Ulker Confectionary: Sound growth prospects, BUY recommendation
We maintain a BUY on Ulker on attractive valuation, sound growth outlook and improving profitability.
Raring to go
Sound growth prospects intact: We met the IR Director of Ulker Biskuvi today to get an update on operating performance of the company. Top-line growth dynamics are intact this far in 3Q19 thanks to the back-to-school period and successful EID season, despite the high base of 3Q18. Supported by the decent gift and sharing category sales prior to the religious holiday in Turkey, chocolate segment sales remains strong. There were no new product launches in 3Q19 as new launches are scheduled for 4Q19.
Expanding footprint in Asia
Ulker has started to list McVities products in some supermarket chains in Russia. If these products are a success, the company may continue to supply McVities biscuits to Russian retail chains in future. This should help top-line growth and profitability of Ulker’s Kazakhstan operations. Ulker targets to expand its footprint in Central Asia next and concrete developments are expected in 4Q19.
Weaker TRY poses upside risk to profitability
In terms of profitability, there were no price adjustments in July and August but there could be resizing in some SKUs in September.
There have been no major changes on cost side too. Although palm oil prices seem to be on the rise as per Bloomberg, 3Q19 average is still lower than 2Q19 average. Nevertheless, Ulker has already fixed palm oil procurement prices for rest of the year. Cocoa prices are also fixed for the next 12 months. TRY will be the key determinant of 2H19 EBITDA margin as FX denominated revenue account for 40% of the total, while FX denominated EBITDA is 46% of total EBITDA.
Ulker currently enjoys weak EUR against USD as the company has EUR588m short EUR and USD543m long USD position. First tranche of Ulker’s EUR debt (ca.EUR280m) is due in April 2020. We maintain a BUY on Ulker on attractive valuation, sound growth outlook and improving profitability.
By Akif Dasiran, TEB Invest