Mergermarket Interview with Orhun Köstem, Sabancı Holding Group CFO

16 January 2023

Sabancı Holding outlines key growth areas: energy and climate, digital and advanced material technologies

• ESG filters power inorganic growth in new areas
• Organic and inorganic growth set for developed markets, particularly US and Europe
• Short-term priority in US is to invest in climate technology and renewable energy

Turkish conglomerate Sabanci Holding [IST:SAHOL], is looking for both organic and inorganic opportunities within the energy and climate, digital technologies and advanced material technologies divisions, its Chief Financial Officer Orhun Kostem, told Mergermarket.

These three pillars of the ‘new economy’, are the business focus for the next decades, he said. Sabanci receives unsolicited offers from peer global companies in these areas which have reached negotiation stage, he said. However, such approaches are always reviewed as part of dynamic portfolio management principles, and at present there is no ongoing deal making, he added.

The Group’s motto is to “unite Turkey and the world for a sustainable life with leading enterprises," Kostem said.

Sabanci’s banking arm Akbank [IST: AKBNK]) remains the Holding’s largest business with the majority of its exposure in Turkey, he said. Its banking contributes 69% to overall EBITDA performance, energy contributes 19% and the industry and construction materials add around 8%, he said.

However, it is now looking to invest in the three pillars of the new economy, on a global scale, Kostem noted. Bunol, a Spain-based white cement manufacturer, which the holding acquired through its subsidiary Cimsa [IST:CIMSA], as well as its subsidiary Kordsa’s [IST: KORDS] acquisition of Italy-based composite company Microtex reflect such investments, he said.

Group financials provide positive outlook

The group’s combined turnover has increased by 175% in the first nine months of 2022, with exponential growth in EBITDA by 254% and net profit increase by over 322%, compared to the same period last year, the CFO said.

While inflation stood at 83% in November 2022, the holding outperformed inflation, he said adding that “[Sabanci’s] profitability grows as much as, or even faster than its turnover.”

Sabanci Holding's latest mid-term targets included turnover growth by eight points above inflation rate and 10 plus points above inflation rate for EBITDA growth, Kostem noted.

Besides it core business in finance, in which Akbank showed a solid performance in the first three quarters of the last year, the energy business also performed well, the CFO said.

As a result of the plan to double its capex/sales to around 14%, the group is looking to invest in new business areas such as climate technologies, while 25% of the capex will be spent on capacity increase and transformation of its current businesses, he added.

Sabanci’s hard currency (USD, EUR) income is expected to increase over 30%, as announced in its midterm guidance, Kostem said.

There is a holding policy that in general limits its group-level net debt/EBITDA ratio to 2x times or less of EBITDA, he said, with its most recent level (as of 9M of 2022) standing at around 0.7, which means that there is still room for growth, he added.

ESG filter

Besides on its investments in Turkey, Sabanci Holding also plans to invest in new prioritised areas abroad, filtering them through environmental, social and governance (ESG) principles, the CFO said.

Climate technologies, renewable energy or alternative fuels like hydrogen are already a part of the holding’s investments portfolio in Turkey, he said. The group is now looking to spur growth of these assets globally through organic investments or through acquisitions where necessary to grow its capacity, Kostem said.

Similarly, its SabancıDX subsidiary, which is a dedicated digital company, added a new business branch last year which focuses on cyber security and digital marketing, he said. It acquired Turkish digital marketing firms SEM Internet Reklam Hizmetleri, Liberdatum Internet Reklam Hizmetleri, and Israeli cybersecurity firm Radiflow, in April 2022, as reported.

It still plans bolt-on acquisitions for the digital unit in relevant segments “to create value”, he added, declining to specify. Sabanci will look for potential growth opportunities in developed markets, mainly the US and Europe, the CFO said.

Corporate disposal and divestment strategy

Sabancı evaluates its portfolio annually and appropriately divests its interests in assets - as was the sale of its stake in its Philsa partnership with Philip Morris [NYSE: PM] in 2021, he said. Proceeds from such exits are generally invested in new business areas, Kostem said adding that it could assess more noncore asset divestments.

