One of Turkey’s leading brokerage houses Yatirim Finansman assessed the outlook for Turkish retail industry in 2019, as well as selecting its top picks. For years, retail led Turkey’s consumption boom. In parallel to declining employment, higher inflation gnawing into disposable income and high household leverage, the boom might be over. The retail PMI published by independent Ankara think-tank TEPAV reveals that February confidence declined 14 points vs last year and 3 points vs January. How will listed stocks fare? This article contains excerpts from Yatirim Finansman retail 2019 research report:
Memories of a brilliant past
As food inflation climbed rapidly, grocery retailers enjoyed increasing top-line growth and generally strong operating earnings trend in 2018. However, we are likely to see lagging effects of cost inflation in 2019 and sales growth rates will be gradually slowing down.
Migros is our top pick on cheap valuation, prospects for deleveraging
– Valuation: Migros trades at 2019E EV/EBITDA multiple of 4.4x in 2019E (7.2x adjusted EBITDA including term interest expenses) vs. peers average of 8.3x. Current EV is €0.9bn is about 50% lower than price paid by current shareholders despite the fact that Migros having 115% expansion in sales area and 23% higher sales in EUR terms. Our TP is TL25.8/share, offering 55% upside potential.
– Deleveraging: We forecast Migros to reduce leverage ratio to below 1.0x in 3 years from 2.4x as of 2018-end through lighter capital spending, possible asset disposals and continuing operating cash flow. Migros management also says they are committed to deleveraging as they already sold two assets in Jan’19 for TL178mn (equal to 6% reduction in net debt).
BIM maintained as Market Perform with a higher PT of TL102/share
– Expect strong EPS growth in 2017-2018 to moderate in 2019: While growth outlook remains robust for BIM, we expect moderating earnings growth in 2019 due to our expectation of lower gross margins. BIM’s price inflation was 300 bps above CPI food inflation in 2018 (also 750 bps higher on a cumulative basis over the last 3 years) and we believe BIM is now likely to invest more in its prices. We expect EBITDA and EPS to increase by only 9%-6% in 2019E (vs. +45% in 2018) as a result of ~70 bps margin contraction driven by gross profit margin.
– Valuation: BIM trades at 2019E P/E multiple of 19.4x vs. 3-year average forward multiple of 21.5x (we are 7% lower than consensus for 2019E net income). Our TP is TL102/share based on target P/E of 21x, which we apply to the average of our 2019-2020 estimates.
BIZIM upgraded to Outperform with a PT of TL10.8/share
– Improved earnings growth profile: We think the market should give credit to the company’s new management based on progress in 2018. We expect Bizim to deliver EPS growth of 67% in 2019E and 54% in 2020E, indicating P/E multiples of 14.0x/9.1x. We increase our TP to TL10.8/share based on DCF and raise our recommendation to Outperform.
– Recalibrated business model & favorable outlook for cash&carry: Rather than opening new stores aggressively, BIZIM managed to shift its sales mix to more profitable client/SKU groups. This eventually improves existing store efficiency and produce EPS growth without heavy capex. Problems in traditional wholesale/distributor channel is also an important external tailwind that we think will help the company maintain current positive trend in operating results.
Mr. SERHAT KAYA, research analyst