PA Intelligence is blessed with a bumper crop of high-quality sector and equity research reports from global names, which we use excerpts from as frequently as possible. Our mission is very specific and simple. We intend to increase awareness of Turkey’s economy, capital markets and business environment by English-speaking observer, investor or businesswoman.
Our weekend coverage starts off with a consumer and retail stocks report by Merrill Lynch, which is positive from a pricing perspective despite the recent weakness in domestic consumption indicators. To recall, private broadcaster BloombergHT’s January consumer confidence index dropped by 7.5% in January, languishing in zones suggesting the households are in no mood to spend. Food prices are rising at 25% clip, as a new survey by private and prestigious University of Kadir Has confirms that economic weakness and inflation remain the top concerns of participants. Why is ML optimistic?
Despite a healthy start to 2019 (the seven stocks are up c.12% YTD, with Ulker and Mavi outperforming by a wide margin), we see room for further share price appreciation. Our new POs imply 22-46% potential upside. The broader operating backdrop is tough, but our recent meetings in Istanbul revealed that consumer demand for staples remains stable. The companies sound cautiously optimistic about 2019 (at least 1H19) and do not foresee any significant slowdown in consumption. Numerous margin-protective tools are also in place (price increases/operating leverage, downsizing, hedging, mix improvements, cost-saving initiatives etc.), suggesting that the 2019 guidance releases in March may trigger positive consensus revisions.
Buy all seven Consumer names: 22-46% more to go
We maintain our preference for Turkey in the region as flagged in our 2019 EEMEA Consumer Year Ahead report. The shares have done well so far, but we see further upside: valuations are still attractive, positioning is low and we see room for consensus upgrades. Our recent trip to Istanbul confirmed that demand for staples is fairly stable, while high CPI provides more flexibility to protect margins from input cost headwinds, besides multiple hedging tools. The sector should post another year of solid revenue growth, stable or improving margins and better returns. We believe that reassuring quarterly releases/management comments (triggers for consensus upgrades) and the stable TRY (one of investors’ key concerns) should help unlock value in the sector.
We raise our POs by 1-9% on several adjustments and reiterate our Buy ratings on all seven names. Sok and Mavi are our top sector picks on higher potential upside (excluding dividends), while BIM is included in BofAML’s 1Q19 Best Buy Ideas list as a high-quality business with good earnings momentum.
Low positioning, solid growth and cheap valuations
Our Equity Strategy team flags that the Turkish equity market screens well from a top down perspective: valuations are attractive vs history and growth momentum is generally strong. This applies to our consumer names too: BIM, Migros, Ulker, CCI and Efes trade, on average, at a c.35% discount on an EV/EBITDA basis to the five-year level.
On our numbers, the sector now trades at 6.4x 2019E EBITDA for a 26% average 2018- 20E EBITDA CAGR, which we consider to be compelling. Positioning is also low, which may act as a catalyst if recent TRY stabilisation continues and investors gain more comfort regarding CBT rates policy.
Demand buoyed by 26% minimum wage increase
We have more confidence in 20%+ nominal wage growth in 2019E following the 26% minimum wage increase and our recent company meetings. No doubt, demand will be softer this year, but spending cuts should mostly relate to higher-ticket discretionary categories (including imports), we think. While some downtrading in staples is possible too (benefiting the covered discounter names), we would not overstate the impact: a zero-to-slightly-positive delta between wage growth and food CPI suggests to us no material risks to grocery volumes. Stable unemployment and currency (consumers’ two big concerns), if achieved, would aid sentiment into 2H19E, possibly igniting some recovery in consumption.
Consensus has moved up, but still room for upgrades
The Street has raised 2019E sales and EBITDA by 12% and 11%, respectively, on average for the seven names, over the past six months. We are still up to 10%/24% ahead of consensus on 2019E revenue/EBITDA, implying room for further upgrades. We think the Street may be underestimating the positive operating leverage effect (Sok’s margins screen particularly well) and volume resilience for the beverage producers, as well as Mavi’s ability to execute on costs.
Excerpt only, see full report for detailed company analysis