically better vehicle platforms, which evolved from the “ONEFORD” initiative.
The Q1 & Q2 Corporate 'Take-Away' -
The Q1 2012 earnings announcement and analysts conference saw CEO Alan Mulally seek to broadcast the following positive points:
- The 11th consecutive quarterly pre-tax operating profit; with positive Automotive operating-related cash flow.
- Wholesale volume and revenue slightly lower YoY.
- The highest operating profit in North America since 2000
- Strong performance at Ford Credit
- Profitable in South America
- Losses in Europe and Asia Pacific Africa.
- Reconfirmed 2012 FY PbT about equal 2011
- This driven by strong North America performance.
- New actions to de-risk FMC's pension obligations.
- Continued investment
- Stronger worldwide product lineup
- Remains on track to achieve the mid-decade outlook
- Paid first quarterly dividend since 2006 & declared a Q2 dividend
- Renegotiated revolving credit facility with a total of $9 billion to near YE 2015
The Q2 2012 announcement by CEO Mulally and CFO/EVP Shanks communicated the following:
- The 12th consecutive quarterly pre-tax operating profit, with positive Automotive operating-related cashflow.
- Importantly USA market share down by 1.7% (at 15.6%)
- Yet North America and Captive Credit divisions provide the 'heavy lifting'.
- NA providing 10% Operating profit, with >$12bn sales total (solid NA H1)
- South America, slightly betters break-even (but Revenue down 21%)
- Asia-Pacific and Africa incur losses (Revenue up 10%, but high Capex)
- European woes continue with greater losses (Revenue down 21%)
- Wholesale volumes down 5% (at 1.4m units) YoY
- Revenue down 6% (at $33bn) YoY
- Pre-tax Operating Profit down $1bn (at $1.8bn) YoY
- H1 PbT (exc special items) down $1.6bn (at 4.1bn)
- H1 PbT for Autos of $3.2bn (5.6% Op Profit)
- Q2 portion was $1.8bn ($1.4bn Autos / $447m Credit)
- Net Income down $2.5bn (at $2.4bn)
- EPS of $0.30 ($0.19 lower YoY)
- Lower PaT and deferred tax impact YoY
- Fitch & Moodys up-rate Ford to “Investment Grade”
- New Escape model in North America launched
- New (lower cost Romanian made) B-Max launched
- Additional production shifts / capacity in USA.
- New Thailand facility 'ramped-up'
- Completed sale of 2 US based components plants (incurring PbT special losses)
- Q2 saw 'mark-to-market' loss on value of Mazda holding.
- $27.3bn Automotive Gross Cash (up $700m vs Q1)
Product Pipeline -
With all regions except North America, China and India seeing TIV contractions, a regionally aligned, segment aligned and attractive model range is vitally important.
Mulally et al believe that the Q1 announcement regards new and face-lifted model introductions provide FMC with a good competitive position; which from basic consideration, does indeed appear the case. New Fusion targeted at N.America (in H2) with Lincoln MKZ concept adding a halo effect, the SUV-esque EcoSport & Kuga favourable to BRIC markets, as is new (Mazda-based) Ranger pick-up, and the Tourneo concept promising important entry into the EM mainstream of compact MPVs, with B-MAX and Fiesta ST aligned to partially redress under-peformance in Europe.
Vital has been the company's additional 30% of Chinese production capacity obtained via the opening of the CFMA Chongqing assembly plant, so giving a national output of 600,000 units.
In the US, 4 million SYNC-enabled systems have been delivered, and announcement that SYNC would soon be introduced into Europe beginning with new B-MAX.
But overall NA volume has been affected by discontinuation of the full-size sedan Crown Victoria and small pick-up Ranger, both of which were ostensibly fleet bought vehicles.
Selling Into Tough Global Conditions -
The new IMF report revised its forecasts downward on the worlds prime economies from its April to July projections between 2012 and 2013.
Europe has experienced painful contraction which looks unlikely to diminish soon, most regional VMs – except the fortunate Germans - tabling a compelling argument for general capacity reduction, assembly plant closures, labour-force reductions and altered pay / conditions agreements. This a slow but seemingly positive process as union leaders at last appear to recognise the immense size of the task required to compete within what is now an era of worldwide cost deflation.
South America has emphatically slowed over the last year, but promises a 'V' shaped recovery as is seen to be the case with 'powerhouse' Brazil, as itself re-aligns from externally sourced commodities based growth toward semi-protected domestic productivity with higher national and regional consumption patterns.
China sees policy-led slowed growth rates as part of an intention to avoid feeding what outsiders have claimed to be a high-risk 'property bubble', the evidence of tier 1 and tier 2 inland cities seeing speculative building showing signs of pre-burst dynamics. The government's intention is that disposable income now re-directed away from property will be willingly spent upon consumer goods and services, automobiles an economic agenda priority given the positive effect on inland employment and living standards.
All of Asia seeing reduced growth as a consequence of China's economic slowing and self-orientation, so notably reducing near-term trade reliance across its Asia-Pacific neighbours.
Russia though perceptively growing from domestic and foreign investment still awaits the typical next 'Putin-play' of oil and gas export linked economic growth, and whilst this expectation affords 'trough-point' investment in that specific sector – including specialist vehicle purchase - (hence the BP-TNK friction), there will be a lag before the broader economy feels the upswing to once again drive passenger car production and see the likes of populist LADA rebound in its new form.
Thus presently, amongst the once fabled BRIC economies, only Brazil maintains anything close to past-trend growth rates, though this perhaps only the result of coming back from a much declined base.
However, as all well note, pan-Asia remains a powerful force for the mid-term, with especially strong traction in Indonesia & Vietnam (amongst the wider global CIVETS).
North America, having seemingly steadied the economic boat and heading toward the end of year presidential election, seems to appear quietly optimistic yet cautious given the S&P 500's traction since last December, the short May drop, and the recent rebound to date. This undoubtedly the dual effects of a slowed global economy, assisting ongoing safe-haven US stock buying from foreigners and Americans, the usual pre-election fervour build-up prior to November, and the notion that either outcome will be investor-friendly: either an immediate new stock-boosting QE3 action expected from the Democrats or capitalism friendly mid-term policy promises from the Republicans. Ideas of a “Third Way - Grand Bargain” that see both sides reaching coalition-type policy-setting agreements, whilst discussed in Washington's inner-circles, presently looks unlikely given the massive ideological divide between the parties.
However, even amongst the now entrenched dour economic the IMF heralds reason for renewed cautious optimism.
In world terms the IMF downgrade is only slight, with July's report still showing a global lift from approx 3.5% growth in 2012 to 3.9% in 2013. It sees the general set of 'advanced economies' (ie the Triad) lifting from 1.3% to 1.9% - an impressive near 50% improvement which can only be alloted to European and American 'pull'*. It sees the EM set lifting from 5.5% to 5.9% - itself lifted by primarily Brazil and India, themselves respectively rising by 2.5% to 4.2% and 6% to 6.5%.
[NB investment-auto-motives believes that the IMF predictions of America's contribution from 2% to 2.1% is overly pessimistic, and that of the Eurozone's -0.2% to 0.8% (ie 1%) jump overly optimistic].
The IMF is of course not a crystal ball or arbiter of growth, and is often highly criticised, but the underlying macro-sentiment behind the forecasts shows greater world optimism than that seen across last year's DAVOS and G20 sentiment.
North American & Chinese Reliance -
Whilst Brazil and India are still included as new era auto-market cornerstones, it seems that for Ford especially it is the world's 2 largest car markets that will be the prime fighting territories.
As per America...
The US, Canada, plus the inclusion of Mexico to comprise the NAFTA area, have of course historically been Detroit's “Big 3” backyard enclave. Trade terms between the US-Mexican border have been ever 'melting' to secure both comparatively cheaper Mexican production, and with national growth, the tapping into a vitally enlarged mid-continental marketplace. Yet even with Mexican amalgamation and boost, the US by far remains the automotive sales heartland even in its weakened condition.
Fortunately the “Big 3” experienced a domestic competitive reprieve during the recent turbulent period. The previous decades-long never-ending pressure from Toyota, Honda, Nissan was temporarily reduced as Japan was forced to literally re-structure its industrial base after the Fukushima disaster, so disrupting parts supply to US factories and Japanese exports. And the astoundingly maintained FX strength of the Euro throughout its own crisis (seemingly supported by Chinese foreign reserve 'multi-currency basket-buying') prohibited what should theoretically have been a powerful cross-Atlantic export drive by the German firms; though the Dollar vs Euro differential benefited FIAT's capital injections into Chrysler.
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But those reprieves are now waning. Japan's VMs rapid re-ramping of US and Japanese production levels are aided by calls from BoJ insiders for new QE measures to boost domestic demand and provides a tailwind for exports. And the strength of the Euro has now declined to new lows, giving greater incentive for Germans to undertake a pronounced US export drive, as American business owners and wealthier private buyers start to reconsider new car purchases, the US credit arms of the German producers able to now obtain low rated wholesale finance from both sides of the Atlantic.
This then puts renewed pressures on at least the “Big 2” to provide compelling product and credit propositions, with the likelihood being a return to past patterns, whereby Ford produces the stronger 'product-pull' given its technical lead and GM the stronger 'credit-pull' given its buoyant cash position.
