Turkey Food Retail: Time to refocus, valuations appear cheap

Post our recent conversations with Turkish Food retailers, we conclude that: 1) There is not a tangible reversal of growth trend vs expectations in Q3, 2) Fast space expansion continues across the sector, and 3) No signs of major competition that could weigh on the margin outlook for the rest of the year.

Companies are comfortably on track to deliver their FY20 guidance where upside risk remains for Q4 and depends on whether resurgence of COVID-19 cases could bring an unexpected rebound in sales. BIM is likely to lead the sector in terms of growth, while fast deleveraging in Migros will be the key theme in Q3 albeit its moderating growth. SOK continues to benefit from operational leverage yet at a slower pace than we had been expecting.

Our pecking order for stock selection remains unchanged and still relies on market disrupters, valuation gaps and room for operational leverage. We remain OW on Migros and SOK, N on BIM, while we hereby upgrade our PTs across the sector as a result of rolling over our cash flows to 2021 year-end. Our new PTs are TL77.5 for BIM, TL16.6 for SOK and TL58.4 for Migros.

 

Overview of Q3 trends

Growth momentum is moderating toward the trend line for the sector (27% for discounters, 18% for Migros) with the only surprise the faster-than-average store space expansion in discounters. LFL sales growth is likely to retreat back to Q319 levels (13-15%) on the back of gradual normalization in basket size (30% growth vs >60% in Q2), while traffic remains negative (down 15%). Major headwinds in Q3 were delays in “back to school” dates, weak tourism impact on seasonal stores and high base of last year. Online trends are firm across Turkey (almost 3x higher in Migros), while we observe some traffic returning to shopping malls (+37% m/m in Jul) – positive catalyst for Migros and partially to BIM.

 

Dormant share price QTD but growth with defensive nature may bring attention back to retailers

 

Turkish food retailers differentiates themselves thru having high FCF generation (7-10% of sales), high ROICs (>30%) and continued space expansion opportunity. Exposure to fx is almost non-existent in BIM and SOK, whilst Migros reduced its short fx position to EUR80m by August. We see undervalued stocks as SOK and MIGROS, which are trading below 5x 2021E EV/EBITDA multiples, offering 45% discount to CEEMEA peers as well as to BIM.

 

Market disrupters – Migros and BIM

Migros continues to disrupt the market thru expanding its online exposure and diversifying its SKUs thru adding ready-meal options with a target to continue to gain traffic under changing consumer habits. BIM was a surprise mover in Q2 with rising non-food spot campaigns, well-managed inventory levels during the pandemic and changing store formats to a more modern look; hence, it was the fastest-growing retailer YTD. SOK, on the other hand, is an operational leverage story.

 

Growth remains attractive during normalization period

 

We expect Turkish Food Retailers to continue to deliver relatively faster growth in 2021 vs their CEEMEA peers; with top-line trends likely to be helped by a rising inflationary environment and continued space expansion. Normalization in sales would still mean superior growth for Turkish food retailers, for which we forecast an average 21% top-line growth for our universe post 27% in 2020E.

 

Forecast revisions and PT changes

We upgrade our forecasts for BIM and SOK, reflecting a stronger revenue trend than initially projected, while we adjust Migros’ 2020 earnings with fx losses. Migros remains as our top pick in the sector with the shares offering hefty upside potential of 43%, followed by SOK, which offers 36% upside potential. BIM shares, on the other hand, are fairly valued in our view, trading on par with CEEMEA peers.

J.P. Morgan Securities plc,  CEEMEA Equity Research by Hanzade Kılıçkıran

 

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.