Is Investment - Company Reports - Ülker Bi̇sküvi̇ Sanayi̇ a.ş. (Ulker)

1 Please refer to important disclaimer at the end of this report.

Tap into the growth Outperform recommendation reiterated with 23% upside potential Following the revisions in our macro estimates post election and updated peer group multiples, we reiterate our OUTPERFORM recommendation for ULKER since our updated target price of 22.6TL/share offers 23% upside potential. We like mid-to-long term growth prospects of the company as being the dominant player in fast growing domestic confectionery market. Potential entry to underpenetrated markets through planned acquisitions and further room for margin expansion thanks to on-going SKU optimization and contribution of synergies with United Biscuits, especially on the procurement are the key positives.

ULKER trades at a discount based on its 12.0x 2016E EV/EBITDA and 19.3x P/E vs its international peers median of 12.9x and 22.7x, respectively.

Price adjustments limited the volume growth in domestic market In order to reflect increased cost-base on the back of higher cacao and palm oil prices in 2014 due to drought and Ebola worries, Ulker has made price increases (c.16% YoY in domestic market) at every category which in turn limited the volume growth in domestic market in 1Q15. Accordingly, consolidated volume was down by 7.5% in 1Q15 which was partially due to carry on price increases. Besides, export volume contracted sharply by 32% YoY due to turmoil in Iraq and Yemen.

Domestic demand is expected to accelerate in 2H15 We expect domestic consumption to accelerate in the remainder of the year and assume domestic sales volume to increase by 5% YoY in 2015. Hence, consolidated revenues are expected to grow 9% YoY in 2015. In addition to that, the company also looks for inorganic growth opportunities in MENA region in order to capture high growth potential in underpenetrated markets.

Yldz Holdings Egypt and Saudi Arabia ventures are the initial acquisition targets We believe that the companys strategy to cater into underpenetrated markets like S.Arabia and Egypt will be positive in the mid-term since these markets offers significant growth potential. The company targets to finalize stake purchase at Egypt venture in 1H15 and S.Arabia acquisition is projected to be completed until the end of 2015. Stable cacao and palm oil prices is a positive factor, yet dollar appreciation will eliminate the positive impact Following sharp increase in 2014, cacao and palm oil prices are eased in 2015 thanks to increases in the level of supply. The positive impact of this will be mostly compensated by dollar appreciation, taking its toll on the margins. However, SKU optimization and lower G&A expenses will help the company to improve its EBITDA margin. Accordingly, we estimate TL3.1bn revenues in 2015 along with 12.5%EBITDA margin.

Major risks to our call: Lower than estimated growth in domestic market, delay or higher than expected acquisition price in Saudi Arabia and Egypt and failure to achieve the targeted margin improvement are the major risks to our call.

Company Update

Upside Potential 23%

OUTPERFORM(Previous: O.P)

Ulker BiskuviEquity / Large Cap. / Food

19/06/2015

Ticker ULKER

Stock Data TL US$Price at 18 06 2015 18.35 6.75Target Price 22.60 8.69Prev.Target Price 22.60 8.69Mcap (mn) 6,276 2,310Float Mcap (mn) 2,694 991Avg.Daily Volume (3M, mn) 14.5 5.4No. of Shares Outstanding (mn) 342Free Float (%) 42.92Multiples 2015E 2016E 2017EP/E 29.8 19.3 17.2P/BV 4.3 3.8 3.5EV/EBITDA 16.8 12.0 10.7

Price Perf. (%) 1 Mn 3 Mn 12 MnTL -7 -7 5US$ -12 -12 -17Relative to BIST-100 0 -5 0

Price / Relative Price

80100120140160180200220240

1.20

6.20

11.20

16.20

21.20

26.2001

/13

04/1

307

/13

10/1

301

/14

04/1

407

/14

10/1

401

/15

04/1

5

ULKER Close(LHS) Relative to BIST100

52 Week Range (Close TL) 2.17 4.72

Foreign Share (%)

35

36

37

38

24/0

3

07/0

4

21/0

4

07/0

5

22/0

5

05/0

6

Foreign Share (%)3M Average

+90 212 350 25 52

Ilyas Safa [email protected]

EMISPDF intellinet from 213.225.149.5 on 2015-06-25 08:34:08 BST. DownloadPDF.Downloaded by intellinet from 213.225.149.5 at 2015-06-25 08:34:08 BST. EMIS. Unauthorized Distribution Prohibited.

