Company Outlook: Adding GARAN & SISE, Removing MGROS

Adding GARAN. We expect Garanti to maintain its leading position in ROE progression this year with upside risks to earnings in case of a benign macro scenario that meets the second half expectations of lower inflation, leading to lower funding costs and improved spreads. Given the Bank’s proven track record in managing short-term macro volatility as underpinned by 1Q results, the decisive factor for full year earnings would be asset quality trends. Strong GDP growth and BRSA’s reported plans to extend temporary NPL classification rule of 180 days until year-end lower the short-term uncertainty on this front. We maintain that Garanti’s strong coverage buildup since 2018 and its ample free reserve buffers (TL4.8bn) add an extra safety margin against earnings volatility versus peers. Garanti share price is down by 27% since our downgrade in mid-January vs. the 6% fall in BIST-100 during the same period. While the macro uncertainties that keep Turkey’s CDS, interest rate and REER at stressed levels remain, we think that GARAN is oversold at 2021E P/BV of 0.45x and P/E of 3.3x. Short-term catalysts behind our upgrade are i) CBRT decision to keep policy rate unchanged until inflation heads down, ii) recent local selling into USD strength and iii) positive FX flow momentum on external payment vs. tourism revenues trajectory; which all should support TL.


Adding SISE. Thanks to the recovery in global economic demand, SISE is well positioned to enjoy higher sales volume along with strong margins across most of its business units in 2021E. With flat glass being the main growth driver, we estimate 15% increase in consolidated sales and 30% jump in EBITDA in USD terms for this year. In addition to this year’s cyclical rebound, we believe the EU’s “renovation wave” has potential to lift demand in flat glass segment for a long period, while improving price outlook for Soda ash also offers continuation of strong earnings momentum through 2022. Glass packaging operations add defensive character to the sales mix and protect margins against negative shocks. We see room for rerating in the post-merger structure of the group as the company now fully owns all main subsidiaries and efficient capital allocation could boost annual EBITDA towards USD1bn level in long-term vs. 5-year average of 641mn. Even a possible mean-reversion in EV/EBITDA multiple would lead to significant upside as we estimate current multiple at 4.0x vs. long-term average at 6.0x. Our TP is 11.60/share, which offers 53% upside potential.


Removing MGROS. Share price is up 9% since addition to our Model Potfolio since June 2020; but the relative performance has reached 18%, over our stop-loss level of 15%. The Company has reported 1Q results better than market expectation, which failed to trigger a positive reaction, perhaps due to elevated financial expenses that keep pressuring the bottom line. We think MGROS remains attractively valued at 3.2x 2022E EV/EBITDA but also estimate PE would remain high at 18x.

Our Model Portfolio outperformed BIST100 by 12.1% year-to-date.


Source: Y.F Securities Research