Arcelik (Buy, TRY 7.96 )

We are initiating coverage on Arcelik with a BUY rating and 12M target price of TRY 7.96 per share, offering 28% upside potential. We expect Arcelik to deliver strong output growth thanks to the resiliency of the domestic white goods (WG) business fuelled by replacement demand and leading indictors remaining robust, coupled with a solid track record of market share gains on export markets. ARCLK is trading at 4.8x and 6.5x on 2012E EV/EBITDA and P/E multiples compared to the past two-year average of 6.3x and 9.7x, respectively, while the current multiples imply 8% and 19% discounts to its peers despite its 13% EBITDA and 14% EPS CAGR for 2011-2013E, compared to the 7% median CAGR of its peers. 

■  Main value driver, domestic WG business likely to remain resilient – While Arcelik has successfully expanded its geographical foothold, the key value driver remains its domestic WG business, which by our estimate contributes 49% of EBITDA. We foresee a resilient outlook for domestic WG market, underpinned by replacement demand, leading indicators (i.e occupancy permits) remaining robust and healthy channel inventories. We expect domestic WG market to grow by 4.7% in 2012.

■  Easing margin pressure in 2012; net beneficiary of TRY depreciation – We foresee easing pressure on margins from raw materials costs with the basket down by ca. 15% since the end of 2Q11 coupled with expected price increases in export markets (indicated by Electrolux for 1Q12). While we do not model any further depreciation of the TRY, every ca. 5% depreciation of the TRY against the basket would have a ca. 3% positive impact on EBITDA, by our estimate.

■  Proven track record of market share gains on export markets – Appliance demand in W. Europe (ca. 50% of exports) has contracted by 2% in 2011, whereas Arcelik’s export shipments were up 10%, similar to the 2009 crisis. We forecast 8% WG export volume growth this year, with Arcelik’s improved competitive position from a weak TRY, recovery in MENA region and penetration into new markets (Southeast Asia).