Tekfen Holding continued to grow in all its business areas in 2007 in a sound and stable manner. In November, the Holding completed its initial public offering, a milestone in its corporate history.

2007 was a successful year for Tekfen. The Group’s revenue increased by 10% to reach TRY1,895 million. Profitability followed a similar trend in 2007. Earnings before interest, tax, depreciation and amortization remained stable at TRY197 million while earnings before tax jumped by 66% to TRY150 million and net income from continuing activities increased by 81% to TRY124 million. When the income gained from the sale of the majority shares in Tekfenbank is added, Tekfen Group’s net income amounted to TRY279 million for 2007.

The growth seen in revenues and profitability were also reflected in the Group’s assets. Excluding the assets of Tekfenbank, the majority shares of which were sold in 2007, total assets of Tekfen Group increased by 25% from TRY1,933 million at the end of 2006 to TRY2,421 million at the end of 2007. Moreover, the increased market value of the Group’s real estate holdings was not included in the calculation of total assets for 2007.

These positive developments demonstrate that the Holding continued to build on its strong foundation to prosper, reinforcing its reputation both in Turkey and abroad due to its focused and consistent growth strategies. The fact that this growth trend continued in 2007, despite fluctuations in global markets and unfavorable economic conditions, makes Tekfen’s performance even more significant.

The world economy failed to reach its projected growth level in 2007 and anxiety in international financial markets inspired by the U.S. mortgagecrisis adversely affected the world economy throughout the year. The liquidity crisis that emerged in developed countries, particularly the United States, due to mortgage foreclosures caused the dollar to lose value. This created anxiety in international markets that in turn caused sudden fluctuations in Turkey from time to time.

Although the global state of affairs was unfavorable in 2007, the Turkish economy grew for the sixth consecutive year. According to the new national income series based on 1998 fixed prices, GDP increased by 4.5% in 2007. The fact that the year closed with a positive growth rate signifies the stability of the economy. However, the decrease in the growth rate is noteworthy, as is the fact that inflation exceeded its targeted level to reach 8.4%.

Turkey’s 2007 foreign trade volume reached a record level of $277 billion, with exports and imports significantly higher. The fact that the foreign trade volume, which was around $70 billion only 10 years ago, has reached these levels indicates just how fast the Turkish economy has integrated with the rest of the world. However, the growth in the foreign trade deficit is alarming. The current account deficit, which increased parallel to the foreign trade deficit, was financed by the more than $50 billion in capital that entered Turkish economy in 2007, as foreign direct investment, in particular, increased.

Growth of the Contracting Group continues

Global oil prices continued to increase throughout the year, resulting in a rapid increase in industrial and infrastructure investments in oil producing countries, which in turn created more business opportunities for international contracting companies. This situation created significant potential for Tekfen Contracting Group, which has gained a strong reputation from the projects it has completed in the world’s most important oil production zones.

The Middle East occupied an important place in Tekfen Contracting Group’s activities in 2007 and Tekfen monitors developments in the region closely. Saudi Arabia allocates more resources for oil sector investments than any other country and, in this regard, it has provided many opportunities for Tekfen. The activities of the Contracting Group in Qatar - one of the most important natural gas producers in the world - continue and expand daily. The contract to construct a $600 million highway in this country was one of Tekfen’s most significant achievements in 2007.

Another promising development of 2007 is the “The Great Man Made River” project in Libya -a milestone project that extracts water from aquifers deep under the desert to use for agricultural irrigation and public consumption. A Tekfen-led Turkish consortium was awarded a portion of this project, the value of which is the highest of any contract ever awarded to Turkish contractors in Libya.

Tekfen Contracting Group’s backlog value was $2 billion in 2007 - a record for the company. Parallel to this growth in business volume, the Group re-organized its regional management structure in 2007 in the Caspian, Middle East and North Africa regions.

Progress continued on Caspian Region projects during the year. However, the partnership dispute between the consortium led by Agip and Kazmunaigas, the Kazakhstan state oil and natural gas company, adversely affected the Kashagan Field Development Project. On the other hand, the record high of 23 million accident free operation hours at the Kashagan site is a source of pride for Tekfen, as are all achievements in the area of safety.

