Turkey Wake up call: Macro, Political and Equity News, 5th May

This analysis by GLOBAL Securities is presented to you by Raiffeisen Centrobank AG. Raiffeisen Centrobank AG acts solely as a distributor of this analysis and has not introduced any material changes to the content of this analysis or any recommendation included herein.

Wake – up call

BIST lost 2.24% yesterday in its weak start to the month, in sync with the sour sentiment in global markets. After a downtick start that marked the highest point of the day, index turned south and retreated to 99k levels which proved to be a support during the first part of the day. But further selling pressure after 2:30PM pushed the BIST100 lower to 98.3k from where it staged a 500-point recovery till the close. Banks performed in line with the broader market, losing 2.19% on average. PGSUS, ENKAI, ALKIM, MPARK, cement stocks, and Koza Group names were among the rare gainers while TUPRS, TTKOM, TCELL, EREGL, CCOLA, and automotive plays topped the decliners. Today, our local macro agenda showcases Central Bank's April'20 real effective FX rate due at 2:30PM local time. The CPI-based index is expected to decline further from its 9-month low of 72.87 mark for previous month given ~5.2% depreciation of lira vs the currency basket dwarfing the 0.85% headline CPI print for April. Separately, Treasury will issue 2-year fixed-coupon bonds and reissue 5-year CPI-linkers today in its double domestic borrowing auctions. Redemption for the week is a small TL188mn and the Treasury already raised TL8.83bn in its discount bond auction yesterday as part of its hefty TL40bn domestic borrowing target for the month. We foresee a positive start for the BIST as the 0.9-1.1% overnight rebound in U.S. indices after we closed yesterday and the 0.8% gain in futures this morning are creating some optimism that is also attested by the gains in Asian equity indices. Lira is flattish, trading just below the 7.05 mark vs the greenback.
Macro and Political News:
(=/-) Number of deaths from coronavirus reached 3461... According to the Health Ministry, the number of deaths from coronavirus increased by 64 people yesterday and reached 3461. The total numbers of tested and infected people are 1.17mn and 127,659 in Turkey.

(=/+) Normalization steps announced by President Erdogan... Following the cabinet meeting, President Erdogan announced some items for the normalization from the coronavirus pandemic. The gradual steps will continue between May and July. Accordingly, the 7 of 31 cities (which have been under quarantine for weekends) will be removed, while the curfew for 65 years old citizens have been loosened and those citizens are allowed to go out for a certain day in a weekend for four hours. The barbers and the shopping centers will be opened on May 11th, while the taxi services will be available by May 5th.

(=/-) Apr20 CPI slightly above the consensus... Accordingly, CPI rose by 0.85% MoM in April, coming slightly above the consensus of 0.60%. PPI for April came in at 1.28% MoM, . Thus, YoY CPI and PPI was 10.94% and 6.71%, respectively. While the core CPI increased by 1.04% MoM, the highest monthly increases were 4.08% in clothing and shoes and 2.53% in food & beverages among the 12 sub-items. On the other hand, transportation inflation was minus 1.83% MoM. Recall that the Central Bank of Turkey revised down its 2020E CPI forecast to 7.4% from the previous 8.2% We believe that this may result in further policy rate cuts for the rest of 2020, which is currently 8.25%.

(=/-) Turkey PMI in April retreated to 33.4... According to the data released by Markit and Istanbul Chamber of Industry, the PMI has been announced at 33.4 in April 2020, down from 48.1 in March 2020. Mainly due to the slowdown in the manufacturing sector in Turkey related to lockdowns as a result of coronavirus, almost all sub-sectors of manufacturing have been impacted negatively


Sector and Company News:

(=) BIMAS announced an update on its dividend payment because of the recent dividend legislation of the regulator. As a result, BIMAS will distribute TL 0.50 p/s dividends on May 13. This is the maximum level of dividend payment BIMAS can distribute according to the new regulations. Recall that companies are allowed to distribute maximum 25% of their previous year’s net income.

(=) TKFEN is expected to announce its 1Q20 financails today after the session close, which will be followed by a conference call tomorrow at 4.30pm Istambul time. We expect TKFEN to post TL109mn net income (consensus: TL165mn), which indicates 86% YoY decline.

