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MIGROS:  Leader of the Pack

Despite the recent rally, the stock is still trading at a 50% discount to its peers in terms of 2020E EV/EBITDA

MIGROS:  Leader of the Pack

Unique place in Turkish FMCG retail market

Migros is the largest supermarket player in Turkey with around 1.5mn sqm sales area and 2,121 stores as of 9M19; which is almost 2.5x higher than its closest competitor Carrefoursa. Meanwhile c. 400 other supermarket players are locals with stores ranging from 5 to 150 and are not capable of threating Migros’ market position. A potential competitor could be BIM’s supermarket banner FILE, which has only 89 stores in 11 cities at the moment. Hence unlike three discounters (BIM, A101 and Sok); which have a fierce competitive environment in their segment; Migros will be less disturbed by its direct competitors for future growth. The only setback could be the lack of suitable locations for organic growth, especially for larger formats.


Declining net should debt pave the way for inorganic growth

In 2016, the company acquired third largest player, Tesco Kipa at an attractive price (TRY303mn EV, c. 0.12x EV/sales) and a sizeable real estate portfolio. This major acquisition was followed by the acquisition of fourth largest player Makromarket’s selected stores in Istanbul and Antalya and Carrefoursa’s stores in the Central Anatolian city of Kayseri. These acquisitions and management’s Euro based borrowing preference pushed the net debt to 4x of EBITDA, distorting the balance sheet of the company. As 6M19, the net debt declined to 2x of EBITDA (before IFRS-16), this may be further lowered by liquidating some real estate, which have book value of TL1.8bn. The fragment picture in supermarket space and the financial instability of local players may increase the inorganic growth options of Migros and the company may continue to act as the consolidator of the segment, especially in selected regions of Turkey, where the penetration of Migros is relatively low.


Changes to our estimates to incorporate IFRS-16 and lower rfr

We made some changes to our estimates to incorporate the accounting amendment related to lease contracts, namely IFRS-16; which significantly increases EBITDA margin in asset-light companies, like Migros, however, the impact of this change on valuation is very limited. With some fine tuning in our estimates, our TP increased by only 0.45/shr. We also cut our rfr to 15% from 16% following the rate cut cycle of CBRT, which added another TL0.75/shr to our TP, which reached to TL26.80/shr, offering 31% upside. Despite the recent rally, the stock is still trading at a 50% discount to its peers in terms of 2020E EV/EBITDA.


Risks to our estimates

Since the company is operating in a defensive sector, the economic slowdown may have a limited impact on operations. That said an increase in VAT or income tax may disturb the purchasing power and curb revenue growth. Although the company is less vulnerable to TL fluctuations, thanks to lower short EUR position and leverage, the major risk to our target price remains as the EUR/TL volatility. Meanwhile, the possible divesture of BC Partners’ 18.47% stake may create a share overhang.




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