By Citi Research
CITI’S TAKE
We update our models to incorporate recent minimum wage hike (+49%, at the higher end of our expectation of 40-50%) and macro datapoints. Our sales/EBIT expectations increase c.4%. We remain fundamentally constructive on Turkish grocery seeing it well positioned to pass through inflation and we see the sector as a defensive exposure once a consumption slowdown is more visible (on the back slower credit growth amid higher rates).
We make slight increases to our target prices for BIM (TL450), and Migros (TL470). Our SOK target price is unchanged (TL93). All are Buy-rated.
2024: Story of two halves
We expect inflation and growth to remain elevated in 1H24 (CBT expects inflation to peak at over 70% in 2Q24), supported by base effects as well as a minimum wage increase from January supporting consumption, driving >80% YoY sales growth in 1H24 on average for our covered retailers. In 2H24, once the effects of disinflationary measures and slower credit impulse are more visible, we would expect retailer growth to slow to 50-60% YoY, averaging close to 70% for the full year.
Cost pressures — 49% minimum wage hike from January 2024 is at the higher end of our expectation (40-50%)
Assuming this is the only wage hike (as opposed to 2022/2023) we would not expect material pressure on retailer margins as we think it will be largely passed on to consumers. If energy prices do not increase sharply, and mindful of 2023 negative one-off effects (earthquake and early retirement), we see cost pressure for retailers somewhat easier in 2024 vs. 2023. At the same time, higher interest rates and slower credit growth will likely put pressure on consumption, which could require some price investments.
However, we do not expect price investments to be driven by discounters who naturally benefit from trading down, and we continue to see room for market share gains from mom-and-pop stores / traditional retailers.
Upcoming elections as a catalyst
Yapi Kredi Bank: Downgrade to Hold: Risk/reward looks balanced after recent run
While we note improved sentiment towards Turkish domestic assets, we continue to see the period around upcoming local elections as an important catalyst for local assets, as some investors are still concerned about the sustainability of disinflationary policies after the elections. We also do not rule out that foreign investor demand might be subdued unless either entry points in USD become more attractive again (we note expectations of TRY correction post 1Q24) or TRY outlook is improved with further monetary tightening.
Valuations
Despite strong performance in 2023, Turkish grocers trades at a discounts to CEEMEA peers on 2024E P/E: BIM/Migros at 9.4x /SOK at 6x vs. peer average of 18x). Updated target prices: BIM (TL450) and Migros (TL470).
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