Turkish consumer: Coping with ever increasing inflation

Headline inflation topped 19% YoY in August, while PPI still hovers around 45%. Turkish consumer companies appear to have managed increasing costs very well so far; however, consumers’ declining disposable income leaves us concerned about the sustainability of demand at this pace. We favour Coca-Cola Icecek (CCI) thanks to its resilient business model, with effective pricing and hedging policies. Although food retailers are also a great fit to the current environment, regulatory risk on the short-to-medium term growth outlook is still a valid concern owing to potential changes in the retail law. We consider Ulker Biskuvi’s (Ulker) recent acquisition as pricey and not a game changer for shares.

On the other hand, Yatas is benefitting from its new format via rapid network expansion. We fine-tune our expectations and accordingly make slight adjustments to our TPs. Coca-Cola Icecek (CCI) remains our top pick in Turkey Turkish food retailers have been underperformers YtD, despite strong operational performances, led in part by the switch from ‘consumer staples’ to ‘consumer discretionary’, but mostly by the stress of potential regulatory changes in the retail law, in our view. Operationally, all three retailers have experienced a stronger-than- expected performance in 1H and have hinted at a brighter outlook in 2H. The pace of store expansion has been strong YtD, pushing our revenue and EBITDA margin expectations towards the high end of revised 2021 guidance or even above.

BIM is trading at a one-year forward EV/EBITDA of 7.0x and P/E of 12.6x – implying
respective discounts of 22% and 25% to its five-year average. Sok Marketler is trading
at a one-year forward EV/EBITDA of 4.3x and P/E of 13.2x – implying a discount of 40% and a premium of 5%, respectively, to BIM. Migros is trading at a one-year forward EV/EBITDA of 3.9x – implying a discount of 28% to its five-year average.

CCI’s acquisition in Uzbekistan is likely to be finalised in September or November. We regard the Uzbekistan acquisition as a good fit to its network geographically, despite a significant premium to CCI’s trading multiples. More importantly, CCI has been silent since 2012 in terms of inorganic growth. Given what we view as sound operational performances, coupled with a healthy leverage ratio, we believe the Uzbekistan acquisition will not be the last one in the foreseeable future (as per management’s changing rhetoric to highlight CCI as an ‘FMCG company’ when talking about the future of the company rather than as a ‘bottling / beverage company’). A potential re-opening of the inorganic growth window for the company would be positive for a re-rating of the stock too, in our view. Excluding the Uzbekistan deal, CCI trades at a 2022E EV/EBITDA of 5.4x and P/E of 8.0x – implying discounts of 33% and 48% to its global peer average.

On the other hand, Ulker’s recent acquisition will not lead to a share re-rating, in our view. Although the acquisition should help make Ulker less dependent on other group companies (which has always been a main concern of investors due to a lack of visibility) and enable it to utilise excess cash for the business, the acquisition multiple is some way above Ulker’s trading multiples. On the operational side, profit margins should be better in 2H21 after a weak 2Q, albeit still lower than 2H20.

We retain our positive view on Yatas, which managed to recover its EBITDA margin quickly in 2Q21 despite significant raw material pressure. As rapid new store openings
continue thanks to the new ‘Divanev’ format, high growth at the revenue, EBITDA and
net income lines should be sustained in the foreseeable future, in our view.


Source: Renaissance Capital