The saving grace for GM, Ford and Chrysler has been the strength of US agriculture, one of the few commercial sectors showing confidence. Higher commidity prices have come from a mixture of improved volume yields in certain crops, and ironically expectations of a limited output of corn because of recent drought conditions in the Mid-West. Whether achieved profits originate from crop volumes or crop scarcity, farmers appear to be profiting, which bodes well for the supporting commercial activities around farming.
Ford is expected to be a prime beneficiary, given its massive sales base for its F-series trucks (esp 150 & 250 series), the Ford constantly out-selling GM's Silverado and Dodge's Ram. Moreover, as was demonstrated in the 1990s, the profit margin provided by F-series is amongst the best – if not the best - of the FMC vehicle portfolio.
Thus, for this very early stage of possible US economic traction, Ford appears best place amongst the Big 3.
As per China...
Industry observers will be aware, Ford's foray into China has by been relatively recent, GM well ahead of its blue oval rival. But GM sales have been in decline in the face of ever stiffer upscale foreign products in China and the rapid advancement of China's domestic offerings in the mainstream market.
In this context newcomer Ford appears in the ascendant providing a well balanced proposition, whilst GM appears in the slow descendent, thus Ford possibly seizing the competitive high-ground with “mainstream quality” and “Americana” mantles, seen by Chinese buyers vis a vis Toyota and Honda.
However, unlike GM which used the notionally mid-scale Buick yesteryear to entice the newly motorised middle-classes, and has seemingly since lost the brand's former perception of pseudo-luxury, it is presumed Ford has few delusions about its capability to vie against the German and Japanese car-makers in the luxury sectors; so with low expectations for Lincoln and instead targeting the raised profile and increased popularity of the blue-oval cars.
Given that VW, Honda, Toyota, Nissan and Hyundai are the respected foreigners (in ranked order) in the senior levels of the mainstream Chinese market, it seems very likely that Ford will find a place within this crowd, thanks to product prowess and critical entry into a much stabilised and less frenetic marketplace compared to preceding years. Ford's possible fortunes very probably at the relative expense of GM (though itself will of course still grow at a slower pace in the more controlled but still expanding marketplace. Instead it may be the likes of Chrysler, PSA, Renault and FIAT that find the barriers to full and proper Chinese entry ever harder.
The Need for a US-Centric Productivity Push -
Although the Q2 earnings season started with Alcoa's slipped results and the weaker than expected results of others such as Bank of America, the general earnings trend thus far has been a little brighter than generally estimated.
Retained cash and lean operations have allowed many US corporations to create much needed sound new commercial footings, with freer credit than elsewhere amongst 'advanced nations' when sought by company Treasurers – this seen in Ford's own improved rolling credit facility – and cross-sector slimmed workforces that at last recognise the reality of present-day business pressures.
However, with 'financial deleveraging' still continuing across portions of banking, government budgetary re-alignment at federal and state levels, and of course the most visible amongst consumers at large – weaning off of credit (for the time being) and building-up savings – it seems the case that no or very little economic support can be found by way of sizeable public or private spending.
The consequence is that the only comparatively healthy realm is the corporate sector.
With such a tumultuous experience over the last 4 years company management and boards have understandably been necessarily entrenched into a defensive attitude of self-preservation.
However, the fact remains that the US (and indeed UK) now must rely upon the notion of a slow, cautious well executed 'productivity push' from within the corporate world to eventually properly resuscitate the broad economy. This is a task that (as the UK's PM David Cameron points out) may take until 2020 to achieve a wide social reach, from top to bottom of the social stratas. Yet just like that much implored recessionary imperative of house-building, the US, UK and Europe is only at the foundation digging and securing stage of the whole economic re-construction task.
Hence, the west now inhabits a fiscal and monetary arena where 'supply-side economics' is realistically the only route to economic, social, national and intra-national improvement.
To this end, national governments and national people's across the Triad region must understand that even though the IMF's forecasts have true reason for optimism, as seen by the raft of heavily damaged corporate and private equity firm share prices, that optimism emerges from a very low economic baseline, and so the economic 'trickle-down' process will take some years. A period throughout which CEOs and CFOs will need to maintain a very necessary cautionary stance regards domestic investment and cost-containment, even in the face of what is publicised as 'easy money' from the Fed and intermediary banks.
That money, flowing through investment and retail banks, will of course need to be directed toward both stable blue-chip companies and smaller SME's via those two routes respectively, yet the health of the SME ultimately relies upon, or is in tandem with, the blue-chip. So stabilising the large-cap constituents of US (especially EU and global) stock markets, so that investors start to truly believe there is innate value down the road, and not just as a defensive move - remains the prime economic
motive.
Furthermore...
Given that this era is such a transformative one, the re-orientation of whole commercial sectors and the companies within is part of the slow but vitally important process, so that the future firm foundations of the broader economy can be built from the solid foundations of the now highly vital corporate world.
Ford Motor Company, as history has demonstrated, along with its industry peers (GM, FIAT-Chrysler and the remaining global VMs, plus those other multi-sector counter-parts, will as of 2012 play the prime roles in re-energising the western and global economies.
This period then is one of strategic option analysis to decide what shape of company will provide the best returns for shareholders and returns for broader commercial and private society.
Strategic Options -
With admittedly little detailed consideration, the following 3 strategic route-ways are highlighted by investment-auto-motives as potential growth possibilities for FoMoCo.
These intentionally drawn from the company's own history given its century-long existence, and its past proven ability to undertake value-creating 'horizontal' ventures across the automotive and consumer spectrum.
“Back to the Future #1” :
Commercial Vehicle Expansion -
Though today the blue oval adorns cars, pick-up trucks and small & midi vans, it once sat upon a plethora of heavier commercial vehicle types, including large trucks, semi-trailer tractor units and coach & buses (aswell as agricultural tractors for a time). In the past Ford expanded its product portfolio on a regional basis by both adapting pre-existing typically American vehicle designs for new markets, by designing all new product in-house with an expanding capability thanks to the economic boom, and when beneficial by acquiring struggling local specialist vehicle companies, the latter undertaken on both sides of the Atlantic ocean. These strategies seen in Britain during the 1950s and 60s by Ford of Britain initially under the 'Ford Thames' sub-brand (which itself licensed to Enro of Spain) and later simply under the 'Ford' moniker with the division thereafter sold to Italy's Iveco in 1986. With the plethora of German, French, Italian and Scandanavian HGV brands in Europe, Ford saw little commercial promise.
However, of course, in its US homeland, the company's rooted exposure to commercial vehicles and tractors meant that it had always maintained CV and Heavy Duty Truck (psuedo-HGV) sections, with more recently portfolio expansion 'downward' The previous introductions of an LCV class of vans via the Euro-sourced small Connect and (US rated) 'compact' Transit, and the now promised 'sub-compact' Tourneo, have complimented and bolstered the legendary large E-series van range.
The iconic F-series truck range remains centre-stage, and is perhaps critically important to corporate income, as previously mentioned. It has been expanded throughout the last decade to offer an incrementally bigger vehicle family via increases in overall dimensions, GVW, powertain capacity / BHP, towing weights etc; hence now psuedo-HGV when offering a 5th wheel either bolted directly to chassis or to load bed. Critically for 2012 F-series 550 now offers a PTO (power take off unit) used to drive ancillery equipment when the vehicle is either stationary (ie in generator mode) or when moving to power snowploughs etc. This allows the vehicle to undertake certain agricultural, construction and infrastructure roles, a true competitive advantage at this low-point phase of this particularly drawn-out economic cycle, since large infrastructure build projects are part of the economic panacea.
Offered seemingly only on the 550, it means that Ford seeks to tempt all utility customers / buyers (fleet, corporate, SME's and independent 'tradies') into the higher spec and higher prices 550 as part of America's and its own regeneration process.
The 2012 discontinuation of the smaller Ranger pick-up in North America means that all customers must purchase the costlier F-series, thus improving Ford's large truck volumes and so margins.
“Back to the Future #2” :
Vehicle Rental Firm Acquisition -
The natural synergies between vehicle producers and vehicle renters is obvious.
It is a marriage that dates back to 1925 when GM part-purchased Hertz (Drive-Ur-Self) taking the remaining stake in 1943, when its price was depressed by WW2.
The well established mutual advantages recognised in 1987 when Ford purchased Hertz, by then a well formed international vehicle rental firm with massive appetite for new vehicles.
As part of its own renaissance efforts, Chrysler took a interest in the sector in 1989/90 when it amalgamated Dollar and Thrifty concerns to form the basis of the modern company.
Such a natural bolt-on acquisition builds a near guaranteed downstream demand-base, which with the stable requirement of large fleet customers, provides the foundational basis for a near-confirmed, steady base level of factory output, so assisting general capacity planning, which in turn underpins new and maintenance investment levels and raised base-level amortisation rates on new and face-lift product programmes.
Importantly, it provides for a near-assured cash generative income stream which itself boosts immediate cash-flow. It creates a mini economic eco-system in as mush as rental car customers are effectively able to test-drive the company's new and existing products for a period, and if feeling comfortable and impressed, are themselves more likely to purchase a Ford branded vehicle in the future. Furthermore, it means that more new vehicles are seen on public roads, which in turn whets the public's desire.