(=) CCOLA is to announce its 1Q20 results today after market close. We expect TL2,611mn of revenues (+17% YoY), TL368mn of EBITDA (+15% YoY – 0.4pps decline in margin) and TL67mn of net profit (1Q19: TL3mn loss). Consensus’ revenue, EBITDA and net profit expectations are TL2,582mn, TL374mn and TL88mn, respectively.

(+) ULKER posted TRY96mn net loss in 1Q20, much below the consensus estimate of TL177mn and our expectation of TL199mn. Reason behind lower than expected bottom-line is significant level of non-operational loss from fair value decrease of financial investments (TL569mn). In this period, revenues grew by 22% YoY to TRY2,376mn, slightly above the consensus expectation of TL2,299mn and our call of TL2,236mn. EBITDA increased by 26% YoY to TL415mn and EBITDA margin grew by 0.5pp y-o-y to 17.6% in 1Q20. Note that consensus’ average EBITDA margin was also at 16.9%, amounting to TRY389mn. Gross profitability is up by by 2.4pps YoY to 30.1% in 1Q20 thanks to the positive impact of McVitie’s in ULKER’s international operations and favorable direct costs in addition to higher sales in domestic market. In In 1Q20, we see 3.9% YoY and 8.7% YoY increase in domestic and international sales volumes. As a result of volume and price increases coupled with TL depreciation, domestic and international revenues increased by 23% YoY and 24% YoY, respectively. In Turkey operations, while biscuit and chocolate categories’ volume grew by 0.2% YoY and 11% YoY, cake volumes declined by 4% YoY which resulted a total growth of 4% in 1Q20 on the back of new launches. In international operations, all segments showed a solid growth and biscuit, chocolate and categories’ volume grew by 4%, 23% and 5% YoY which resulted a total growth of 9% in 1Q20 on the back of positive contribution of synergy products. As a result; solid revenue growth derived by strong exports, currency impact, favourable category and price positioning of McVitie’s, new launches in domestic market and price adjustments in both domestic and international markets. On the B/S side, net debt/EBITDA level is still in the safe-zone and in-line with our estimates. Recall that ULKER has two syndicated loans and their maturities will end this year. If the market reacts negatively to ULKER’s 1Q20 results because of its weak bottom-line, we consider that this may be a buying opportunity for the mid-long term.

TRYmn 1Q20 Consensus Global Securities Dev. from consensus 1Q19 YoY 4Q19 QoQ
Revenue 2.376 2.299 2.236 3% 1.942 22% 2.147 11%
EBITDA 415 389 376 7% 330 26% 340 22%
margin 17,5% 16,9% 16,8% 0,6 pps 17,0% 0,5 pps 15,8% 1,6 pps
Net profit -98 177 199 -155% 365 -127% 165 -160%
margin -4,1% 7,7% 8,9% -11,8 pps 18,8% -23 pps 7,7% -11,8 pps
Net Debt/EBITDA (x) 1,0 1,7 -65 bps 0,7 34 bps
EV/EBITDA 6,8 7,2 6,5
P/E 18,3 6,2 8,4
ROE (%) 10% 25% -15 pps 21% -10 pps
Net debt 1.389 1.727 -20% 855 62%
Working capital 2.236 1.799 24% 1.734 29%
Δ in WC 502 409 23% -371 -235%
CapEx 26 23 13% 63 -60%
FCF to firm -86 -206 -58% 599 -114%
Shareholders' Equity 4.321 3.691 17% 4.411 -2%


Turkey Δ International Δ Total Δ
Sales Volume (tons) 1Q19 1Q20 YoY 1Q19 1Q20 YoY 1Q19 1Q20 YoY
Biscuits 55.592 55.680 0,2% 34.355 35.849 4,3% 89.947 91.529 1,8%
Chocolate 41.191 45.696 10,9% 10.815 13.314 23,1% 52.006 59.010 13,5%
Cake 10.720 10.305 -3,9% 1.842 1.932 4,9% 12.562 12.237 -2,6%
Total 107.503 111.681 3,9% 47.012 51.095 8,7% 154.515 162.776 5,3%



