Downgrading Tupras to HOLD on valuation grounds. In our initiation report Turkish downstream oil sector, we argued that Tupras is a unique refiner and a safe haven for investors, based on its domestic market position, high dividend yield and strong demand dynamics in Turkey. We think these arguments are still valid. On the other hand, the 41% return on Tupras shares since 7 June, vs 32% for the ISE-Industrials Index, and with a 9.6x (7.8x adjusted for debt related to the residuum upgrade) one-year forward looking EV/EBITDA and 11.3x P/E, we think the valuation has become stretched vs peers and based on our DCF model. We raise our TP to TRY49.3 (from TRY43.0) to reflect a lower discount rate, but downgrade our rating to HOLD (from Buy).

Aygaz remains a BUY, with 23% potential upside implied by our new TP. We raise our TP to TRY12.5 (from TRY10.2), based on a slight upward revision to our operating projections and a lower discount rate, and to reflect current market caps in the participation portfolio. We also think that Aygaz will become stronger as a dividend play, as the debt of EYAS will be fully paid-off in two years and Aygaz will be entitled to dividends from EYAS. Accordingly, we think investor interest in Aygaz should stay fresh, based on its cash-generative core gas business, cash dividends, growing power generation capacity and the prospect of acquisitions in the natural gas distribution sector. Despite the recent strong stock performance, Aygaz still trades at 4.4x 2013E participation-adjusted EV/EBITDA (vs the 8.2x average of the non-financial Turkish stocks under our coverage) and 10.6x P/E multiples (vs the 15.1x average of our non-financial Turkish coverage universe).

Dividend considerations will become more pronounced. Given our estimated dividend yield for both names of 10% by 2016, we think Tupras and Aygaz will remain good picks for investors attracted by long-term dividend yields. We also believe that cash dividends will move up on the agenda in the coming years, given the current low-interest-rate environment, and high-yielding companies will be rewarded by investors with higher multiples. Despite our forecast of similar yields for both companies starting from 2016, we think Aygaz is less well recognised as a dividend play, due to its shorter track record, and believe that the stock provides a good basket of energy investments, ranging from refining to liquefied petroleum gas (LPG), power generation and natural gas.

Source: bne