However, it does mean the trade-off between immediate production and income gains versus the recognition that a large volume of ex-rental vehicles will be hitting the used car market within the usual 18-month and 24-month time-frame. So requiring more pro-active used vehicle inventory management across both factory and independent dealers to maintain decent residual values, with necessary avoidance of the typical 'pricing cannibalisation' that occurs with large inventory influx.
Though the company holds a proportionately smaller cash-cushion than many other multi-national auto companies – GM especially so – there might be the ability to commercially leverage interests in the vehicle rental sector, via M&A or JV or looser alliance, and so replay the much needed 'boost effect' seen in the 1980s & 1990s.
This will of course also be the strategic perspectives of GM and FIAT-Chrysler.
But Hertz, Dollar Thrifty and Avis Budget are all stock-market listed, with Market Caps of $5.01bn, 2.24bn and $1.53bn respectively. Complete purchase by Ford of a top-tier player is then is highly unlikely, with perhaps a partial purchase more complex and problematic depending upon the strategic interests of the other major shareholders. The alternative to seek to buy-out a privately held company for total control, yet this brings the problem of much reduced geographical business footprint and thus vehicle volume take.
An investment-auto-motives weblog item looked at the investment potential of the US vehicle rental sector some time ago, when there was rumour that Dollar Thrifty was seeking to buy-up either Hertz or Budget Avis. It was noted that the sector is effectively split into 3 tiers of company size. At the top the aforementioned 'big 3', with in the middle tier: National, Enterprise & Alamo, and in the bottom tier: Ace, Kemwell and Payless.
Exactly how that triple-tier sector is philosophically dissected by Ford (and its Detroit foes) remains to be seen, but it seems that vehicle rental company interests will be back on the table for all.
“Back to the Future #3” :
Consumer 'Needs' Satiation -
The emergence of the automobile age in the 1920s and 1930s was arguably the pinnacle of a far broader consumer-products wave of the time, spanning radios, vacuum cleaners, sewing machines, washing machines, refrigerators, freezers, air conditioners, food mixers, dishwashers etc. The basic materials of steel, rubber and thermo-set plastics and the division of labour, moving-line assembly methods were ostensibly closely related between differing product types, from cars to cookers, so it was inevitable that the large auto-companies sought to maximise production efficiencies and cross-sector market potential by enveloping a consumer good company into a car-maker's fold. White goods, brown goods and cars became for a period more closely related than most ever knew. This best illustrated by GM 's ownership of Frigidaire between 1919 and 1979.
Ford however was largely absent from such consumer diversity, with the only manufacturing diversion being WW2 military manufacturer of jeeps and aircraft (Tri-Motor and Liberty).
Yet the IT age has seen a significant merging of IT and automotive technologies. Inside the inner working of a vehicle there has been digital dash instruments, CANBUS systems, pre-programmed pro-active and reactive safety systems and ever finer programming of drivetrain and chassis systems. But whilst this is viewed as part and parcle of electro-mechanical evolution, the last decade has seen IT become instrinsic to the external workings of the vehicle, toward ever better (driver and passenger) 'user-enablement'.
In recent years Ford and all major VMs have sought to design their vehicles with GPS and internet and connectivity, so that the car can either itself act as a mobile communications device able to inter-connect to a myriad of infotainment services etc, and/or itself become a power and telecoms 'host' for personal devices ranging across smart-phones, tablets, notebooks, laptops et al via increasingly standardised 'plug-and-play' docking ports.
Hence Ford's commercial relationship with Microsoft, having adopted its basic software operating architecture / system named SYNC as the communications enabling system.
The availability of vastly cheaper 'data warehousing' has effectively nurtured emergence of the 'Data-Cloud' / 'Cloud' ' / 'Cloud Computing, which when coupled with a trend toward the data storage 'de-contenting' of consumer's own smart-phones, tablets and net-books, means that a new watershed era has begun (started by social networking) wherein private individuals, corporate workers and government workers will increasingly rely upon the ethereal (and ultimately corporate owned) 'Cloud'
[NB investment-auto-motives will retain its 'off-cloud' data-storage privacy policy].
However, this ongoing theme of progress, and the need to seemlessly connect with the 'cloud', has required Microsoft to introduce a new generation of operating platforms, so accompanying SYNC with the new LYNC.
Critically, having been under pressure from youth orientated Apple in consumer and games markets, the emergence of other software providers and on-line product/service providers such as Google, and heavily impacted by the post-2008 recession because of much reduced business spending, Microsoft is having to re-write its own play-book, which has involved growing alliance interests with other corporate giants such as Ford.
Hence, the enhanced merging of what were once very separate commercial sector products & services are a necessary part of co-creating what has now become a dimensionally fluid human existence: across the wholly physical world, the wholly virtual world and of course the expanding merged (cyborg-type) world where IT becomes both crutch and enabler.
So whilst Ford did not participate in the first consumer revolution in the 1920s, it looks to take a leading role in that of the 2020s, and must seek to maximise industrial synergies to do so.
Ford's New Tools for the American & Global Task -
So Ford's initiative to include its 'new tools' of a PTO on the F550, and the 'cloud-connectivity' to be deployed across all its vehicles, is a necessary move to reinvigorate the US commerce both domestically and internationally; and in turn reinvigorate the broader world economy.
Creating the US 'Productivity Push' -
As highlighted earlier, and witnessed by the Occupy Wall Street movement and dire public angst and suffering across all supposed classes, there is now a need for a US-centric 'productivity push'.
Each of these strategic route-way possibilities would then serve both Ford, and the broader American economy, regards the very necessary aim of a much needed 'supply-side' led 'productivity push'.
Indeed, all US companies led by Washington and local federal bodies will no doubt have been reviewing how to best re-create and feed a new and improved American industrial society. Whilst also seeking to unburden commerce of any previously incurred, then bearable but now problematic, policy disincentives.
However, of even greater consequence is the ability to create a very well structures, integrally meshed, highly fluid and high efficient renewed, broad-reach US-industrial complex.
It is only this type of thinking at company and national levels, which comprises of an “industrial inter-connectedness philosophy”, will provide for a speedy and sustained economic upturn. And so create the foundations for a long serving eco-directed, new industrial society.
Creating a “Value Triangle” at Ford -
Any forward-thinking, ideally visionary, company seeks to create a commercial footprint that can maximise synergies across those sectors which are viewed as both dynamic and critical. This a necessary executive task when assessing how to move from present strategic standing toward a more advantageous future position – simplistically evoked by the quandrants (and deep-view evolved co-ordinates) of the BCG Matrix.
To this end, in decades past we have seen companies almost constantly assessing the M&A potential for backward and forward 'vertical' integration along its internal value-chain, across the 'horizontal' of market-related product, segment and sector couplings, and periodically investigation into the less usual 'diagonal' which typically sets out longer-term broad span ambitions.
But during the more recent dotcom era a more 'connective' business mindset evolved.
This necessarily originating from the financial limitations internal to new business start-ups, and the supportive VC community's need for risk-reduction via business plan re-modelling. Though then the credit boom years, those highly sensitive 'capital application' experiences are now replayed in corporate boardrooms, because of reduced global investment liquidity. But ironically, this capital-squeezed reality must be seen to be within a broader context, where those companies that can best inter-connect with each other and B2B and B2C markets will take a disproportionately larger share of tomorrow's rewards – if planned and executed well.
Never in modern times then has so much future global potential been riding on such limited financial resources; the balancing fulcrum being that of human ingenuity. This is indeed a critical period for companies in setting out their stall for the remainder of the 21st century.
FoMoCo's High Potential 'Magic Triangle' Formula -
Ford + Microsoft + Vehicle Rental Co. ….........(see accompanying graphic).
Conclusion -
The global economic downturn that has become apparent in 2012 has create a yet greater competitive platform upon which global VMs must operate.
A renewed atmosphere of austerity has become especially apparent in the Triad region, and has become all too apparent in even the fire-fighting ploys of premium players such as BMW.
To maintain its traction it well recognised the value of sponsoring the London Olympic games now underway. But instead of offering a lump-sum of cash and deploying its logo on screens, as has been the case with Coca Cola, P&G etc, BMW UK & its Munich Headquarters had the prescient insight to offering a reported 3,000 new cars to the Olympic committee, to be used as road registered 'Olympic Torch' UK tour cars and participants' general transport vehicles. At a time when new car sales have declined across the board, this means that BMW will soon be bringing 3,000 or so pre-registered 'demonstrator-type' vehicles to the UK market, with vitally important concomitant price reductions, handled by its dealer network and sold with the notional cache of 'Olympic vehicles'.
At a time when Daimler, Audi and BMW have been targeting rental market players in Europe, and recognised the bottom-line boost effects of such an initiative, all other VMs that operate in the mid-stream – especially those such as Ford with its maintained strong pricing strategy – must take note.
A well considered execution of rental market sourced capacity-boosting with accompanying credible marketing tactics must be considered by Ford; especially so in Europe with far lesser need in the US. This is not to say it should re-run anything like the well remembered GT 500 Hertz Mustang initiative of the 1960s – played out again in 2006 to commemorate - but that it should re-think the possibilities.
