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Ulker Biskuvi (confectionary):  A new BUY recommendation

Is Invest is increasing Ülker’s TP to TL27.7 from previous TL24.6 and maintain our BUY recommendation with 35% upside potential

Ulker Biskuvi (confectionary):  A new BUY recommendation

Very attractive forward multiples on strong EBITDA and de-levering


We are increasing Ülker’s TP to TL27.7 from previous TL24.6 and maintain our BUY recommendation with 35% upside potential. The TP increase comes from i) lifting our 2020/2021 EBITDA estimates by 11%/9% on expected higher contribution from international operations on strong 1H19 performance, iii) slightly revised-down risk free rate assumptions by an average 1ppt during the forecasted period) iv) better cash cycle assumptions compared to 1H19 and iv) expected USD120mn dividend (only our estimate) from Godiva Belgium.

The investment case


We believe that Ülker offers an attractive investment case on i) increasing EBITDA contribution from margin accretive and fast growing international operations, ii) undisputed leader position in Turkish Confectionary market with very strong presence in traditional retail channel, iii) fully hedged balance sheet, enjoying positive carry and iv) expected deleveraging over the next two years with partial normalization of working capital and strong EBITDA generation. At 6.9x/6.0x 19E/20E EV/EBITDA Ülker is trading at 53%/56% discount with respect to its international peers.


Increasing exposure to nearby geographies with margin accretive acquisitions

Ülker has been on an international expansion path since 2016 through the acquisition of Yıldız Holding’s confectionary assets in Saudi Arabia, Egypt and Kazakhstan.  Acquisition of UI MENA and IBC were the final leg of the inorganic growth for Ülker in the region. Acquisition of two production facilities in Saudi Arabia (FMC&IBC) and McVitie’s distribution / production rights in MENA turned Ülker into a strong regional player. In fact, EBITDA contribution of international operations including exports from Turkey increased to 47% in in 1H19 from only 10% (only exports) in 2015. On the more positive side, all the acquisitions except for Kazakhstan was margin accelerative and currently, roughly 40% of Ülker’s EBITDA are in USD or in USD pegged currencies (Saudi Riyal and Emirati Dirhams), providing strong earnings visibility.

Additionally, Middle East and North Africa are structurally attractive regions owing to their i) low per capita consumption of confectionary products, i) increasing distributable income, iii) favorable demography and iv) relatively low health consciousness.

Easing of working capital need

Easing of highly inflated working capital need on high base should reduce net debt significantly in 2020. Ülker’s operating cash flow declined to TL3mn in 2018 from TL749mn in 2017 mainly due to very sharp increase in receivables from related parties, Yıldız Holding’s distribution companies in particular. The main reason behind such deterioration according to the management was i) higher receivable days offered to end clients due to weak macro conditions in parallel with other market players and ii) strong base year impact in 2017 due to early collection impact. As for 2020, we expect partial easing in working capital requirement, along with continuation of strong EBITDA generation, to translate into TL1.4bn operating cash flow. In addition to that, we expect company’s capital expenditures stayed at 4% of the sales as Ülker completed major modernization investments in Turkey. Strong operating cash flow generation coupled with mild cap-ex growth, dividend income from Godiva Belgium and hedged balance sheet should bring Ülker’s 2020 net debt to EBITDA ratio to only 0.5x (including derivative positions).

Fully hedged balance sheet with positive carry, immune to TL weakness


Ülker carries TL1457mn net debt position (including derivative positions), mostly dominated in hard currency as of 1H19. However, the company has fully hedged its short fx position through cross currency swaps at TL fixed financing cost of only c. 14% back in April 2017, until April 2020. So, this very timely hedging on quite favorable terms creates a significant positive carry for Ulker, thanks to its fully interest bearing TL 4.1bn cash holdings.


No change in dividend policy


Ülker announced that it will not distribute any dividends from 2018 earnings. (First time since the IPO in 1997). Many other bluechip companies took similar action this year mainly due to sharp increase in  short-term borrowing rates. The management indicated that this year’ decision is temporary and that there is no change in company’s dividend policy.


By Kayahan Demirak, İs İnvest


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