We downgrade our rating on Turkish hard discount food retailer BIM to Sell from Neutral with a new price target of TRY90 (from TRY91.5), which implies 3% downside vs. average upside for our Turkish non-financials coverage of c.40%. While we like the defensive nature of BIM’s operating environment and financial structure (no debt and no FX exposure), and see it as a key driver of the stock’s outperformance since the start of macro volatility in Turkey, we find this to be priced in with the market not yet reflecting operational headwinds this year.
(1) Full valuation; at a large premium to peers: BIM has outperformed the Turkish main benchmark, BIST-100, by 29% since the start of 2018 and now trades at a c.17% premium to its 3-year history on 12m fwd EV/EBITDA of 13.4x (vs. average 18% discount to history for the rest of our Turkish consumer coverage). BIM’s premium to CEEMEA food retail peers has expanded to c.68% on 12m fwd EV/EBITDA and 35% on P/E. We note that BIM’s premium to key peer Sok (Not Covered) is now c.71% vs. 38% on average since Sok’s IPO in May 2018.
(2) Moderating food inflation should drive LFL normalisation: Basket growth has historically been the key driver of BIM’s LFL growth, with trends in parallel to food inflation. After a year of record high food inflation, we expect a moderation during 2019 with BIM’s LFL slowing to 11% on average in 2019 from c.17% in 2018.
(3) We expect minimum wage increase of c.26% (effective end-Jan) to pressure margins: We expect the wage increase to lead to an opex/sales increase of c.50 bp in 2019, a key source of pressure on margins. We expect BIM to deliver a 2019 EBITDA margin of 5.1%, in line with management’s sustainable level guidance of 5%, yet much lower than the 2018 figure of 5.8%.
Defensive business model and favourable market dynamics on relatively low penetration levels...
Established in 1995 as Turkey’s first hard discount food retailer, BIM today has 6,556 stores in Turkey (as of 9M18) and 16% market share in the Turkish modern food retail market (excluding File branded stores, total of 55 stores as of 9M18). We like BIM’s defensive business model: its focus on price offer of a smaller number of SKUs caters well to the needs of Turkish consumers who tend to shop daily for essential items with price as the key differentiator, making the company resilient to macro volatility. While we highlight the competitive nature of the Turkish food retail market given its fragmented structure (combined share of Top 5 players is 47% vs. 62% in Poland, 82% in South Africa and 67% in the UK), we believe the relatively low penetration of the modern channel offers a favourable environment for long-term growth.
...yet valuation stretched with 12m fwd EV/EBITDA of 13.4x, a premium of 81% vs. our Turkish consumer universe median and 68% vs. CEEMEA food retail
BIM’s shares are up 16% since the start of 2018, implying 29% outperformance vs. the main Turkish benchmark, with the bulk of the outperformance since the start of macro volatility in Turkey from May 2018. We see three factors driving outperformance: (1) the defensive nature of the sector in which BIM operates vs. macro volatility; (2) high food inflation in 2018, reaching c.25% in 2H (vs. an average of 14% over the last five years), driving strong LFL growth as a result of basket growth; and (3) BIM’s strong financial structure with no debt and no operational exposure to FX (which has been a key investor concern for Turkish corporates). Following this outperformance, BIM trades at 12m fwd EV/EBITDA of 13.4x, a 17% premium to its 3-year history and a 68% premium to CEEMEA food retail peers. We note that Turkish consumer stocks trade at an average 18% discount vs. 3-year history.
We see two headwinds in 2019: (1) a slowdown in food inflation impacting basket growth...
Most of BIM’s LFL growth is driven by basket growth rather than by traffic, with a large pass-through of food inflation to the average basket (as c.80% of BIM’s average basket is composed of food). BIM reported basket growth of c.16% as of 9M18 vs. an average of c.9% over the last five years, driven by increasing food inflation in 2018. Our Macro team expects c.800 bp of decline in Turkish CPI (from 20% at end 2018 to 12% at end 2019), with moderation in food inflation also. This should drive BIM’s LFL lower; we expect LFL growth of c.11% in 2019, in line with the company’s historical average.
...and (2) minimum wage increase pressuring margins
The Turkish government increased the minimum wage by 26% at the start of this year (effective end-Jan), ahead of 2018’s average CPI of 17% and our Macro team’s average CPI expectation of 15% in 2019. Wages and salaries make up the largest cost item in BIM’s opex base at c.47%, with c.50% of BIM’s staff on the minimum wage.