IS Investment – Company Report: Migros 3Q20 Earnings Review

Operationally inline yet NI beat estimates: Migros announced TL9mn of net profit in 3Q20, better than consensus net loss estimate (IS Investment: TL14mn of net profit, consensus: TL72mn of net loss), mostly due to the TL44mn of investment income and lower financial expenses. Inline with market estimates, the Company reported TL7.7bn of revenues in 3Q20 (IS Inv: TL7.7bn, cons: TL7.7bn) and posted TL610mn of EBITDA (IS Inv: TL650mn, cons: TL612mn).

Comment: Despite the earnings beat, we do not expect the results to have a material impact on share price as operational results were inline with consensus figures and due to the mix picture of the revised guidance as topline growth and new store opening guidance revised up where as EBITDA margin guidance revised down to the lower end of the previous guidance.

Solid LfL growth yet weaker margins: Migros reported TL7.7bn of revenues in 3Q20, suggesting a robust growth of 19.1% y/y thanks to the solid LfL growth of 15% (based on our calculation) and 3.8% space growth despite the dilutive impact of seasonal stores, shopping mall revenues and wholesale revenues. The LfL growth remained strong supported by a significant growth in online channel as online orders thorough Migros Sanal was 2.6x and Migros Hemen was 13.5x, respectively in 9M20 vs. that of 9M19 as a result of changing consumer behavior after COVID. The Company posted TL610mn of EBITDA in 3Q20, down by 10.8% y/y. Note that the Management has a different calculation of EBITDA including severance payments which suggests 12.4% contraction. The contraction in EBITDA mostly stemmed from lower imputed interest rates and COVID related costs. Excluding the impact of lower imputed interest rates, EBITDA grew by a mere 3.4% y/y, still much lower than topline growth. EBITDA margin realized at 7.9%, showing c.290bps deterioration y/y. Excluding the effect of interest rates (calculating 3Q19 margin based on current actual interest rates) and adverse impact of IFRS 16, there would still be 50bps EBITDA margin deterioration y/y.

Topline growth guidance revised up whereas EBITDA margin revised down: The Management has revised up its topline growth guidance for the third time this year yet EBITDA margin guidance revised down to the lower end of the previous guidance. Accordingly, they now expect 22-23% topline growth for 2020 (9M20: 22.8%), up from 20-22% and expect ~8% EBITDA margin down from 8-8.5% (9M20: 8.1%). They also revised up new store opening guidance to +160 from 160 (9M19: 136) and Capex guidance to TL470mn from TL440mn.

Euro net debt further decreased to €55mn: Total net debt has improved to TL547mn as of end-3Q20 (2Q20: TL1.09bn) despite the weakness of TL against euro during the quarter while euro portion of net debt decreased to €55mn as of end-3Q20 (2Q20: €115mn) thanks to the strong operational cash flow. The Management highlighted that short Fx position decreased to €42mn as of October. The net debt /EBITDA also decreased to 0.4x (2Q20: 0.7x).

Reiterate our BUY: Following the Management call to be held today, we may revise our estimates. Our existing topline estimate is in-line with the new guidance yet lower interest rates may require downward revision in our EBITDA margin estimates. We keep our BUY recommendation with our unchanged 12M PT of TL50/share. Currently, the share trades at 6.6x 2021E adj. EV/EBITDA (exc IFRS 16, including imputed interest), offering 45% discount to BIMAS. We expect valuation multiples to continue to expand due to the improving risk/reward profile as the significant ytd decrease in euro debt eases concerns over the name.

Source:Can Ilker