TURKEY - Company Update <YATAS TI>: The good, the bed and the mattress, Tuesday, 28 January 2020

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TURKEY - Company Update : The good, the bed and the mattress, Global Securities, Tuesday, 28 January 2020
We revisited our estimates and target value for Yatas, after we visited the companys top management and discussed its lucrative 2020E outlook. Having almost a quiet 1H19, the companys operations have started reviving starting from 4Q19 through the positive impact of declining interest rates. On top of that the VAT cut in the furniture sector (re-introduced in early Jan20) has become the major catalyst for its successful operations. Apart from its domestic growth outlook, the company also expands its footage in overseas markets and in the near future, the revenue share from international markets will reach to 20%. PLEASE USE THIS LINK TO DOWNLOAD THE DOCUMENT
Reiterating BUY recommendation with 20% upward revision at target price… The key reason behind the upward revision in target price is the change in growth story for the following years after we discussed future growth strategy with the management. The key revisions in our assumptions are i) Divan Home store number in perpetuity: Old - 200 stores, New - 400 stores ii) International sales points: Old 5 stores per year and Perpetuity: 100 sales points, New - 10 sales points per year and Perpetuity: 150 sales points. With higher revenue growth, we also slightly revised our EBITDA margin estimate for the following years from 15.0% to 15.2%. Not only for Yatas but also for Turkish furniture industry, the decrease in furniture renewal cycle (from 15-20 years to 7-10 years), increasing share of urbanization, rising marriage and divorce rates are still the main catalysts for the industry. Yatas market positioning in high-quality segment with reasonable prices with strong after-sales support as well as the initiation of Divan Home brand will open a significant room for growth. Through this segment, Yatas will be able to touch low-mid segment. Besides, its strong brand perception is another advantage in order to maintain its market share gain not only in high segment but also in lower segments. Thus, we revised our 12M target price to TRY12.10 from TRY10.20 and maintain our BUY recommendation for Yatas, with solid growth outlook and attractive multiples. (2020E 6.2x EV/EBITDA and 2020E 8.9x P/E ratio) Management expects to have at least 30% top-line CAGR in the next 3 years… Yatas targets to maintain its strong organic growth both in domestic market and abroad. As a result, the Company has a top-line guidance of TRY1,700, indicating 45% YoY growth, with a +15.0% EBITDA margin. The management indicated that major CapEx requirement has been completed so far and they expect a CapEx/Net Sales ratio around 3-4% in the following years (last 5 years average: 9.7%) because store growth will be derived by franchises. Well-equipped for huge growth outlook in the domestic market… Opening 100 new Divan Home stores and 35 new Enza Home and Yatas Bedding stores in 2020 in Turkey will be the key catalysts to maintain its strong top-line growth. At mid-January, 40 of 100 new franchise agreements target has already been signed and these stores are expected to be operational until Apr20. Yatas management considers reaching a total of 600 stores in Enza Home and Yatas Bedding and 500 stores of Divan Home will be reasonable and reachable growth target in the long term. As of today, Yatas has 402 Enza Home and Yatas Bedding stores (78 of total is owned store) and 1 Divan Home, suggesting a strong growth potential in low-mid segment. Strong growth appetite in international markets… The Company transformed to a major player in domestic market with a franchise-store growth oriented strategy recent years thanks to its strong brand perception, Yatas also targets to expand its footage in international markets particularly MENA region, Europe, Russia and USA. Note that Yatas had a successful strategy in Germany, where the company owns a Germany-based company Yatas Europe Gmbh. This led Yatas to increase its exports weight in total net sales from 7% in 2017 to 13% in 2019E. Yatas entered Russia with a similar structure (have franchises and corner points, and owns a warehouse to have a fast delivery option) and US entry will take place in 2020. The management targets to have USD3.0mn and USD1.5mn revenue from Russia and USA in 2020, respectively. Note that management has a 20% export ratio target until 2023E. The downward revision of the export weight target from 30% to 20% is stemming from the expected solid growth of domestic revenue, which is expected to be generated from Divan Home store openings. Management is glad with their Pakistan and India operations although they struggle against the macroeconomic conditions in Egypt, Libya, Syria and Iraq, the regions impacted by geopolitical tension. Last but not least Yatas aims to have +20 store/sales point openings until it reaches 150-200 sales points abroad. (2019 year-end: 71 sales points) Solid improvement in working capital requirement in the last couple of years and management considers that cash conversion cycle is at its sustainable level… Thanks to decline in stock turnover ratio coupled with the improvement in collection period, the Company decreased its cash conversion cycle from around 120-150 days to 70-80 days in the last 4 years. We consider that solid control in cash cycle will continue and the management does not expect a significant discrepancy in Divan Homes cash conversion cycle compared to Enza Home and Yatas Bedding; nonetheless, cash conversion cycle may be 10-15 days higher than current structure in ramp-up period, 18-24 months. However, it does not have a major impact in our valuation. Potentially re-initiating dividend pay-out will be another catalyst… Following a successful 2019 year and better outlook for 2020E, we believe management will resume its dividend payments starting from their 2019 earnings. In our estimates we incorporate a pay-out ratio of 20% yielding 1.5% as of its latest closing price. A snapshot for 2019… The year started with a weak demand mainly because of high interest rate environment despite the government extended VAT and SCT incentive until 2Q19-end. Following the end of incentive, a slight deterioration in demand continued in the second half of the year. As a result, we expect the Company to have a top-line growth of 23% YoY in 2019, printing TRY 1,163mn of net sales revenue, and to reach TRY171mn of EBITDA with a margin of 14.7%. On the bottom-line, we expect Yatas to reach TRY97mn which indicates 28% YoY growth. Our year-end estimates are in-line with the managements 4Q19 guidance. 2020 expectations, Divan Home concept (around 1,500-2,500 sqm store size each and aims low-mid segment) and growth potential in Enza Home and Yatas Bedding… At 2020-end, the Company targets around 100 new Divan Home store openings and a total of 35 new Enza Home and Yatas Bedding stores in Turkey. Furthermore, the Company targets to have around 100 sales points abroad by the end of 2020. Yatas management expects additional TL200mn revenues from Divan brand in 2020.