REPORT ON TURKISH RETAIL SECTOR - MGROS TOP PICK

MGROS – Top Pick (Buy, target price: TRY 22.0, upside: 29%)
BIMAS – Fairly Valued (Reduce, target price: TRY 61.0, downside: -10%)
BIZIM – Ahead of challenges (Hold, target price: TRY 27.0, upside: 9%)
KILER – Inorganic growth expert (Sell, target price: TRY 2.80, downside: 12%)

We believe in the Turkish food retail sector’s solid growth prospects. We do not reduce the entire retail story to lower prices, nor do we prefer one format to another. We are not devoted to the small store format. We like players that are successful at store execution, that are early adopters of new changes in the market and that boast strong cash flow generation.

MGROS: Migros is set to record better operating margins in 2012, thanks to the sale of its discount arm. The current share price (implying 2012e EV/EBITDA of 10.6x ) presents good entry levels ahead of a possible tender offer opportunity after the likely exit of the current main shareholder.

BIMAS: An exceptional success and growth story, and still the only true hard discounter in the market, for which we have the most bullish growth outlook. However, operational positives are already in the price.

BIZIM: Although we have concerns over the growth story of the wholesale market in general, we believe Bizim Toptan could still deviate from the general trend, thanks mainly to the fragmented structure of the market and limited stake of organized players in total. We welcome management’s greater focus on the HoReCa segment. A change in the company’s business model in the next decade would not surprise us.

KILER: We do not favor Kiler's strategy of investing in inventory, working with a positive cash cycle and targeting higher operational margins, as it is a particularly risky approach, in our view. However, the company could surprise the market with its inorganic growth proficiency and/or by becoming an acquisition target itself.