At a time when Ford and FIAT are at the bottom of the EU plant efficiency rankings, the all-new American vehicle offerings cold be regionally out-manouvered by the aging revamped Italian products, when seeking to re-popularise their respective cars.
For Ford the US will continue to provide firm footings, and NA will seemingly see the company through to the rebound of EM and European markets...but its venerable technologically superior vehicles may themselves need an improved 'push from the re-starting blocks' in the sprint for returned near-term market share, and long-term share of mind.
The general investment community - and investment-auto-motives specifically – continue to closely follow the VM pack as each player seeks to best gauge and react to the immediate US tailwind and global hurdles.
Sunday, 29 July 2012
Friday, 13 July 2012
Company Focus – OtoKar (Turkey) – Positioned for both 'Gloom and Boom' of the Middle East
Background -
The various regime changes throughout the middle East – starting with Tunisia, most notable in Libya and Egypt and slowly underway in Syria – has seen Turkey seek to position itself as the centralist power-broker. Its geo-strategic position between Arab and European worlds has historically been advantageous as a historical cultural buffer between what were once very different mindsets.
Yet whilst in the past seen as an dualistic ally of both the USA and Russia – acting in buffer mode yet again - its own economic boom of recent years has resulted in an innate political confidence and maturing by the decade-long governing AKP. (Initials translate as the Justice & Development Party, with Erdogan and Gul as respective Prime Minister and President).
As western economies still suffer from fragility, set to see a slow-growth near-term future, and the once rapid growth rate of the BRIC countries slows given global trade contraction, it is the “CIVETS” & “Next 11” high-growth economies – in which Turkey knowingly sits – which gain investor and so political attention because of their influence over what are typically smaller but high potential regional neighbours.
[NB the “Next 11” consisting of: Turkey, Egypt, Iran, Pakistan, Bangladesh, Indonesia, Philippines, S.Korea, Vietnam, Nigeria and Mexico. Whilst the CIVETS consists of Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Notably, amongst those, it is now only Mexico with a strong cultural link to Europe & the USA. The power-shift toward the Muslim world well recognised by Turkey].
That power-shift perhaps most notably seen by the heavily deteriorated relations with Palestine relative to the Israel, and the “Aid Boat” vs “Arms-Supply-Boat” incident. More recently however has been the Erdogan government's strong reaction to the loss of a Turkish jet-fighter, shot-down by Syria's Assad regime, calling for an extra-ordinary UN meeting, reflecting its desire to be globally trusted as a regional 'Otto-Arab' “co-parent”.
The prevailing cross-MENA circumstances over the last 18 months known as the 'Arab Spring' has witnessed newly installed governments and expectancy of a greater national & intra-regional voice by the Arabic peoples. It also replays 20th century events through the periodic cycle of civil war, severe civilian casualties, heavy infrastructure damage and administrative regime change.
Such political, social and economic disruption consequentially followed by the need for nation re-building. This achieved by way of infrastructure & services rebuild, a process ostensibly paid for from natural resource wealth (typically oil, gas, agriculture), the welcoming of such sector-specific FDI, economy broadening FDI (in defence, transportation, second-tier manufacturing & increasingly culture-orientated tourism) and the creation of a much improved – notionally far fairer - private enterprise climate.
The Middle East then has proven to be the historical examplar of “Gloom & Boom”.
Geo-Strategic Businesses -
Over the preceding 100 years, regional friction and emergent political factions have been the norm, in reaction to: early era Franco-British colonialism, the creation of Israel in 1948 and the Arab-Israeli war days after, the Sinai war / Suez Crisis of 1956, the six day war of 1967, the OPEC oil embargo of 1973, the Iraqi-Kurdish conflicts since the 1970s, the Turkish-Kurdish conflicts since the 1980s, and very obviously Palestinian Independence and simultaneous Israeli 'settlements' incursion. 1991 saw the first Gulf war, whilst American invasion of Iraq and internal conflict ran throughout much of the last decade.
And of course since, the 'Arab Spring' has effectively destabalised many countries throughout the region, with the hopes of long-term betterment. Yet as seen with the cases of Syria and Egypt, nation re-building is often a tumultuous process spanning a long journey between outright civil war to the vying and bargaining of opposing interests in a problematic election process.
The Commercial Imperative Throughout -
Within this long backdrop of inter-regional social and economic instability, companies from all affected countries have sought to create business models which both serve national and sovereign interests, assist the needs of regional allies and trade partners, and of course relate to the economic dynamics of the area; which across MENA, because of geo-political, geo-economic dynamics, have been characterised by dramatic shifts of fortune from positive to negative; these also heavily influenced by by periodic trade embargoes, previously often via the UN at the behest of Anglo-Euro-American influence.
However, equally, during periods of calm and growth within any one the MENA countries, there has been mutually rewarding trade agreements and commercial contracts ratified to boost a nation's internal capabilities, economic standing and improvement of living standards; perhaps best evidenced by those agreements with major western vehicle manufacturers, whether of HGV truck, bus, van, pick-up and of course standard car.
Thus, whether as part of a government-led detailed industrial agenda, or from the self-seeking activities of politically influential entrepreneurs, most all of the MENA region's countries have a level of automotive capability geared toward national defence and public and private transit;. whether ranging from the adaption of grey-imported trucks – as seen with the recent people's armies – to the historical creation of an enterprise devoted to the requirement.
Turkey's Illustration -
The Turkish manufacturer Otokar is a prime illustration of the latter.
Since the demise of the once aggressive Ottoman Empire, and creation of modern Turkey (under Ataturk in 1922) the country has remained seemingly strong but introverted; strong from the size of its armed forces, but introverted in that it has only fought to protect its sovereign interests, not to enlarge them.
From this position, and with the responsibility for domestic development first and foremost, it has been historically an “arms'-length removed” docile but influential regional player; today perhaps more so then ever, instead building-up industrial / commercial capability over overt military capability, to promote both internal growth and importantly gain 'soft-power' across MENA, the CIS and bordering CEE – espoused by the modern Turkish national anthem with olde 'Germania' tone.
However, the overlap of the 'military industrial complex' and 'civvy-street' operators within Turkey is easily seen, much as may be the case with GKN plc or Rolls-Royce plc in Britain or GE and GM in the USA.
Otokar A.S. -
Otokar is a prime, high-visibility example of how the established Turkish mindset, in certain strong cases, merges military and civilian development and production capabilities, whilst seeking regional commercial and military contracts. Indeed its very name appears to derive from two sources: the idea of Otto-Car (ie Turkish Vehicle) and association with a dynasty of Bohemian Kings named Ottokar, so emphasising Turkey's historical connection with SE Europe].
Located in Adapazari, Sakarya province, within the Marmara region, the firm sits east of Istanbul yet close to the automotive heartland of Bursa province and next to what is effectively the Euro-Asian inter-continental 'land bridge'.
It is a publicly listed sub-holding of the largely family controlled Koç Holding A.Ş. (a conglomerate of 113 companies) with a 44.7% share-hold of Otokar, 24.8% held by Unver Holding A.Ş) and the remaining 30.5% the free-float.
[NB Other Istanbul Exchange listed auto companies with Koc interests include: the Ford JV 'Otosan', with an 18% free-float, and FIAT JV 'Tofaş' (Türk Otomobil Fabrikası A.Ş) with a 24% free-float. Others are the production JV 'Anadolu-Isuzu', vehicle importer Dogus Otomotive, battery producer Mutlu Aku,
Privately held Turkish owned auto-firms include BMC (Çukurova Group), Karsan (Kıraça Group), Oyak-Renault (Military Pension Fund with 49%), Temsa (Sabanci Group), Ermetal Otomotive (Ermetal Şirketler Group) amongst others].
As such with 30.5% Otokar has the largest free-float and is thus more accessible to the general national and international investment community.
It must be maintained that as part of broader conglomerate constructs under Koc and Unver, the company may not have complete automony, internal resources utilised elsewhere as necessary. However, importantly, from the structural ownership and larger free-float perspectives, it appears to have greater freedom for self-governance than would be the case with Ford-Otosan and FIAT-Tofas.
However, the reason for researching the Otokar company is that it seem inevitable that in time the 2 major Turkish conglomerates – Koç & Sabanci (and smaller Holding A.Ş counterparts) – will seek to continue to divest further holdings to both enrich the Turkish economy, and gain capital for any regional or global expansion ambitions; see Turkey's political ambitions - prefaced by the expansion plans of Turkish Airlines. Thus Otokar may gain a greater free-float on the open Istanbul market, and possibly other bourses, in years to come depending upon its growth fortunes.
