Turkey - INDES Earnings Review, 10th March

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Turkey - INDES Earnings Review, 10th March

INDES posted TL39mn net income in 4Q19, above our estimate of TL33mn. Better than expected net income was mainly attributable to slightly higher than expected revenues and EBITDA margin in 4Q19. We consider that its results were slightly better than estimates however, its cash flow generation was weak in 4Q, as INDES generated minus TL195mn cash flow in the underlying quarter and net debt to EBITDA increased to 1.1x from 0.3x 3Q19. However, it was mostly due to working capital requirement as a result of sharp revenue growth.



INDES posted TL39mn net income in 4Q19, above our estimate of TL33mn. Better than expected net income was mainly attributable to slightly higher than expected revenues and EBITDA margin in 4Q19. We consider that its results were slightly better than estimates however, its cash flow generation was weak in 4Q, as INDES generated minus TL195mn cash flow in the underlying quarter and net debt to EBITDA increased to 1.1x from 0.3x 3Q19. However, it was mostly due to working capital requirement as a result of sharp revenue growth.

Solid revenue growth… INDES managed to increase its revenues by 29% YoY to TL1.96bn in 4Q19. This was also 3% above our estimate of TL1.9bn. Low base impact in 4Q18 as well as recovery in domestic consumption as well as INDESs reshuffling marketing strategy (to focus more on volume) led to the solid revenue growth in 4Q19. Looking at the breakdown Information Technologies revenues grew by 135% YoY to TL1.7bn. On top of that telecom segments revenues grew by 158% YoY to TL265mn in 4Q19 and its share in total revenues jumped to 14% from 12% a year ago. In addition to its colossal IT business, INDES also focus more on telecom segment and the company aims to grow further in that segment in 2020. And the company focuses mainly on the cell phones whose price is below TL3,500. Recall that there is an instalment limitation for cell phones pricing above TL3,500. Its 4Q19 revenues brought the 2019 revenue growth to 28% YoY, following a 17% YoY contraction in 2018.

Improvement in EBITDA margin… INDESs EBITDA of TL62mn in 4Q19 was above our estimate of TL57mn. It was also 138% YoY higher. Its EBITDA margin improved to 3.2% from 3.1% in 4Q19. We consider that focusing more on profitable product as well as changing sales mix led to the improvement in EBITDA margin in 4Q19.

Indebtedness temporarily increased… In 4Q19, INDESs net debt to EBITDA multiple increased to 1.1x, compared to 0.3x a quarter ago. It was -1.5x at YE18, which was boosted by cash proceedings from its real estate disposal. Its net debt increased to TL173mn in 4Q19, from TL36mn in 3Q19. In 4Q19, its operating free cash flow generation was weak at minus TL195mn vs. TL33mn in 3Q19, mainly due to deterioration in working capital needs, as a result of sharp revenue growth in 4Q19.

Stronger 2020 is on cards… INDESs initial guidance for 2020E indicates stronger 2020E for the company, in terms of revenue growth, which will also bring operational profitability and net earnings as well. In our estimates, we incorporate 35% revenue growth for 2020E. The key drivers of revenue growth will be declining interest rates and increasing consumer confidence in our view. We also assumed INDES will generate TL199mn EBITDA (27% YoY growth) and TL116mn net income for 2020E.

Coronavirus impact will be limited… Recall that INDES imports some of IT-related products from China. With the recent outbreak of the virus, some of the tech plants were halted their production in China but most of them have resumed production so far. On top of that INDES works with almost one-month inventory. So, the virus impact will be limited on INDESs 2020 outlook.