In the same way as it did with Kordsa and its construction material companies, some of its current businesses are already focused on new business areas, he said. Other divisions will either be restructured or the group may take di"erent decisions on them if there is an opportunity to maximise their efficiency, he added.

Among the 70 companies within its portfolio, numerous have partnerships with global companies such as Bridgestone [TYO: 5108] in BriSA [IST: BRISA], Carrefour [EPA: CA] in Carrefoursa [IST: CRFSA], Ageas [EBR: AGS] in Agesa [IST: AGESA] and Aksigorta [IST: AKGRT], Marubeni [TYO: 8002] in Temsa, PPF Group (owner of Skoda Transportation) in Temsa Transportation Vehicles business, Heilderberg [ETR: HEI] in Akcansa [IST: AKCNS] and EoN in Enerjisa [IST: ENJSA], Kostem said.

The holding could establish new partnerships if it sees opportunities in the new business areas of climate, energy and digital technologies, he noted.

Sabanci Holding also houses 12 listed companies (including Sabancı Holding itself) on the Bourse Istanbul, he said. These companies’ market caps constitute 6% to 8% of the total main Borsa Istanbul 100 index, Kostem said. The current sentiment is not favourable for IPOs, he said, noting that it would continue to pursue plans to list other private portfolio companies in a healthier market.

US in the radar

The group’s Kordsa, Cimsa and Bunol businesses have a global footprint with the latter having operations in Spain with exports mainly to the US, he said.

The holding announced greenfield renewable energy investments in the US last year, with more, similar investments in the pipeline for its di"erent renewable energy business, the CFO added.

The greenfield investment will enable the holding to understand the dynamics of the US market which will encourage it to assess both organic and inorganic opportunities in the US and in Europe and act accordingly, Kostem said.

Other than the US, Sabanci is also reviewing other investment opportunities in other markets, depending on the industry and the market condition, he said. The conglomerate invested in the US renewable industry due to the high demand and the liberal market conditions, he added. The short-term priority is to take steps in climate technology and renewable energy in the US, Kostem noted.

“There is a big energy demand in the US with subsidies and relatively more liberal regulation when compared to Turkey and Europe," he explained. This is an attractive opportunity for Sabanci which will review such opportunities, he said. While the growing energy demand is global, Sabanci’s criteria is "to operate within such liberal markets,” the CFO added.

In November 2022, the holding acquired a project license for the establishment of a 272 MW solar power plant in the USA through its Sabanci Renewables subsidiary, as per a company announcement. An Engineering, Procurement and Construction Agreement (EPC) was signed for investment in the power plant and the project is expected to be completed in the first half of 2024, as per the same company report.

Startup investments

The VC arm Sabanci Ventures has a USD 30m fund and invests in start-ups with a financially-wise approach that can either be integrated within Sabanci Holding’s eco-system or that can feed it, Kostem said.

Its most recent investments include digital factory platform Supply Chain Wizard, the cloud solutions firm Bulutistan, AI-based patient management and healthtech services platform developer Albert Health, industrial wearable technology products startup Thread in Motion, insurance technologies firm Lumnion, AI-based smart assistant services firm Zack.ai and fintech company Figopara, he added.

Investments under Sabanci Venture are complimentary to the holding's ecosystem with project quality being the main driver, he said. These are totally different to the ones conducted under its asset management subsidiary Ak Portfoy, he added.

The holding also invested in US based VC Safar Partners with a growing portfolio in climate technologies, the CFO noted. Sabanci invested directly in two projects in the US, through its newly established climate technology subsidiary Sabanci Iklim Teknolojileri, namely in the Commonwealth Fusion Systems, a start-up working on fusion and in Quaise Energy, a company developing deep geothermal energy technologies, he added.

by Erdinc Ergenc in Istanbul