History -
The company was established to perform the role of manufacturing public buses using a license agreement with Germany's Magirus Deutz in 1963 to do so. The 1970s saw the introduction of a Minibus and Koç Group take control. A medium sized City-Bus was added to the product portfolio in the 1980s. That economic growth period for Turkey also saw Otokar diversify with the origination of a armoured van for cash and high-value goods delivery; acquiring new tentative but growing knowledge in the lucrative armoured vehicle sector. A licensing agreement with the UK's Land Rover was struck in 1987 in order to supply the Turkish Army, adding a 3rd income stream, with obvious synergies with its own vehicle 'up-armouring' capabilities. Utilising absorbed understanding of Land Rover's 4x4 drive-line system, Otokar created its own first dedicated 'light-armoured' military model variants (Akrep & Cobra) in the early 1990s. 1997 saw the firm relocate to Sakarya. 2002 proved an active year with further diversification into Trailers and Semi-Trailers in 2002 via the acquisition of Istanbul Fruehauf (a fellow Koc Group company), and launch of a self-developed Small Bus (Navigo). Expansion of the military vehicle offering came in 2003 with cooperation with STK (Singapore Technologies Kinetics) for a 8x8 tactical armoured vehicle. 2005 saw its military/civillian defence range expand with the 'Armoured Internal Security Vehicle'. A new 9m Bus (Vectio) arrived in 2007. In 2008 Otokar was awarded prime contractor status for the new 'all Turkish' Altay Battle Tank, showcasing a life-size model. 2009 introduced the mine protected Kaya armoured vehicle, and saw the new 12m Bus (Kent) and a new series Mini-Bus (Centro). 2010 launched the 6x6 (Arma) military vehicle, by seemingly utilising engineering knowledge gained from the STK contract., whilst 2011 saw an 8x8 variant of Arma, effectively replacing the STK product. Otoakar opened a new Tank Testing Centre in 2012, no doubt to develop series additions, replacement and sibling vehicles for the Altay Tank, and very probably to provide a 'proving-ground' for off-road capabilities improvement of its AWD vehicles; recognising that to date western firms have typically maintained a mobility capability edge over MENA, Latin American and Asian manufacturers thanks to larger budgets and historical precedence. This year Otokar also showed its first electric-powerd Bus (Doruk) (based on Vectio).
Product Line -
To summerise, Otokar has sought to self-educate for obvious commercial and homeland benefit, doing so through design and manufacturers of its own vehicles across 3 distinct sectors, and produce under license to offer a 4th distinct segment:
1. Coach & Bus (City, Inter-Urban, Tourism)
2. Semi / Articulated Trailers (Curtain, Van, Skeletal, Tanker, Tipper, Car Transporter)
3. Military / Peace-Keeping Vehicles (Various Tasks)
4. Land Rover Defender models (licensed) (90,110,130 w/b)
Thus Otokar has over the decades sought to construct a broad-based, multi-sector and notionally anti-cyclical business model. Interacting with the public sector transport bodies, private transport operators, the defence ministries of national and international government, peace-keeping agencies, and commercial fleet transport operators.
2011 Financial Highlights -
2011 YoY was certainly impressive, with:
Operating Revenues increased by 75.29%, from TRY 560,804,092 to TRY 983,054,123 . Operating Result increased by 176.28% from TRY 25,641,262 to TRY 70,841,850.
Overall Profit increased by 163.96% from TRY 20,778,314 to TRY 54,846,604.
RoE rose from 11.98% to 25.71%.
RoA rose from 3.27% to 6.42%.
Net Profit Margin rose from 3.71% to 5.58%.
Debt to Equity Ratio rose from 266.36% to 300.59%.
Current Ratio shrank from 1.19 to 1.05, showing greater assets vs liabilities 'balance'.
Chairman's 2011 Report -
Kudret Onen offered the following observations over last year's market and business dynamic:
- Whilst affected by the global downturn, Otokar (like many Turkish firms) was less ravaged.
- Post-poned 2010 demand of Bus and Trailer translated into strong 2011 sales.
- MENA and Gulf region civil unrest created immediate demand.
- Yearly revenue grew by 72% to TL / TRY of 890m, sales up 58%, profit to TL 55m
- Maintained focus on proprietry IPR to provide NPD and regional sales freedom.
- Export focus: Otokar exists in 60 separate countries
- “Strong geographical footprint, strong sectors, strong in-house competance”
- Bus & Coach markets in Turkey to expand, and EU market price sensitivity assists.
- Tanker Trailer sector to grow with new Turkish safety regulations and oil sector re-growth
- High potential for expansionary markets of Wheeled Tactical Vehicles
- Paraphrase: “Limited recession damage, good future potential”.
Contrasting Fortunes of Mainstream vs Specialist -
Turkey has seen a momentus rise in economic growth over the last decade, thanks in great part to a then growing EU, so marked improvement in domestic living standards and thus massive increase in private motoring and passenger vehicle sales, aswell as commercial vehicle sales. This leading to an influx of automotive investment and so greatly raised capacity to reduce unit costs and arguably a large degree of inventory stocking in factories, dealers and dock-sides to feed the voracious national and international appetite.
At the tail-end of this expansion, across 2009 and 2010 and 2011 Turkish vehicle production grew from 869,605 units to 1,094,557 units to 1,189,131 units. Retail sales over those years were 575,869 to 793,172 to 538,532 units. Export were 628,790 to 754,469 to 790,966 units.
But the decade-long, partly credit-fuelled, boom is now contracting as EM governments, Turkey included, seek to reign-in what is viewed as overly-loose credit conditions – the kind of conditions that ruined the west – which impacted Turkey's car export levels.
The almost immediate effect has been a dramatic cut in passenger car production, and so all vehicles TIV. The most affected Ford-Otosan and Oyak-Renault. The January-May output of 2012 was 8.4% lower than 2011, 512,506 units vs 469,366 units. But it was actual sales that demonstrate the real contraction, down 21% over the same period from 360,503 to 284,790. Even more extreme was the 26.4 drop-off of 'factory sales' between VM and corporate/fleet buyers in cars and pick-ups, falling from 155,809 units to 114,701 units. The slower deterioration of exports (including parts and accessories) assisted Tier1 and 2 suppliers, falling 'only' 5.5% in volume terms, but with the FX differential, recognising a 2.8% fall in overall income to $7.6bn USD.
Bucking this contracting trend though has been sections of the Bus, sections of CV/HGV and Defence markets, those in which Otokar resides.
Amongst all the auto-manufacturers and retails in Turkey over 2012 thus far, it has only been Otokar which has bucked the universal trend of contraction.
Where Otokar in its specialist domain has actually increased sales by 6.6% over the first 5 months of 2012, the mass car manufacturers of FIAT-Tofas and Oyak-Renault have fallen 30%, whilst Ford-Otosan is down 25%, and Toyota & Isuzu are both down approximately 22%. Domestic Karsan (maker of the eponymous mini-bus and shared taxi 'Dolmuş') is down 44%. And Otokar's large coach and bus rivals Temsa Global and BMC are down 3.5% and 28% respectively, the former better exposed to other healthier markets explaining the difference. However, even HGV suffered, with competitive placement all important as seen by the difference between Mercedes Benz Turk losing 'only' 6.6% and MAN Turkiye losing domestic 55% sales.
Add together domestic sales and exports, and once again Otokar the domestic and foreign VM pack leader – bettered only slightly by Hyundai. Otokar saw a 11.3% rise between January-May 2012, (Hyndai 13.5% increase). Whilst FIAT-Tofas, Oyal-Renault and Ford-Otosan lost 20%, 15% and 11% respectively. Toyota lost 5%, Isuzu down 21%. Karsan down lost 10%, Temsa Global down 10.7%,BMC down 37.7%. Mercedes Benx Turk lost 29% whilst MAN Turkiye's export drive helped it lose only 0.9%.
It has been the Mini-Bus and Midi-Bus segments which have been the tailwinds to the Turkish auto-industry this year, Otokar operating in both. Yet (as mentioned) it was Karsan that benefited most from domestic Mini-Bus sales up 21%, whilst Otokar actually saw a 93% decline on its small number of national deliveries. But Midi-Bus has given greater fortune, Otokar seeing a 65% rise to 684 units thus far versus Temsa Global's fall of 25%. All except BMC have suffered in the Large-Bus/Coach segment, BMC rising from its low base.
As for exports, Otokar beat all thus far, seeing new activity in Mini-bus (albeit small numbers), a 60% rise in Midi-Bus exports and a 114% rise in Large-Bus/Coach
Across the full May 2010 to May 2011 year, it was only Otokar beat all with a 16% rise in sales and exports, tailed by Hyundai on 15% and Ford-Otosan on 14%. But as that mass-manufacturer's momentum has been hard fought or lost in the face of the global slow-down, it has been the specialist arenas in which Otokar operates that has supported revenue and overall income.
[NB data sourced from The Industrial Development Bank of Turkey / TSKB Research].
Yet, it appears that it has been Otokar's military links which have supported its general revenue, a n income stream which most of its contemporaries lack. A
Although understandably 'hard numbers' and exacting data regards vehicle deliveries and the order book are not easily available – due to because the sensitive nature – recognising the weakness of the broader car market and presently constrained bus market, Otokar has sought to publicise its defence markets capital investment programmes and continuing success in attracting defence market orders.
