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MAVI GIYIM – Trading at attractive multiples

After hitting historic lows in early 2019, consumer confidence in Turkish is recovering with declining headline inflation and interest rates, as well as stable TL. We believe Mavi should be one of the true winners of this environment

MAVI GIYIM – Trading at attractive multiples

A better consumer outlook in Turkey

After hitting historic lows in early 2019, consumer confidence in Turkish is recovering with declining headline inflation and interest rates, as well as stable TL. We believe Mavi should be one of the true winners of this environment. Turkey makes more than 80% of Mavi’s sales and better market conditions would continue to be the main driver of company’s growth. The improving consumer confidence should increase the number of transactions, which should help the company to keep its strong revenue growth momentum. We pencil in a Turkey retail segment growth range of 20-22% until 2023E.

 

Online will be the focus

The recent shopping frenzy on the week of Black Friday, a non-event in Turkey two years ago, underlines the changing consumer trends and the importance of the online business in fashion retail. Meanwhile, Mavi’s US and Canada businesses, where share of online is above 50%, are the most profitable markets. Hence the management’s main focus, along with expanding Turkey retail sales, would be the online growth in both domestic and international markets. Given the slowdown in retail store expansion in Turkey and international markets, a major part of the future capex will be on that front, as well. As of 9M19, online sales has respective shares of 3% and 28% in domestic and international sales. We believe the company will reap the fruits of these investments and the share of online business in Turkey may reach 9% of total business by 2023E, despite retail segment’s strong growth. On the international front, some 50% of sales could be through online platforms.

 

Revising our target price

Since our initiation on May, the trading environment in Turkey has been improved, we revised down our risk free rate to 15% and Mavi’s net debt came down to as low as 0.1x 12M trailing EBITDA, which pushed our DCF value higher (details on page 2). Our 15% risk free rate, cost of equity of 21.1% and terminal growth rate of 6% implies an upside risk in case of further decline in interest rates. Meanwhile the stock is still trading at 5.9x 2020E EV/EBITDA, which implies an eye-catching discount of 59% to its peers. Hence we decided to revise our TP of TL57.20 from TL48. Our TP is a blend of DCF (70%) and peer comparison (30%) and implies an upside of 27% to yesterday’s closing.

 

Risks to our estimates

Since Turkey sales constitute more than 80% of total revenues, a slower than expected recovery in consumer confidence may hurt revenue growth. Volatility in TL vs. hard currencies, especially in times of bulk raw material purchasing may also have an adverse impact on margins.

EVREN GEZER, RESEARCH, YF Invest, brokerage house

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