Turkey - SAHOL - Main Takeaways from SAHOL Conference Call

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TURKEY – SAHOL - Main Takeaways from Sabanci Holding (SAHOL) Conference Call

SAHOL arranged a conference call to discuss its 1Q20 earnings and its future prospects. Recall that SAHOL posted TL1.19bn net income in 1Q20, higher than consensus estimates by 18%. The share trades at 46% NAV discount which we consider it is not fair taking the strong asset structure of the conglomerate into consideration. We maintain our Buy recommendation due to this deep NAV discount which is below 9 ppt its five year average discount of 37%. The management did not give any date for guidance revision declaring that they will continue to follow up the developments.

Here are the main takeaways from the conference call:

• 1Q20 financials… SAHOL posted TRY1.19mn net income in 1Q20, 18% higher than the consensus estimate which was TRY1.008bn vs. in-line Global estimate of TRY1.20bn. The conglomerate’s net income increased by 36% QoQ vs 13% YoY in addition to 4% QoQ EBITDA growth from TRY2.49bn to TRY2.59bn in Q1. The company’s non-bank revenue has been TRY4.55bn in Q1, down by 9% QoQ and up by 6% YoY. The largest contribution to the non-bank revenue came from the retail segment by TRY2.82bn followed by industrial segment by TRY1.20bn. The contribution of the banking segment to the conglomerate revenue was TRY9.13bn, declined by 8% QoQ and 15% YoY.

• Leverage outlook… The conglomerate has EUR700.0mn and TL10.0bn net debt on the energy generation and retail segments, respectively. The energy generation side is naturally hedged for USD therefore the company is using currency hedging instruments for EUR-USD parity. In total, the company has TL20.0bn net debt which corresponds to 2.1X Net Debt/EBITDA multiplier down from 2.2X in 2019 while it was 5.3X in 2013.

• Restructuring in Retail segment… In Q1, with the contribution of quarantine conditions, the retail segment of SAHOL also performed well especially in terms of revenue generation. The combined revenue of retail increased by 27% YoY and EBITDA increased by 136% however, the bottom line still remained in the negative territory despite the decline in loss by TL22.0mn from TL81.0mn to TL59.0mn. SAHOL management emphasized that they have a restructuring plan for the retail side but they do not expect a movement to the positive territory in 2020.

• New corporate governance practices… Sabanci Holding is considering further improvement in the corporate governance structure aiming the Board of Directors to be composed of majority non-family members. The company took a step that Sakip Sabanci Holding, the largest shareholder, has been nominated to the Board of Directors and represented by a finance professional. They also started a recruitment process to hire more independent board members.

• NAV and profitability metrics... By the end of 1Q20, the conglomerate’s consolidated ROE has been 11.7%; non-bank ROE of 12.9% exceeded the banking ROE which has been 9.6%. Additionally, the company managed to increase its stand-alone net cash from USD279.0mn to USD299.0mn that corresponds to 6.3% of its current NAV. On the other hand, 87% of the company NAV corresponds to low – moderate cyclical sectors such as energy, food retail, banking and other financial services that indicates a defensive character against the pandemic conditions.