Furthermore, the recent announcement that Koc Group will invest TRY 1.9bn ($1bn USD) with Ford in its Otosan venture to produce the new Transit van range and small Transit-Connect underling, demonstrates that it seeks to once again capture the lucrative Mini-Bus market from Karsan and others, including it seems any ambitions Otokar may have previously held. This 'growth denial' to Otokar then indicates that it will continue to focus upon Mid-Bus and Large-Bus/Coach with export bias given its pricing-led strategy, and critically mean yet greater focus on its Military Vehicle range, spanning 'Dark Green' Tanks, 'Light Green' Armoured Vehicles and 'White' Support Vehicles, including Mid and Large Bus for troop and civillian peace-keeping logistics.
Otokar's Stock Performance YtD -
Having started the new year at TRY 24.25 (Turkish Lira), Otokar's stock rose to 32.7 on 20th March, fell away and returned to 32.8 on 25th April, then seeing a low of 26.5 on 4th June before climbing to a YtD high of 33 on 12th July.
[NB Presently, TRY 2.8 to £1 GBP / TRY 1.81 to $1 USD].
The post Q1 fall was due to lower YoY Q1 earnings (TRY 6.33m vs 9.19m), whilst seemingly the expectation of a Turkish Army delivery contract re-boosted and deflated the share-price a full 3 weeks before formal announcement on 14th May, before re-climbing to present high.
Key Financial Figures -
Current P/E: 15.24
Estimated P/E (YE) 13.22
EPS 2.17 (TRY)
Estimated EPS (YE) 2.5
MktCap 729m (TRY)
Shares Outstanding 24m
Enterprise Value 980.11m (TRY)
EV / EBITDA 10.33
Price / Book 4.61
Price / Sales 0.865
Dividend (Gross) 6.06
Earnings Report 27.07.2012 (Q2, H1 2012)
Investors should of course compare these figures - with ideally deeper analysis of the firms Balance Sheet, P&L and CashBook - to those of its direct and indirect competitors.
However, whilst running what is seen by the investment community as an anti-cyclical 'defensive' investment case, it should be noted that the apparent self-interest of the Otokar to maintain its role as a prime enterprise in service of Turkey, means that its corporate governance, though seemingly better than many, should be improved if the company wishes to attract foreign investment.
Though it should be recognised that this notional ultimate aim may not be an immediate concern given the sovereign solvency of Turkey (its national debt only 40% of GDP), accompanying internal liquidity levels (government & private) and the liquidity levels ripe for cross-border investment by other 'Turkey friendly' EM nations.
Nevertheless, it is worthwhile pointing out the corporate governance limitations given the expected long-term desire to attract world funding.
Corporate Governance -
A web-sourced report published by SAHA Corporate Governance and Credit Rating Services Inc, provided the following overview:
Corporate Positives -
- Strong and declared corporate nationalistic vision / mission
- Separate Chairman and CEO posts
- Updated apparent transparency via website
Corporate Negatives -
- Lack of corporate governance structure
- Lack of independent BoD representation
- Lack of information regards controlling shareholder members
- Articles of Association quasi-deny shareholder participation
- No shareholder voting priveleges
- The SAHA Rating system used (0-100) does not numerically perfectly match Capital Markets numbering principles (0-10), suggesting either apparent 'better detailed reflection' or possible deliberate obfuscication.
Conclusion -
Though facing a notably slowing period in its general national development, largely thanks to previous economic reliance on the 'advanced' regions of Europe and the USA, Turkey today recognises its newly emergent position as an economically and politically powerful sovereign state within the wide and culturally inter-connected geographies of the MENA region, Gulf region and CIS region.
The western credit crisis of 2008 to date, undoubtedly propelling the global economic slowdown, has meant that the fast growing EM countries in the CIVETS and 'Next 11' groups are seeking new economic paths that are less reliant upon the 'old west' export markets and instead have started to focus ever more 'inward' to the growing strength and populace expectations of their own close proximity and bi-lateral regions.
So whilst undoubtedly remaining westward-looking to encourage FDI where possible and maintain technology transfer, Turkish companies like their BRIC and EM counterparts, have started to create EM-based 'clubs' via greater commercial and intellectual inter-action and of course increasingly stringer trade agreements.
Otokar has been seemingly selected by the Turkish power-brokers to be part of that new equation, one which is ironically actually being supercharged by the unrest of the 'Arab Spring' which will ultimately not only build new individual Arab states, but very probably create a new Arab network, as the moderates within Sunni and Shia win-over the popular consciousness through nation re-building tasks and programmes.
However, until that idealised end-point, the nation-building process and accompanying unrest is still more than evident and may continue for some years to come.
Otokar then is well placed as a provider of “regionally affordable” military and peace-keeping vehicles for purchase and deployment of both new civil defence forces and the likes of the UN who themselves will be keen to identity a 'passive leader' country. Turkey sees itself in that role.
And when the civil hostilities have subsided, and the new modern infrastructures of water, fuel, public services etc are created, Otokar will seek to be part of that evolutionary stage as it offers public transport vehicles and commercial cargo carriers which will help drive the new econiomic machines of renewed sovereign countries.
Wholly orientated for the region's current ”Gloom” and eventual “Boom”.
The various regime changes throughout the middle East – starting with Tunisia, most notable in Libya and Egypt and slowly underway in Syria – has seen Turkey seek to position itself as the centralist power-broker. Its geo-strategic position between Arab and European worlds has historically been advantageous as a historical cultural buffer between what were once very different mindsets.
Yet whilst in the past seen as an dualistic ally of both the USA and Russia – acting in buffer mode yet again - its own economic boom of recent years has resulted in an innate political confidence and maturing by the decade-long governing AKP. (Initials translate as the Justice & Development Party, with Erdogan and Gul as respective Prime Minister and President).
As western economies still suffer from fragility, set to see a slow-growth near-term future, and the once rapid growth rate of the BRIC countries slows given global trade contraction, it is the “CIVETS” & “Next 11” high-growth economies – in which Turkey knowingly sits – which gain investor and so political attention because of their influence over what are typically smaller but high potential regional neighbours.
[NB the “Next 11” consisting of: Turkey, Egypt, Iran, Pakistan, Bangladesh, Indonesia, Philippines, S.Korea, Vietnam, Nigeria and Mexico. Whilst the CIVETS consists of Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Notably, amongst those, it is now only Mexico with a strong cultural link to Europe & the USA. The power-shift toward the Muslim world well recognised by Turkey].
That power-shift perhaps most notably seen by the heavily deteriorated relations with Palestine relative to the Israel, and the “Aid Boat” vs “Arms-Supply-Boat” incident. More recently however has been the Erdogan government's strong reaction to the loss of a Turkish jet-fighter, shot-down by Syria's Assad regime, calling for an extra-ordinary UN meeting, reflecting its desire to be globally trusted as a regional 'Otto-Arab' “co-parent”.
The prevailing cross-MENA circumstances over the last 18 months known as the 'Arab Spring' has witnessed newly installed governments and expectancy of a greater national & intra-regional voice by the Arabic peoples. It also replays 20th century events through the periodic cycle of civil war, severe civilian casualties, heavy infrastructure damage and administrative regime change.
Such political, social and economic disruption consequentially followed by the need for nation re-building. This achieved by way of infrastructure & services rebuild, a process ostensibly paid for from natural resource wealth (typically oil, gas, agriculture), the welcoming of such sector-specific FDI, economy broadening FDI (in defence, transportation, second-tier manufacturing & increasingly culture-orientated tourism) and the creation of a much improved – notionally far fairer - private enterprise climate.
The Middle East then has proven to be the historical examplar of “Gloom & Boom”.
Geo-Strategic Businesses -
Over the preceding 100 years, regional friction and emergent political factions have been the norm, in reaction to: early era Franco-British colonialism, the creation of Israel in 1948 and the Arab-Israeli war days after, the Sinai war / Suez Crisis of 1956, the six day war of 1967, the OPEC oil embargo of 1973, the Iraqi-Kurdish conflicts since the 1970s, the Turkish-Kurdish conflicts since the 1980s, and very obviously Palestinian Independence and simultaneous Israeli 'settlements' incursion. 1991 saw the first Gulf war, whilst American invasion of Iraq and internal conflict ran throughout much of the last decade.
And of course since, the 'Arab Spring' has effectively destabalised many countries throughout the region, with the hopes of long-term betterment. Yet as seen with the cases of Syria and Egypt, nation re-building is often a tumultuous process spanning a long journey between outright civil war to the vying and bargaining of opposing interests in a problematic election process.
The Commercial Imperative Throughout -
Within this long backdrop of inter-regional social and economic instability, companies from all affected countries have sought to create business models which both serve national and sovereign interests, assist the needs of regional allies and trade partners, and of course relate to the economic dynamics of the area; which across MENA, because of geo-political, geo-economic dynamics, have been characterised by dramatic shifts of fortune from positive to negative; these also heavily influenced by by periodic trade embargoes, previously often via the UN at the behest of Anglo-Euro-American influence.
However, equally, during periods of calm and growth within any one the MENA countries, there has been mutually rewarding trade agreements and commercial contracts ratified to boost a nation's internal capabilities, economic standing and improvement of living standards; perhaps best evidenced by those agreements with major western vehicle manufacturers, whether of HGV truck, bus, van, pick-up and of course standard car.
Thus, whether as part of a government-led detailed industrial agenda, or from the self-seeking activities of politically influential entrepreneurs, most all of the MENA region's countries have a level of automotive capability geared toward national defence and public and private transit;. whether ranging from the adaption of grey-imported trucks – as seen with the recent people's armies – to the historical creation of an enterprise devoted to the requirement.