2

Ulker Biskuvi

Summary of Key Financials (TL mn)

57.0%

43.0%

Yldz Holding&Subsidiaries&Family Members

Free Float

Production of biscuits, chocolate, chocolatecovered biscuits, w afers, cakes andcrackers. Sells its products throughoutTurkey and exports to more than 80countries including Germany, France,Southern/Eastern Europe/CIS and the MiddleEast.

Company Overview

Shareholder Structure

Summary of Key Financials (TL mn) 2 3 4 5 6Income Statement (TL mn) 2013A* 2014A* 2015E 2016E 2017ERevenues 2,748 2,891 3,141 4,129 4,646EBITDA 315 332 391 548 615Depreciation & Amortisation 52 54 86 86 96EBIT 263 277 305 462 518Other income (expense), net 49 8 116 153 172Financial expenses, net (240) (121) (158) (208) (234)Minority Interests 39 23 0 0 0Income before tax 279 263 264 407 457Taxation on Income (52) (28) (53) (81) (91)Net income 189 212 211 326 365Cash Flow Statement (TL mn)Net Income 189 212 211 326 365Depreciation & Amortisation 52 54 86 86 96Indemnity Provisions 10 13 0 0 0Change in Working Capital 113 34 (41) (126) (63)Cash Flow from Operations 364 313 256 286 398Capital Expenditure 70 92 79 96 106Free Cash Flow 294 221 177 189 292Rights Issue 0 0 0 0 0Dividends Paid 150 133 94 148 228Other Cash Inflow (Outf low ) (5) (293) (80) (115) (50)Change in net cash 139 (206) 2 (73) 14Net Cash (95) (300) (298) (371) (357)Balance Sheet (TL mn)Tangible Fixed Assets 543 580 573 583 593Other Long Term Assets 25 41 50 66 75Intangibles 1 1 1 1 1Goodw ill 0 0 1 1 1Long-term financial assets 465 529 529 529 529Inventories 198 212 226 285 318Trade receivables 649 604 665 874 983Cash & equivalents 1,165 1,035 1,124 1,477 1,662Other current assets 116 186 188 247 278Total assets 3,162 3,188 3,523 4,281 4,684Long-term debt 10 1,244 1,492 1,791 2,149Other long-term liabilities 57 57 60 64 68Short-term debt 1,250 91 (70) 58 (130)Trade payables 508 511 545 687 765Total Debt 1,260 1,335 1,422 1,848 2,019Other short-term liabilities 68 55 12 7 4Total liabilities 1,894 1,958 2,076 2,644 2,897Minority Interest 138 92 100 112 125Total equity 1,130 1,138 1,447 1,637 1,787Paid-in capital 342 342 342 342 342Total liabilities & equity 3,162 3,188 3,523 4,281 4,684RatiosROE (%) 18.1 18.7 16.3 21.1 21.3ROIC (%) 22.4 24.2 25.7 35.3 35.7Invested Capital 907 927 971 1,123 1,204Net debt/EBITDA (x) 0.3 0.9 0.8 0.7 0.6Net debt/Equity (%) 8.4 26.4 20.6 22.7 20.0Capex/Sales (%) 2.55 3.20 2.51 2.33 2.28Capex/Depreciation (x) 1.4 1.7 0.9 1.1 1.1EBITDA Margin 11.5 11.5 12.5 13.3 13.2EBIT Margin 9.6 9.6 9.7 11.2 11.2Net Margin 6.9 7.3 6.7 7.9 7.9Valuation MetricsEV/Sales (x) 2.0x 2.2x 2.1x 1.6x 1.4xEV/EBITDA (x) 17.2x 19.4x 16.8x 12.0x 10.7xEV/IC (x) 6.0x 6.9x 6.8x 5.9x 5.5xP/E (x) 24.4x 25.7x 29.8x 19.3x 17.2xFCF yield (%) 6% 4% 3% 3% 5%Dividend yield (%) 3% 3% 1% 2% 4%*based on average Mcap during the year


3

Ulker Biskuvi

Our target price of TL22.60/share offers 23% upside potential. Following updated macro estimates and peer group multiples, we have revisited our valuation for ULKER and came up with a new 12 month target equity value of TL7,725mn, implying 23% upside potential. We attach 70% weight to the DCF in our blended peer + DCF valuation analysis, as DCF better captures the value creation from the acquisition of international businesses and medium term EBITDA margin improvement. Therefore, we reiterate our OUTPERFORM recommendation for ULKER shares and added the stock to our Most Recommended List.