In spite of all these positive developments, Tekfen Contracting Group’s profitability was unsatisfactory. A major cause for this was the rapid oil-price induced proliferation of projects in foreign markets, which caused material, equipment and qualified labor costs to inflate and project timings to slide.

These cost increases primarily affected projects that had been taken on before 2005 and completed or neared completion in 2007. This unexpected and uncontrolled cost increase impacted profitability, especially in the first quarter of the year. As the year progressed, the Group won tenders with more advantageous terms, resulting in better financial performance in the last quarter of 2007.

Another important aspect that should be emphasized is the depreciation of the U.S. dollar in 2007 against the Turkish Lira. Since a significant portion of income is in U.S. dollars, this had an adverse effect on the Contracting Group’s revenues. Thus, Tekfen Contracting Group revenues declined in Turkish Lira even as they increased in U.S. dollars.

Accordingly, with the 4% decrease in revenues to TRY 1,029 million, Tekfen Contracting Group’s earnings before interest, tax, depreciation and amortization declined by 43% to TRY74 million.

2007 was a transition year; the momentum achieved during the last quarter of 2007 is expected to continue and increase in 2008, resulting in significantly better financials for 2008.

Agri-Industry Group increases market share

Fertilizers are an important input for the global agriculture sector. Although the demand for fertilizers increased rapidly in 2007, insufficient supply caused a bottleneck in fertilizer and fertilizer raw material procurement. In addition to that, hikes in transportation costs and prices of fertilizer raw materials caused by higher oil price, led to dramatic increases in fertilizer prices.

Agriculture’s share of the Turkish economy continued to decrease in 2007. Climate change and drought induced by global warming contributed to the downsizing of the agricultural section. Supplies of certain product groups failed to meet demand, which led Turkish agriculture to incur a foreign trade deficit in 2007. For example, cereal production decreased by 15% compared with the previous year. All these developments caused fertilizer consumption in Turkey to decrease by 4% in 2007.

In the face of all these drawbacks, Tekfen Agri-Industry Group maintained its market leadership and even significantly increased its fertilizer sales, market share and profitability. In 2007, the Group managed to increase its domestic sales of chemical fertilizers by 15%, causing its market share to increase 5% to reach 31%. The major factor behind this success was the Group’s ability to supply fertilizers to customers in a timely manner thanks to its effective international relations and strong logistics infrastructure, which enabled flawless and timely fertilizer and fertilizer raw material distribution. The company has similar advantages in the water-soluble fertilizer segment, in which Toros Tar›m increased its revenues by 23% while strengthening its leadership position of this segment.

Profit margins increased in 2007 thanks to a higher market share and a widening margin between fertilizer prices and fertilizer raw material costs. As a result, revenues of the Agri-Industry Group in 2007 rose by 30% to TRY775 million while earnings before interest, tax, depreciation and amortization rose by 59% to TRY110 million. The Group expects to increase its profit margin from 14.5% to 16.5% in 2008.

The Group displayed significant progress in its non-fertilizer fields of operation - seed production, tissue culture, seedling production and cereal trade - in 2007. This situation demonstrates the advantages of correct investment strategies and the adoption of a long-term perspective in the face of the difficulties in agriculture sector.

Similarly, developments in Toros Tar›m’s terminal business prove that Tekfen Holding’s decision to invest in ports as part of its long-term investment strategy was correct. Toros Tarım’s terminal at Ceyhan, which became one of the most important trade centers in the East Mediterranean after the BTC pipeline came on stream, has an important place in the region, due to its load handling and storage capacity. With the region’s re-definition as the “Ceyhan Energy Industry Region”, the business potential of Toros Ceyhan Terminal and Toros Adana Yumurtalık Free Zone is set to increase dramatically.

Focusing on the real estate sector

The real-estate sector, a rising star of the Turkish economy in recent years, has an important place in the future vision of our Holding. Real-estate development operations, previously the preserve of the Contracting Group, were gathered under a separate business group that is represented at the vice president level. This change reflects the new vision of the Holding.