Turkey's Illustration -
The Turkish manufacturer Otokar is a prime illustration of the latter.
Since the demise of the once aggressive Ottoman Empire, and creation of modern Turkey (under Ataturk in 1922) the country has remained seemingly strong but introverted; strong from the size of its armed forces, but introverted in that it has only fought to protect its sovereign interests, not to enlarge them.
From this position, and with the responsibility for domestic development first and foremost, it has been historically an “arms'-length removed” docile but influential regional player; today perhaps more so then ever, instead building-up industrial / commercial capability over overt military capability, to promote both internal growth and importantly gain 'soft-power' across MENA, the CIS and bordering CEE – espoused by the modern Turkish national anthem with olde 'Germania' tone.
However, the overlap of the 'military industrial complex' and 'civvy-street' operators within Turkey is easily seen, much as may be the case with GKN plc or Rolls-Royce plc in Britain or GE and GM in the USA.
Otokar A.S. -
Otokar is a prime, high-visibility example of how the established Turkish mindset, in certain strong cases, merges military and civilian development and production capabilities, whilst seeking regional commercial and military contracts. Indeed its very name appears to derive from two sources: the idea of Otto-Car (ie Turkish Vehicle) and association with a dynasty of Bohemian Kings named Ottokar, so emphasising Turkey's historical connection with SE Europe].
Located in Adapazari, Sakarya province, within the Marmara region, the firm sits east of Istanbul yet close to the automotive heartland of Bursa province and next to what is effectively the Euro-Asian inter-continental 'land bridge'.
It is a publicly listed sub-holding of the largely family controlled Koç Holding A.Ş. (a conglomerate of 113 companies) with a 44.7% share-hold of Otokar, 24.8% held by Unver Holding A.Ş) and the remaining 30.5% the free-float.
[NB Other Istanbul Exchange listed auto companies with Koc interests include: the Ford JV 'Otosan', with an 18% free-float, and FIAT JV 'Tofaş' (Türk Otomobil Fabrikası A.Ş) with a 24% free-float. Others are the production JV 'Anadolu-Isuzu', vehicle importer Dogus Otomotive, battery producer Mutlu Aku,
Privately held Turkish owned auto-firms include BMC (Çukurova Group), Karsan (Kıraça Group), Oyak-Renault (Military Pension Fund with 49%), Temsa (Sabanci Group), Ermetal Otomotive (Ermetal Şirketler Group) amongst others].
As such with 30.5% Otokar has the largest free-float and is thus more accessible to the general national and international investment community.
It must be maintained that as part of broader conglomerate constructs under Koc and Unver, the company may not have complete automony, internal resources utilised elsewhere as necessary. However, importantly, from the structural ownership and larger free-float perspectives, it appears to have greater freedom for self-governance than would be the case with Ford-Otosan and FIAT-Tofas.
However, the reason for researching the Otokar company is that it seem inevitable that in time the 2 major Turkish conglomerates – Koç & Sabanci (and smaller Holding A.Ş counterparts) – will seek to continue to divest further holdings to both enrich the Turkish economy, and gain capital for any regional or global expansion ambitions; see Turkey's political ambitions - prefaced by the expansion plans of Turkish Airlines. Thus Otokar may gain a greater free-float on the open Istanbul market, and possibly other bourses, in years to come depending upon its growth fortunes.
History -
The company was established to perform the role of manufacturing public buses using a license agreement with Germany's Magirus Deutz in 1963 to do so. The 1970s saw the introduction of a Minibus and Koç Group take control. A medium sized City-Bus was added to the product portfolio in the 1980s. That economic growth period for Turkey also saw Otokar diversify with the origination of a armoured van for cash and high-value goods delivery; acquiring new tentative but growing knowledge in the lucrative armoured vehicle sector. A licensing agreement with the UK's Land Rover was struck in 1987 in order to supply the Turkish Army, adding a 3rd income stream, with obvious synergies with its own vehicle 'up-armouring' capabilities. Utilising absorbed understanding of Land Rover's 4x4 drive-line system, Otokar created its own first dedicated 'light-armoured' military model variants (Akrep & Cobra) in the early 1990s. 1997 saw the firm relocate to Sakarya. 2002 proved an active year with further diversification into Trailers and Semi-Trailers in 2002 via the acquisition of Istanbul Fruehauf (a fellow Koc Group company), and launch of a self-developed Small Bus (Navigo). Expansion of the military vehicle offering came in 2003 with cooperation with STK (Singapore Technologies Kinetics) for a 8x8 tactical armoured vehicle. 2005 saw its military/civillian defence range expand with the 'Armoured Internal Security Vehicle'. A new 9m Bus (Vectio) arrived in 2007. In 2008 Otokar was awarded prime contractor status for the new 'all Turkish' Altay Battle Tank, showcasing a life-size model. 2009 introduced the mine protected Kaya armoured vehicle, and saw the new 12m Bus (Kent) and a new series Mini-Bus (Centro). 2010 launched the 6x6 (Arma) military vehicle, by seemingly utilising engineering knowledge gained from the STK contract., whilst 2011 saw an 8x8 variant of Arma, effectively replacing the STK product. Otoakar opened a new Tank Testing Centre in 2012, no doubt to develop series additions, replacement and sibling vehicles for the Altay Tank, and very probably to provide a 'proving-ground' for off-road capabilities improvement of its AWD vehicles; recognising that to date western firms have typically maintained a mobility capability edge over MENA, Latin American and Asian manufacturers thanks to larger budgets and historical precedence. This year Otokar also showed its first electric-powerd Bus (Doruk) (based on Vectio).
Product Line -
To summerise, Otokar has sought to self-educate for obvious commercial and homeland benefit, doing so through design and manufacturers of its own vehicles across 3 distinct sectors, and produce under license to offer a 4th distinct segment:
1. Coach & Bus (City, Inter-Urban, Tourism)
2. Semi / Articulated Trailers (Curtain, Van, Skeletal, Tanker, Tipper, Car Transporter)
3. Military / Peace-Keeping Vehicles (Various Tasks)
4. Land Rover Defender models (licensed) (90,110,130 w/b)
Thus Otokar has over the decades sought to construct a broad-based, multi-sector and notionally anti-cyclical business model. Interacting with the public sector transport bodies, private transport operators, the defence ministries of national and international government, peace-keeping agencies, and commercial fleet transport operators.
2011 Financial Highlights -
2011 YoY was certainly impressive, with:
Operating Revenues increased by 75.29%, from TRY 560,804,092 to TRY 983,054,123 . Operating Result increased by 176.28% from TRY 25,641,262 to TRY 70,841,850.
Overall Profit increased by 163.96% from TRY 20,778,314 to TRY 54,846,604.
RoE rose from 11.98% to 25.71%.
RoA rose from 3.27% to 6.42%.
Net Profit Margin rose from 3.71% to 5.58%.
Debt to Equity Ratio rose from 266.36% to 300.59%.
Current Ratio shrank from 1.19 to 1.05, showing greater assets vs liabilities 'balance'.
Chairman's 2011 Report -
Kudret Onen offered the following observations over last year's market and business dynamic:
- Whilst affected by the global downturn, Otokar (like many Turkish firms) was less ravaged.
- Post-poned 2010 demand of Bus and Trailer translated into strong 2011 sales.
- MENA and Gulf region civil unrest created immediate demand.
- Yearly revenue grew by 72% to TL / TRY of 890m, sales up 58%, profit to TL 55m
- Maintained focus on proprietry IPR to provide NPD and regional sales freedom.
- Export focus: Otokar exists in 60 separate countries
- “Strong geographical footprint, strong sectors, strong in-house competance”
- Bus & Coach markets in Turkey to expand, and EU market price sensitivity assists.
- Tanker Trailer sector to grow with new Turkish safety regulations and oil sector re-growth
- High potential for expansionary markets of Wheeled Tactical Vehicles
- Paraphrase: “Limited recession damage, good future potential”.
Contrasting Fortunes of Mainstream vs Specialist -
Turkey has seen a momentus rise in economic growth over the last decade, thanks in great part to a then growing EU, so marked improvement in domestic living standards and thus massive increase in private motoring and passenger vehicle sales, aswell as commercial vehicle sales. This leading to an influx of automotive investment and so greatly raised capacity to reduce unit costs and arguably a large degree of inventory stocking in factories, dealers and dock-sides to feed the voracious national and international appetite.
At the tail-end of this expansion, across 2009 and 2010 and 2011 Turkish vehicle production grew from 869,605 units to 1,094,557 units to 1,189,131 units. Retail sales over those years were 575,869 to 793,172 to 538,532 units. Export were 628,790 to 754,469 to 790,966 units.
But the decade-long, partly credit-fuelled, boom is now contracting as EM governments, Turkey included, seek to reign-in what is viewed as overly-loose credit conditions – the kind of conditions that ruined the west – which impacted Turkey's car export levels.
