TEKNOSA Report 09/08/2012

TEKNOSA - Initiation of Coverage - Recommendation: "BUY" – Target Price: TL10.0 – Upside Potential: 33%

Market leader sitting on ample cash 

·     We initiate coverage of Teknosa with a BUY rating. A Sabancı Holding <SAHOL TI> company, Teknosa is the largest consumer electronics retailer in Turkey in terms of the number of stores and revenue. According to the research firm GfK, Teknosa holds 45% market share in technical super stores (TSS) channel of the market which company operates in.

·     Teknosa’s strong brand name, leading market position, Sabanci Holding backing and net cash position (TL116mn at 1H12-end) suggest high growth potential given the low per capita technology spend in Turkey and the highly fragmented nature of the industry. We project that Teknosa will attain a 2011-14E revenue and earnings CAGR of 20% and 21% respectively. We do not incorporate any contribution from Teknosa’s recently launched online shopping website www.kliksa.com and highly likely inorganic growth into our model.

·     Starting in 2H10, Teknosa switched from a purely growth oriented strategy to profitability oriented strategy. Teknosa addresses the needs of clients through directed marketing tools, flexible payment terms offered with bank credit cards and Turuncu Card, a loyalty program. Furthermore, effective inventory and CRM management that combines “Scientific Retailing” integrating sales and inventory management and pricing and diversification of product portfolio by store/region, have been implemented since 2006. Those initiatives set Teknosa apart from competition. The company managed to increase EBITDA margin from 2.9% in 2010 to 5.2% in 2011 and aims to maintain EBITDA margin in the 5-6% range. We conservatively assume low-end of the target range at 5.0-5.2% in our model.

·     Teknosa management provided guidance on 2012 earnings. Our forecasts are in line with the guidance and we project 26% adjusted earnings growth in 2012E.

·     We value Teknosa using DCF. Our 12-mth target price is TL10.0/share, pointing to a 33% total return potential. Teknosa trades at a discount to whole domestic retailers and at premium to global peers but offers stronger revenue growth prospects.

·     Key risks to our recommendation include a sharp economic contraction, stiffer competition and potential changes to the operating environment that may result in slower store growth. Low free float at 10% and potential shareholder sales after the expiration of the lock-up period in November also pose risks.