Turkish consumer & retail: Consume but wisely
As the domestic economy starts to pick up in 2H19, post the rapid and substantial interest rate cuts by the Central Bank of Turkey (CBT), 2020 should be a better year for Turkish consumer companies in terms of demand conditions and passing on costs to customers
In 2019, Turkish consumer companies delivered strong share price performances in dollar terms despite challenging domestic macro conditions, reflecting their resilient business models and a re-rating in multiples owing to a lower risk premium on Turkish assets (and ongoing deleverage in some cases). As the domestic economy starts to pick up in 2H19, post the rapid and substantial interest rate cuts by the Central Bank of Turkey (CBT), 2020 should be a better year for Turkish consumer companies in terms of demand conditions and passing on costs to customers due to 1) cheaper and greater availability of credit to consumers; 2) a benign inflation outlook along with no extraordinary external factors.
Post cutting our risk-free rate assumption and rolling our valuations to end-2020, we adjust our TPs for all the companies under our coverage and reiterate our BUY ratings on Migros, Sok Marketler, Coca-Cola Icecek (CCI) and Ulker Biskuvi. We upgrade Yatas to BUY. We maintain our HOLD rating on BIM.
Our top picks – Migros, Sok & CCI
BIM’s LfL traffic growth turned negative in 3Q19 and we expect this trend to continue in 4Q19. In order to increase customer traffic, we expect BIM to invest in prices, which would reflect in a weaker margin performance in 4Q19 and 1H20. However, weak base of 1Q19 would compensate for the weakness to a certain degree, in our view.
Sok is likely to continue to enjoy an improvement in LfL customer traffic growth along with rapid network expansion. We expect Sok to continue to grow at a faster pace at the top-line vs listed peers in 2020. However, the major positive should be realised at the adjusted EBITDA level thanks to rapidly declining interest rates.
Migros will continue its healthy and steady growth in 2020, in our view. More importantly, with short euro exposure declining in absolute terms along with much healthier leverage thanks to higher EBITDA generation and asset disposals, we expect the share re-rating to continue in 2020.
Ulker continues to strengthen its share in the domestic and major export markets thanks to new product launches and created synergies after acquisitions abroad. Moreover, with the help of dividend income from Godiva and the proceeds from the Istanbul Gida sale, leverage is likely to drop below 1x as at end-2019, allowing the potential for substantial cash distribution, in our view. We believe investors should closely follow improvements in working capital management going forward for a potential further re-rating.
CCI has been successful in implementing its strategy of prioritising profitability vs sales volume and beat expectations at the operational level throughout 9M19 despite challenging demand conditions in key markets (Turkey and Pakistan). We view CCI’s current risk/reward profile as attractive, despite continuing short-term challenges, thanks to resilient performances across the board, healthier leverage and less vulnerability to lira fluctuations (post various hedging activities and a more stable lira outlook).
We upgrade our rating to BUY for Yatas. We now see a pick-up in the domestic economy along with rapid growth potential of the new store format (Divanev) which we believe will bring top-line growth above 30% in the coming years.
Excerpt from Renaissance Capital report
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