Arcelik (Buy, TRY 8.98)

Arcelik reported net income of TRY 121mn (down 4% yoy, cons: TRY 130mn; UCM: TRY 108mn) on EBITDA of TRY 225mn (cons: TRY 215mn UCM: TRY 194mn) with an EBITDA margin of 9.4% (down 2.5pp yoy) and sales of TRY 2.41bn (up 42% yoy, cons: TRY 1.99bn, UCM: TRY 2.12bn). Despite a higher-than-expected top line, the earnings miss was mainly due to lower-than-expected margins, while the bottom line would have been perfectly in line with our estimate excluding tax gain. We revise our estimates upwards and raise our 12M TP to TRY 8.98, which implies 17% upside potential; thus, we upgrade our rating to a BUY. The stock has underperformed the index by 6% since our downgrade (31 Jan 2012).   

Robust growth across all segments. WG revenues were up 37% yoy in 1Q12, driven by: 1. slight market share improvement in the domestic market, which grew by 1% in 1Q12; 2. inclusion of Defy (13% impact); 3. 15% volume growth in total export shipments by Turkish producers coupled with a stronger EUR/TRY (up 9% yoy). Management indicates continued market share expansion in Western and Eastern Europe, of which WG demand contracted 5% yoy and was flat yoy, respectively, in 2M12. Electronics sales grew 52% yoy driven by strong growth in the domestic market (25%-30%) for LCD TVs and market share gains of Grundig brand in export markets as well as currency impact. 

Margins under pressure...outlook is improving. The EBITDA margin was down 2.5pp yoy at 9.4% (UCM: 9.2%; cons: 10.8%) due to weak WG gross margins, which were down 3.9pp yoy (up 1.2pp qoq), driven by 1. higher input costs due to high inventory levels at year-end (average cost inventory method) with the lower cost inventory to be reflected in COGS in 2Q12 (locked-in prices in Dec’12); 2. discounts on selective appliances to drive energy efficiency initiative in 2M12 (no longer applicable). Electronics gross margin was flat yoy at 21.2%, despite a weaker EUR/USD with currency mismatch in revenue-cost structure. NWC as % of revenues declined to 38% from 40% in 4Q11.

2012 guidance maintained despite strong growth in 1Q12. Management maintained its +20% sales growth driven by 5% growth in domestic WG volumes and +20% growth in export volumes; the EBITDA margin is expected to be 11%-11.5% in 2012. In light of the 1Q12 results, the risk seems to be to the upside for growth, while attaining margin guidance may be an uphill battle given weak seasonality in 4Q11.  

Upgrade to a BUY. While Arcelik posted broadly in-line operational figures in 1Q12, we believe the worst is over from input cost pressure and domestic pricing pressure due to temporary discounts in 1Q12. We foresee accelerating earnings growth for the rest of 2012 and revise our estimates slightly upwards, reflecting strong growth in 1Q12, and raise our TP to TRY 8.98 on the back of revised estimates and higher peer multiples, denoting 17% upside potential. ARCLK is trading at 10% and 27% discount to peers on 2012E adj. EV/EBITDA and P/E multiples.