The almost immediate effect has been a dramatic cut in passenger car production, and so all vehicles TIV. The most affected Ford-Otosan and Oyak-Renault. The January-May output of 2012 was 8.4% lower than 2011, 512,506 units vs 469,366 units. But it was actual sales that demonstrate the real contraction, down 21% over the same period from 360,503 to 284,790. Even more extreme was the 26.4 drop-off of 'factory sales' between VM and corporate/fleet buyers in cars and pick-ups, falling from 155,809 units to 114,701 units. The slower deterioration of exports (including parts and accessories) assisted Tier1 and 2 suppliers, falling 'only' 5.5% in volume terms, but with the FX differential, recognising a 2.8% fall in overall income to $7.6bn USD.
Bucking this contracting trend though has been sections of the Bus, sections of CV/HGV and Defence markets, those in which Otokar resides.
Amongst all the auto-manufacturers and retails in Turkey over 2012 thus far, it has only been Otokar which has bucked the universal trend of contraction.
Where Otokar in its specialist domain has actually increased sales by 6.6% over the first 5 months of 2012, the mass car manufacturers of FIAT-Tofas and Oyak-Renault have fallen 30%, whilst Ford-Otosan is down 25%, and Toyota & Isuzu are both down approximately 22%. Domestic Karsan (maker of the eponymous mini-bus and shared taxi 'Dolmuş') is down 44%. And Otokar's large coach and bus rivals Temsa Global and BMC are down 3.5% and 28% respectively, the former better exposed to other healthier markets explaining the difference. However, even HGV suffered, with competitive placement all important as seen by the difference between Mercedes Benz Turk losing 'only' 6.6% and MAN Turkiye losing domestic 55% sales.
Add together domestic sales and exports, and once again Otokar the domestic and foreign VM pack leader – bettered only slightly by Hyundai. Otokar saw a 11.3% rise between January-May 2012, (Hyndai 13.5% increase). Whilst FIAT-Tofas, Oyal-Renault and Ford-Otosan lost 20%, 15% and 11% respectively. Toyota lost 5%, Isuzu down 21%. Karsan down lost 10%, Temsa Global down 10.7%,BMC down 37.7%. Mercedes Benx Turk lost 29% whilst MAN Turkiye's export drive helped it lose only 0.9%.
It has been the Mini-Bus and Midi-Bus segments which have been the tailwinds to the Turkish auto-industry this year, Otokar operating in both. Yet (as mentioned) it was Karsan that benefited most from domestic Mini-Bus sales up 21%, whilst Otokar actually saw a 93% decline on its small number of national deliveries. But Midi-Bus has given greater fortune, Otokar seeing a 65% rise to 684 units thus far versus Temsa Global's fall of 25%. All except BMC have suffered in the Large-Bus/Coach segment, BMC rising from its low base.
As for exports, Otokar beat all thus far, seeing new activity in Mini-bus (albeit small numbers), a 60% rise in Midi-Bus exports and a 114% rise in Large-Bus/Coach
Across the full May 2010 to May 2011 year, it was only Otokar beat all with a 16% rise in sales and exports, tailed by Hyundai on 15% and Ford-Otosan on 14%. But as that mass-manufacturer's momentum has been hard fought or lost in the face of the global slow-down, it has been the specialist arenas in which Otokar operates that has supported revenue and overall income.
[NB data sourced from The Industrial Development Bank of Turkey / TSKB Research].
Yet, it appears that it has been Otokar's military links which have supported its general revenue, a n income stream which most of its contemporaries lack. A
Although understandably 'hard numbers' and exacting data regards vehicle deliveries and the order book are not easily available – due to because the sensitive nature – recognising the weakness of the broader car market and presently constrained bus market, Otokar has sought to publicise its defence markets capital investment programmes and continuing success in attracting defence market orders.
Furthermore, the recent announcement that Koc Group will invest TRY 1.9bn ($1bn USD) with Ford in its Otosan venture to produce the new Transit van range and small Transit-Connect underling, demonstrates that it seeks to once again capture the lucrative Mini-Bus market from Karsan and others, including it seems any ambitions Otokar may have previously held. This 'growth denial' to Otokar then indicates that it will continue to focus upon Mid-Bus and Large-Bus/Coach with export bias given its pricing-led strategy, and critically mean yet greater focus on its Military Vehicle range, spanning 'Dark Green' Tanks, 'Light Green' Armoured Vehicles and 'White' Support Vehicles, including Mid and Large Bus for troop and civillian peace-keeping logistics.
Otokar's Stock Performance YtD -
Having started the new year at TRY 24.25 (Turkish Lira), Otokar's stock rose to 32.7 on 20th March, fell away and returned to 32.8 on 25th April, then seeing a low of 26.5 on 4th June before climbing to a YtD high of 33 on 12th July.
[NB Presently, TRY 2.8 to £1 GBP / TRY 1.81 to $1 USD].
The post Q1 fall was due to lower YoY Q1 earnings (TRY 6.33m vs 9.19m), whilst seemingly the expectation of a Turkish Army delivery contract re-boosted and deflated the share-price a full 3 weeks before formal announcement on 14th May, before re-climbing to present high.
Key Financial Figures -
Current P/E: 15.24
Estimated P/E (YE) 13.22
EPS 2.17 (TRY)
Estimated EPS (YE) 2.5
MktCap 729m (TRY)
Shares Outstanding 24m
Enterprise Value 980.11m (TRY)
EV / EBITDA 10.33
Price / Book 4.61
Price / Sales 0.865
Dividend (Gross) 6.06
Earnings Report 27.07.2012 (Q2, H1 2012)
Investors should of course compare these figures - with ideally deeper analysis of the firms Balance Sheet, P&L and CashBook - to those of its direct and indirect competitors.
However, whilst running what is seen by the investment community as an anti-cyclical 'defensive' investment case, it should be noted that the apparent self-interest of the Otokar to maintain its role as a prime enterprise in service of Turkey, means that its corporate governance, though seemingly better than many, should be improved if the company wishes to attract foreign investment.
Though it should be recognised that this notional ultimate aim may not be an immediate concern given the sovereign solvency of Turkey (its national debt only 40% of GDP), accompanying internal liquidity levels (government & private) and the liquidity levels ripe for cross-border investment by other 'Turkey friendly' EM nations.
Nevertheless, it is worthwhile pointing out the corporate governance limitations given the expected long-term desire to attract world funding.
Corporate Governance -
A web-sourced report published by SAHA Corporate Governance and Credit Rating Services Inc, provided the following overview:
Corporate Positives -
- Strong and declared corporate nationalistic vision / mission
- Separate Chairman and CEO posts
- Updated apparent transparency via website
Corporate Negatives -
- Lack of corporate governance structure
- Lack of independent BoD representation
- Lack of information regards controlling shareholder members
- Articles of Association quasi-deny shareholder participation
- No shareholder voting priveleges
- The SAHA Rating system used (0-100) does not numerically perfectly match Capital Markets numbering principles (0-10), suggesting either apparent 'better detailed reflection' or possible deliberate obfuscication.
Conclusion -
Though facing a notably slowing period in its general national development, largely thanks to previous economic reliance on the 'advanced' regions of Europe and the USA, Turkey today recognises its newly emergent position as an economically and politically powerful sovereign state within the wide and culturally inter-connected geographies of the MENA region, Gulf region and CIS region.
The western credit crisis of 2008 to date, undoubtedly propelling the global economic slowdown, has meant that the fast growing EM countries in the CIVETS and 'Next 11' groups are seeking new economic paths that are less reliant upon the 'old west' export markets and instead have started to focus ever more 'inward' to the growing strength and populace expectations of their own close proximity and bi-lateral regions.
So whilst undoubtedly remaining westward-looking to encourage FDI where possible and maintain technology transfer, Turkish companies like their BRIC and EM counterparts, have started to create EM-based 'clubs' via greater commercial and intellectual inter-action and of course increasingly stringer trade agreements.
Otokar has been seemingly selected by the Turkish power-brokers to be part of that new equation, one which is ironically actually being supercharged by the unrest of the 'Arab Spring' which will ultimately not only build new individual Arab states, but very probably create a new Arab network, as the moderates within Sunni and Shia win-over the popular consciousness through nation re-building tasks and programmes.
However, until that idealised end-point, the nation-building process and accompanying unrest is still more than evident and may continue for some years to come.
Otokar then is well placed as a provider of “regionally affordable” military and peace-keeping vehicles for purchase and deployment of both new civil defence forces and the likes of the UN who themselves will be keen to identity a 'passive leader' country. Turkey sees itself in that role.
And when the civil hostilities have subsided, and the new modern infrastructures of water, fuel, public services etc are created, Otokar will seek to be part of that evolutionary stage as it offers public transport vehicles and commercial cargo carriers which will help drive the new econiomic machines of renewed sovereign countries.
Wholly orientated for the region's current ”Gloom” and eventual “Boom”.
Friday, 6 July 2012
Intermission
A one week intermission of the investment-auto-motives' web-blog begins today (Friday 6th July). Timed to retain a view of the previous commentary and details of the accompanying charts given the recent, long-awaited positive dynamic of European stock markets.
A new 'Company Focus' review of an interestingly positioned 'Next 11' constituent firm is to follow.
A new 'Company Focus' review of an interestingly positioned 'Next 11' constituent firm is to follow.
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