New acquisitions to accelerate top-line growth but dilute margins: Arcelik completed the acquisitions of Hitachi ex-Japan and Whirlpool-Turkey at end-2Q21 at deal prices of USD343m and EUR78.3m, respectively. The deals comprise a 60% stake in Hitachi’s Asian manufacturing and sales operations outside Japan and 100% of Whirlpool’s export-oriented manufacturing facility in Turkey. Based on preliminary data shared by Arcelik, we calculate a c10% revenue contribution in 2021 (half year impact) and c20% from 2022 onwards. They will be margin-dilutive as Arcelik reports them as lower-margin businesses, but they also have notably lower WC/sales operations than Arcelik, with net cash balance sheets as of the acquisition dates.
Turkey share of revenues to trend down: Turkey’s share of total Arcelik revenues was c40% in 2016 and 34% in 1H21. After the recent acquisitions, we expect the downward trend to continue: c30% at end-2021 and c25% at end-2025. This sales mix change implies a positive impact on WC/sales (given Turkey is a high WC operation), but is negative for operating margins (given the home market of Turkey generates above-average margins for Arcelik).
We now expect long-term EBITDA margins in the range of 10-11% vs 11-12% previously, but WC/sales falling from c25% at end-2021e to c23% at-end 2025 (vs staying in the 25-26% range previously). The implications are positive for cash conversion ratios: we project
deleveraging from 2022e onwards, along with positive FCF. Margin pressure relief from 4Q21: The effect of the surge in raw material prices since mid-2020 has come with a lag, sending 2Q21 margins notably softer. We look for further softening in Q3 (given also partial dilution from new acquisitions), but some relief and an upturn from Q4 with the help of price action. We now project 50% top- line growth in 2021e, 11% EBITDA margin, cTRY3bn net profit and a 25.4%
WC/sales ratio (vs our previous 33%, 12.2%, cTRY3.2bn and 25.1%, respectively. Our 2021/22 EBITDA forecasts are now 2%/16% higher than previously. Raise target price to TRY45, maintain Buy: As a result of the revisions to our estimates and lower DCF WACC (14.1% from 14.6%), our new target price is TRY45.00 (from TRY43.40). Our new TP implies upside of c35.5% and we maintain our Buy rating. Arcelik is trading on a 2021e PE of 7.3x and EV/EBITDA of 5.3x vs its historical 5 year average forward-looking multiples (Refinitiv) of 10.8x and 6.6x, respectively. Our 2021e target price implied multiples are PE of 10.0x and
EV/EBITDA of 6.5x.
Source: HSBC Global Research