DCF valuation implies 37% higher value than peer valuation analysis. Our DCF valuation signals an EV of TL8,154mn which is 37% higher than the peer valuation analysis. We used 9.6% WACC in our valuation taking 9% risk free rate, 5% equity risk premium and 0.5 Beta. We used 2015&16 EV/EBITDA multiple of international peers 14.4x and 12.9x to reach our multiple based target value.

TL mn Valuation Method WeightCore Business Equity Value DCF 70% 8,154

Peer Comparison 30% 5,962Blended Value 7,497 G New Inc. Book Value 19,23% 176 Godiva Belgium BVBA Book Value 19,23% 323

BIM Target Mcap 0,20% 32Total Participations with 5% discount 505

Minority Shares (26.1% Biskot + %8 Ulker Cikolata) 276Target Value 7,725

Target Price 22.6

Current Price 18.4

Upside Potential 23%

FIGURE 1: DCF Valuation Summary

Source: Is Investment Estimates

FIGURE 2: DCF Valuation Summary


DCF TL mn 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E TVNet Sales 2,341 2,748 2,891 3,141 4,129 4,646 5,169 5,712 6,251 6,824 7,490 12%Gross Profit 503 633 608 681 1,051 1,213 1,370 1,540 1,710 1,879 2,093EBIT 171 263 277 305 462 518 612 729 836 931 1,044

Tax on EBIT -34 -53 -55 -61 -92 -104 -122 -146 -167 -186 -209

Depreciation 48 52 54 86 86 96 101 130 114 119 127EBITDA 219 315 332 391 548 615 714 859 950 1,050 1,172

EBITDA margin 9.3% 11.5% 11.5% 12.5% 13.3% 13.2% 13.8% 15.0% 15.2% 15.4% 15.6%Change in Working Capital 14 -27 34 -41 -126 -63 -62 -69 -63 -68 -81Capex -42 -88 -102 -171 -106 -127 -147 -237 -215 -204 -267Free Cash 156 148 209 118 223 321 382 408 505 592 614 13,481Wacc 9.46% 9.8% 8.8% 11.0% 10.5% 10.1% 9.6% 9.6% 9.2% 8.7% 8.7%

DCF 156 148 209 108 186 245 266 259 294 314 298 6540Terminal Grow th Rate 4%Terminal Value 6540

Enterprise Value 8,449 Net Debt 2014(- acquisition costs) -551Equity Value 8,154

Valuation


4

Ulker Biskuvi

Trades discount vs its international peers ULKER trades at a discount based on its 12.0x 2016E EV/EBITDA and 19.3x P/E vs its international peers median of 14.4x and 22.7x, respectively.

FIGURE 3: Peer Comparison

Source: Bloomberg and Is Investment Estimates

Company Company Country Mcap mn$2015 2016 2017 2015 2016 2017

ULKER ULKER BISKUV TURKEY 2,313 29.8 19.3 17.2 16.8 12.0 10.7Turkey Avg. 29.8 19.3 17.2 16.8 12.0 10.7Disc./Prem. 23% -15% -13% 17% -6% -6%Peer Comp.avg. 24.22 22.68 19.77 14.35 12.85 11.40Peer.Comp. Company Country Mcap mn$ 2015 2016 2017 2015 2016 2017LOTB BB Equity LOTUS BAKERIES BELGIUM 935 25.8 24.4 15.7 14.9 THT LN Equity THORNTONS PLC BRITAIN 44 13.3 11.3 9.2 5.8 5.2 4.7MYOR IJ Equity MAYORA INDAH INDONESIA 1,700 27.9 20.4 17.6 13.6 11.0 9.82206 JT Equity EZAKI GLICO JAPAN 3,366 21.2 30.9 27.5 14.9 13.0 11.8PETRA SP Equity PETRA FOODS LTD SINGAPORE 2,133 31.9 27.0 22.4 17.6 15.0 12.6NESN VX Equity NESTLE SA-REG SWITZERLAND 242,440 20.5 19.1 17.6 13.5 12.8 12.0LISP SW Equity LINDT & SPRUE-PC SWITZERLAND 14,008 31.7 28.6 25.8 20.8 18.9 17.3HSY US Equity HERSHEY CO/THE UNITED STATES 20,360 21.5 19.8 18.3 12.8 12.0 11.5

