Arçelik Report

ARCELIK / Company Update - HOLD (Previously BUY)

2H12E improvement appears priced in 

 

·   Arcelik surprised on the upside with a remarkable 39% revenue growth in 1H12 (27% of which was organic). Yet, the EBITDA margin at 9.9% and net debt doubling over the last 12 months to TL2.5bn limited the impact of the top-line growth on earnings. Arcelik lowered EBITDA margin guidance to 10.5% for 2012 from 11-11.5% (a level deemed sustainable beyond 2012) and pledges to improve working capital.

·   The market share gains in all key markets over the last two quarters have prompted us to revise revenue forecasts up. We now foresee 15-16% higher revenue in 2012-13E compared to before. We expect that EBITDA margin will improve in 2H12 thanks to lower steel costs and the decline in the share of consumer electronics sales in total. We do not expect a further deterioration in working capital but no significant decline in net debt either. As a result, our 2012E/2013E earnings forecasts remain almost unchanged. We forecast 27% earnings growth in 2012E and 19% in 2013E.

·    We downgrade Arcelik to HOLD from BUY as we foresee only 6% total return potential in the stock (including a 4% dividend yield) over the next 12 months. We raise our price target to TL10.2/shr (from TL9.0/shr), as we lower our risk-free rate to 9% and have made some revisions to our long-term forecasts (6-16% higher revenue growth but c70bps lower EBITDA margin). We believe that the expectations of higher EBITDA margin and no further deterioration in working capital requirements in 2H12 are already in the price. The shares have outperformed the market by 32% YTD and 8% over the last month.

·    Further upside for Arcelik would come from a higher than expected white goods demand growth in Turkey in 2013E (our expectation is 6%) and a faster improvement in working capital requirements than foreseen. An acquisition or greenfield investment in a new geography (such as India or North Africa) would also be perceived as further growth drivers.

·    Key risks for Arcelik are lower growth in its operating territories,   increasing competition from other appliance makers globally and appliance retailers in Turkey, higher than predicted raw material prices and a further increase in working capital needs.