Turkish market’s weak performance in June was primarily driven by the early elections, with additional pressures from lira weakness and rising interest rates, VTB Capital said on July 4 in a research note.

Vehicle sales in Turkey plunged 39% y/y to 51,037 units in June, the Turkish Automotive Distributors’ Association (ODD) reported on July 3.

In the first half of the year, Turkey’s overall vehicle sales were down 12% y/y to 355,348 units.

The ODD previously forecast that auto sales will amount to between 925,000 and 975,000 in 2018. Given the first half performance, the ODD’s prediction is rather optimistic.

Vehicle sales declined by 2.8% to 983,720 units in 2017. The passenger car market contracted 4.52% to 722,759 units while LCV sales increased by 2.93% to 233,435.

In 2017, Turkey’s auto production increased by 13% y/y to a record high of 1.67mn thanks to rising exports. In 2016, the country’s automotive output increased by 9% to 1.49mn units.

Across January-May, total vehicle production declined by 2% y/y to 711,999 units while passenger car production alone fell 7% y/y to 471,634 units.

VTB Capital is sticking to its 2018 forecast of a relatively flat market in 2018, as it believes that vehicle sales are likely to recover following the elections. Still, it believes that higher prices on the back of lira weakness and high interest rates might continue to put pressure on the market, which creates downside risks.

Among the stocks in Turkish auto universe VTB Capital continues to favour Tofas (BUY) on anticipated export improvement in the second half of 2018 and Dogus Otomotiv (Buy) on deleveraging and the renewed focus on margins.

VTB Capital sees Ford Otomotiv (Hold) as fairly valued.

Tofas’ light vehicle sales declined 51% y/y in June (down 49% for passenger cars and 54% for LCVs), which resulted in sales falling 19% y/y in the first half. Meanwhile, VTB Capital believes that a recovery in Tofas’ share price hinges largely on an improvement in export sales, where VTB Capital sees good opportunities on the back of a more favourable base effect in 2018.

VTB Capital also notes that Tofas has focused on maintaining margins, which might have also contributed to its underperformance on the domestic market.

Tofas shares fell 0.17% d/d to TRY22.82 (€4.19) at closing on July 4 versus a 0.66% increase to 97,230 in the benchmark BIST-100 index. Tofas lost 17.62% on annual basis versus a 15.70% decline in the BIST-100.

Dogus Otomotiv remained the second largest player on the domestic light vehicle market, after Renault, in terms of unit sales in the first half of 2018. Its market share was 18.4% and 17.1% in June vs. 18.9% in 2017. The company underperformed the market both in June and in H1, with its vehicle sales declining 46% y/y and 13% y/y, respectively.

Dogus Otomotiv has also increasingly focused on profitability of late, which might have contributed to the decrease of its market share, according to VTB Capital. The company’s sales mix continued to shift toward higher margin brands and models. VTB Capital believes that Dogus Otomotiv’s recent efforts to deleverage might also contribute to value creation.

Dogus Otomotiv was also down 1.30% to TRY6.84 on the day while annual loss amounted to 20.56%.

Ford Otosan saw a 35% y/y decline in its light vehicle sales in June, slightly outperforming the market. The company remained the market leader in LCVs, with a 34% share in June and 31% in H1, vs. 30.5% in 2017. Meanwhile, VTB Capital believes that the company’s domestic and export performance is largely priced in at the moment.

Ford Otosan shares gained 0.33% to TRY60.50 on July 4 and annual gain on Ford Otosan shares stood at 50.65%.