P/E EV/EBITDA


5

Ulker Biskuvi

Domestic sales volume is expected to accelerate in 2H15. Consolidated volume was down by 7.5% in 1Q15 which was partially due to carry on price increases, weaker exports and SKU optimization in Biskot. However, we estimate domestic sales volume to accelerate 2H15 thanks to increased consumer appetite and sequential price increases by the competitors.

Revenues set to grow 17% CAGR over the next three years thanks to 6% average growth rate at domestic confectionery market and contribution of planned acquisitions in Egypt and Saudi Arabia. The company will look for other acquisition opportunities in the region as well as a strategy.

We estimate consolidated EBITDA margin to improve 13.2% in 2017 on the back of reduction in sales discounts, SKU optimization and lower marketing expenses. The planned acquisition will make a dilutive impact in the short-term on consolidated figures, yet still we deem that they will contribute to the profitability as well following the restructuring after the acquisitions.

FIGURE 4: Domestic Confectionery Market Growth vs Ulker Sales Volume Growth

Source: Company Presentation

5.5%8.1%

5.8%8.3%

5.5%2.8%

5.6%

-4.0%-2.6%

-7.5%

1Q14 2Q14 3Q14 4Q14 1Q15

Market Growth Trend Ulker Sales Volume Growth

FIGURE 5: Revenue Growth Projection - mn TL


11.5% 0.8%0.5% 0.4%

13.2%

2014

Red

uct

ion in

sa

les

disco

unt

Cate

gory

m

ix/N

ewla

unch

es

Bette

r cos

t & op

-ex

man

agem

ent

2017

E

2,891 614

447694* 4,646

2014 Biscuits&Cakes Chocolate Acquisitions 2017E

FIGURE 6: EBITDA Margin Projection


* Acquisitions are estimated to contribute financials in 2016

Financial Analysis


6

Ulker Biskuvi

Saudi Arabia and Egypt are fast growing markets in the region. We incorporate Egypt and Saudi Arabia ventures to the model, assuming an acquisition multiple of 1.0x 2015EV/ Sales, using the similar transactions as benchmark. They are estimated to contribute TL900mn to Ulkers top line over the next three years.

Egypt confectionery market is c.US$1.8bn and grows c.7% every year. Yildiz Holding operates in Egypt through Hi Food which produces biscuits. Hi Food has a production capacity of 27.5K tonnes. 54% of Hi Food is owned by a local partner while the remaining 46% stake owned by Yildiz Holding. Hi Foods generated US$42mn revenues along with 9% EBITDA margin in 2014 and projects to generate the same amount of turnover in 2015 as the demand were weaker due to political unrest in the country.

Saudi Arabia confectionery market is c. US$2.6bn and grows c.8% on annual basis. Low per capita consumption especially in chocolate category with 1.6kg accompanied by increased consumer spending and organized retailing channels is expected to spur the growth in the country. Yildiz Holding operates in Saudi Arabia through FMC which produces biscuits, chocolate and cakes. Established in 2000, 45% of FMC is owned by a local partner while Yildiz Holding holds 55% stake. FMC has a production capacity of 43K tons and reaches c.10K sales points in the country holding 8% market share in biscuits and 1% market share in chocolate market. FMC has managed to raise its revenues to US$103mn with 9% EBITDA margin in 2014 and projects to generate US$120mn revenues with 10% EBITDA margin in 2015.

