2021 starts under opposing forces but H1 looks reasonably strong.
Strong sales momentum across different markets that Arcelik operates in, near full capacity utilisation (scale benefits), historically low inventory levels for finished goods and favourable FX rates (strong EUR and TRY against USD) indicate the positive factors as of the beginning of 2021. Main headwinds are the rising costs and likely margin pressure from raw material prices and opex (staff and logistics). Cost effects should become visible from 1Q21 onward but could be mitigated via price actions thanks to strong demand, which also gives way to continued scale benefits from full capacity operations, at least in the first few months of the year. The outlook for the second half is less visible in terms of sales momentum and raw material price trends. From a base effect perspective alone, we foresee easier comps for Arcelik in H1 than for H2.
2020 is difficult to beat in many KPIs but 2021 unlikely a “dismal” year.
2020 was a time of major challenges caused by COVID-19 but also unexpected shifts in consumer trends and big-scale cost savings by corporates, resulting in one of the strongest years of profitability for Arcelik. Surging replacement demand for home appliances demand in Turkey, profitable sales under scarce supply conditions, along with cuts in costs and investments resulted in very strong operating margins, all-time low WC/sales ratio and substantial free cash generation. Low interest rates in Turkey in the first half of the year also helped reduce financial expenses notably. We view year 2021 as a partial reversal of many of these difficult-to-beat parameters but in itself a decent year of profitability despite the headwinds. On our revised 2021 forecasts, we expect Arcelik to post 22% revenue growth, flattish EBITDA assuming 11% margin (down from 11.7% previously) and cTRY2.3bn net profit (revised up by 11%). We highlight the main components under the forecast revisions section.
Maintain Buy with TP of TRY40.60 (TRY36); inexpensive stock on multiples.
On our updated forecasts, our DCF model yields a new target price of TRY40.60 (from TRY36), implying 17.7% upside; we maintain our Buy rating due to ongoing sales momentum and likely strong results in the near term. Given the solid cash position, we expect strong dividend payments from 2020e, despite the pending acquisition of Hitachi GLS (expected closing in April 2021 – excluded from our forecasts and valuation). Assuming a pay-out of 50% on clean profits (43% pay-out on reported profit), the implied yield is 5.2%. The stock trades on 2021e PE of 10x and EV/EBITDA of 5.9x vs historical average 1-yr forward-looking multiples of 13x and 7x.
Source: HSBC Global Research