A further step taken to strengthening Tekfen Holding’s position in the real estate sector is the partnership it has entered into with Och-Ziff (OZ), one of the USA’s leading asset management companies. Under this agreement, real estate development activities are conducted by the newly found company Tekfen-OZ Real Estate Development Co., Inc.

From Tekfenbank to Eurobank Tekfen

After the economic crisis of 2001, Turkey gained a strengthened economic structure that encouraged growth. This produced particularly good results in financial markets and started a period of sustained growth. The total assets of the banking sector in 2007 increased by 16% compared with the previous year to reach TRY561.9 billion. In addition to improvements in the economy, the Turkish banking sector’s bright prospects attracted foreign investors. As a result, many foreign banks have entered the Turkish market and invigorated it.

Tekfenbank was established in 1989 and it operated as an investment bank for many years. After the acquisition of Bank Ekspres, Tekfenbank started commercial banking activities. Its partnership with EFG Eurobank, which started in 2007, is an outgrowth of these developments.

EFG Eurobank, a major Greek bank with a significant market share due to its recent investments in Eastern Europe and elsewhere, established a strategic partnership with Tekfenbank in order to enter the Turkish banking sector. For Tekfenbank, the partnership is a way for it to strengthen its position in the Turkish market and thus increase its effectiveness.

Tekfen Holding’s banking activities passed an important milestone when EFG Eurobank and Tekfenbank joined forces in 2007 and the new entity started operations as Eurobank Tekfen. The partnership has been supportive and constructive and, with the financial power and experience of both parties, Eurobank Tekfen will add a new dimension to the Turkish banking sector. Eurobank Tekfen will expand its range of services by adding retail banking to its present corporate banking activities. With an expanded branch network, Eurobank Tekfen will become an influential player in the Turkish market.

A New era starts with a public offering

Tekfen Holding shares were first offered to the public on November 23rd 2007, an event marked by our striking the Exchange Bell to open the Istanbul Stock Exchange Session. The interest that domestic and foreign investors showed in Tekfen shares during the initial public offering and upon listing on the exchange confirmed our expectations.

The Tekfen Holding public offering process is the culmination of a long preparation period. Starting in 2000, the shares of Tekfen affiliates were rearranged and gathered under the roof of the Holding, non-profitable affiliates were either sold or transferred, and the Holding’s efficiency was increased. All affiliates were gathered under a management concept focused on a growth strategy and systematic work was undertaken to achieve a greater degree of institutionalization. These are the major factors that ensured a successful public offering. The philosophy “do what you know, and do it in the best way” is a cornerstone of Tekfen’s culture. The focus this brings increased the company’s revenue and profitability and greatly strengthened the Holding prior to the public offering.

This period, the product of hard and patient work, passed its first examination during the initial public offering held November 14th-16th, 2007, when total demand exceeded supply by nine times. This once again proved the value of the Tekfen brand and its association with trustworthiness and stability. Tekfen Holding’s shares were listed on the stock exchange from November 23rd, 2007. The Holding’s share price increased dramatically from the first day, pushed up by strong demand from domestic and foreign equity investors despite fluctuations in international markets. This is not only Tekfen’s but also Turkey’s success. Tekfen Holding offered 34.5% of its shares to the public and the opening market value of Tekfen Holding was TRY1.69 billion. By the end of 2007, Tekfen Holding’s market value had increased by 13% to TRY1.91 billion. The public offering created additional funds, particularly for investment in the petroleum industry, port management activities, and the agri-industry and real estate development sectors. The public offering is also important in that it supports Tekfen’s institutionalization efforts.

This process has fortified Tekfen Holding and accelerated its institutionalization process. The establishment of internal audit, investor relations, and corporate governance departments within the Holding’s Vice-Presidency for Corporate Affairs, is an important step towards further institutionalization. Additionally, appointment of independent board members and the abolition of privileged shares through changes made to Articles of Association will carry Tekfen Holding forwards in terms of institutionalization.

We are grateful to our colleagues, business partners and customers, as well as to our investors and our founding partners, all of whom have supported us with endless confidence during the process of making Tekfen Holding one of the leading, pioneering corporations in our country in every respect.

Erhan Öner
President