Godiva stake sale might be another catalyst for the stock. Ulker Biskuvi acquired 25,2% of Godiva (dropped its share to 19.23% after 6% stake sale to Yldz Holding), leading premium chocolate producer with significant brand equity globally, for US$ 240mn back in 2008. The company used US$ 240mn bank loan to finance Godiva acquisition, but paid back in June, 2010 in order to take advantage of the early payback option. Godiva almost doubled its revenues since 2008 and has reached US$732mn revenues in 2014 (along with 6.6% EBITDA margin) from US$470mn in 2008. The company currently has 444 retail shops in 100 different countries. Godiva plans to open 50 new stores annually and reach US$1.0bn revenues along with US$120mn EBITDA over the next three years. We attach US$185mn value to 19.23% stake of Godiva, implying US$974mn value for the whole company. A possible stake sale scenario at peers average 2017 EV/EBITDA multiple of 9.8x implies a value of US$1.2bn, 21% higher than our estimate.

Carries TL359mn short f-x position. Ulker carries TL359mn short f-x position due to US$ denominated loans as a result of company strategy. The company incurs f-x losses in case of TL depreciation against US$.

FIGURE 9: GODIVA Key Figures

Source: Company Presentation

(US$ mn) 2013 2014 2015EHi Food (Egypt)Net Sales 36 42 42EBITDA Margin 18% 13% 13%FMC (S.Arabia)Net Sales 91 103 120EBITDA Margin 6% 9% 10%

(US$mn) Market size Growth Per Egypt Capita ConsumptionChocolate 408 5.3% 0.4 Biscuits 869 9.4% 2.9 Saudi ArabiaChocolate 1117 9.7% 2.1 Biscuits 752 5.6% 3.7

FIGURE 7: Market Size FIGURE 8: Company Financials

Source: Euromonitor Source: Company Presentation

Godiva 2008 2013 2014# of stores 432 439 444Revenues - mn US$ 470 680 732EBITDA 0 42 48EBITDA Margin 6.2% 6.6%


7

Price / Recommendations

Ulker Biskuvi

Estimated Forward P/E & 12M Trailing P/E Estimated Forward P/BV & Current P/BV

Source : BIST/ Is Investment Estimates Source : BIST/ Is Investment Estimates

Source : BIST/ Is Investment Estimates

4.00

6.00

8.00

10.00

12.00

14.00

16.00

07/0

5/20

14

28/0

5/20

14

18/0

6/20

14

09/0

7/20

14

30/0

7/20

14

20/0

8/20

14

10/0

9/20

14

01/1

0/20

14

22/1

0/20

14

12/1

1/20

14

03/1

2/20

14

24/1

2/20

14

14/0

1/20

15

04/0

2/20

15

25/0

2/20

15

18/0

3/20

15

08/0

4/20

15

29/0

4/20

15

Estimated Forward P/E 12M Trailing P/E

0.40

0.90

1.40

1.90

2.40

2.90

07/0

5/20

14

28/0

5/20

14

18/0

6/20

14

09/0

7/20

14

30/0

7/20

14

20/0

8/20

14

10/0

9/20

14

01/1

0/20

14

22/1

0/20

14

12/1

1/20

14

03/1

2/20

14

24/1

2/20

14

14/0

1/20

15

04/0

2/20

15

25/0

2/20

15

18/0

3/20

15

08/0

4/20

15

29/0

4/20

15

Estimated Forward P/BV Current P/BV

MPUP

UR

UR

OP

OP

OP

OP

OP O

P OP O

P

OP

OP OP OP

OP O

P

OP OP O

P

0

20

40

60

80

100

12001

/13

01/1

302

/13

03/1

303

/13

04/1

305

/13

05/1

306

/13

07/1

307

/13

08/1

309

/13

10/1

310

/13

11/1

312

/13

12/1

301

/14

02/1

402

/14

03/1

404

/14

04/1

405

/14

06/1

407

/14

07/1

408

/14

09/1

409

/14

10/1

411

/14

11/1

412

/14

01/1

501

/15

02/1

503

/15

04/1

504

/15

TL

Relative to BIST100

01

2

34

5

67

89

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Number of Companies

OP MP UP UR NR

Sectoral Recommendations

47

3316

30

OUTPERFORM UNDER REVIEWNOT RATED UNDER PERFORMMARKETPERFORM

Rec. Breakdown for Coverage (%)


8

This report has been prepared by Yatrm Menkul Deerler A.. ( Investment) solely for the information of clients of Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary.

The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.

All information in these pages remains the property of Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of Investment. (www.isinvestment.com)

This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's.

Ulker Biskuvi


Is Investment - Company Reports - Ülker Bi̇sküvi̇ Sanayi̇ a.ş. (Ulker)

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