Total Δ International Δ Total Δ
Revenues (TLmn) 1Q19 1Q20 YoY 1Q19 1Q20 YoY 1Q19 1Q20 YoY
Biscuits 421 512 21,6% 453 538 18,8% 874 1.050 20,2%
Chocolate 662 845 27,5% 248 333 34,6% 910 1.178 29,5%
Cake 119 119 -0,6% 26 30 13,5% 146 148 2,0%
Total 1.202 1.475 22,7% 727 901 24,0% 1.929 2.376 23,2%


(+) FROTO posted TL629mn net income, up by 32% YoY, significantly above the consensus estimate of TL504mn and our expectation of TL491mn. Revenues remained flat at TL9,367mn in line with the consensus estimate of TL9,210mn and our estimate of TL9,513mn. We see slight improvement in EBITDA, up by 15% YoY to TRY896mn, significantly above the consensus expectation of TL800mn and our estimate of TL818mn. Pricing discipline coupled with strong control on variable production costs resulted with a higher than expected gross and EBITDA margin. FROTO’s total PC+LCV retail sales were down by 18% YoY to 82k units. Exports were down by 25% YoY to 67k units because of the high base in the same quarter of previous year. Domestic wholesale volume was strong and stood at 15k units up by 43% YoY. In 1Q20, CUR was down by 16pp to 71% due to sharp decline in export shipments.

Following the results, FROTO made several changes in its 2020E guidance because of the negative impact of Covid-19 pandemic on automotive sector. Accordingly, the management expects domestic market to stands at 520k-570k units (Previous: 580k - 630k units), and its own domestic volume guidance at 55k-65k units (Previous: 60k - 70k units). The Company sharply downgraded its export guidance to 225k-235k units from 330k-340k units. Capex guidance was revised to EUR130mn-150mn (Previous: EUR180mn-200mn). We deem its sharp downward revision of 2020E guidance as “expected”.

On the B/S side, we see an increase in NWC requirement of FROTO in this quarter resulted with a weaker operating cash-flow than 1Q19. Net debt/EBITDA level is still in the safe zone; nonetheless, we deem slight increase in this ratio as a threat for FROTO’s balance sheet outlook before the new custom generations and transporter investments.

TRYmn 1Q20 Consensus Global Securities Dev. from consensus 1Q19 YoY 4Q19 QoQ
Revenue 9.367 9.210 9.513 2% 9.284 1% 11.502 -19%
EBITDA 896 800 818 12% 781 15% 975 -8%
margin 9,6% 8,7% 8,6% 0,9 pps 8,4% 1,2 pps 8,5% 1,1 pps
Net profit 629 504 491 25% 478 32% 617 2%
margin 6,7% 5,5% 5,2% 1,3 pps 5,1% 1,6 pps 5,4% 1,4 pps
Net Debt/EBITDA (x) 1,2 1,1 9 bps 0,9 27 bps
EV/EBITDA 7,3 6,7 8,3
P/E 10,1 9,9 12,7
ROE (%) 53% 50% 3 pps 42% 11 pps
Net debt 4.032 3.236 25% 3.005 34%
Working capital 1.905 1.159 64% 1.387 37%
Δ in WC 518 176 194% -675 -177%
CapEx 165 259 -36% 422 -61%
FCF to firm 231 347 -33% 1.187 -81%
Shareholders' Equity 4.017 3.491 15% 4.665 -14%



Domestic Δ Export Δ Total Δ
1Q19 1Q20 YoY 1Q19 1Q20 YoY 1Q19 1Q20 YoY
PC 2.045 4.379 114,1% 0 0 n.a 2.045 4.379 114,1%
LCV 7.956 9.980 25,4% 88.650 66.147 -25,4% 96.606 76.127 -21,2%
HCV 440 609 38,4% 543 393 -27,6% 983 1.002 1,9%
Total 10.441 14.968 43,4% 89.193 66.540 -25,4% 99.634 81.508 -18,2%



2020E Guidance Previous New
Domestic Market 580-630k units 520-570k units
FROTO volume 60-70k units 55-65k units
Export shipments 330-340k units 225-235k units
Production 370-380k units 270-280k units
CapEx EUR180-200mn EUR130-150mn