Ulker Biskuvi Report

The recent sales pressure on the stock balanced close to the 12,80 level, which is the bottom line of bollinger band. Technically, we have been following a new short-term upward movement starting from the beggining of this week.

The main support level is 12,80. Above that level, 13,50, 13,20 and 13,00 levels can be followed as intermediate supports.

ULKER BISKUVI (Company Update - HOLD (maintained), 14% downside)

• We still find no upside potential despite the upward revision in estimates… Our TP is raised to TL11.6 per share (14% downside potential) from previous TL9.0 per share with some revisions in our estimates. We still do not find Ulker Biskuvi undervalued, the stock trades at 2013E and 2014E EV/EBITDA of 16.3x and 13.6x and P/E of 26.2x and 21.3x, respectively, far above market levels. The stock increased by 103%, y/y, outperforming the index by 64%. We think that the whole turnaround and restructuring story is fully priced in for Ulker Biskuvi.

 

• 2013 and 2014 Guidance: Ulker Biskuvi’s 2013 guidance is as follows: TL2.5bn-TL2.7bn revenues (2012: TL2.34bn, BGC estimate: TL2.64bn), 10-11% EBITDA margin (2021: 9.3%, BGC estimate: 10.9%), and TL110mn capex (BGC estimate: TL114mn). The company plans to invest in the brand in 2013 and plans to elevate marketing expenses by more than 50% to TL100mn. The gross margin is expected to improve slightly due to stabilizing raw material prices, normalized competition and cost cutting efforts. For 2014, 12% EBITDA margin guidance is maintained with the assumption of an improved gross margin with stabilizing commodity prices and increased control on cost base (in parallel to our current estimates).

Ulker Biskuvi (ULKER TI) : Upgrade to OW: Superior performance deserves credit

* Strong margin improvement in 2012 following the acquisition of chocolate business and restructuring

* We expect company to announce EBITDA margins of 9.4% in 2012 and 10.5% in 2013, much higher than 2011's 4.3%

* We raise our target price to TRY11.75 (from TRY8.9) following the cut in our Turkish risk-free rate assumption and rolling forward our DCF period; upgrade to Overweight from Neutral

Strong margin performance in 2012: Ulker Biskuvi reported significant margin expansion for 9M 2012 at both the gross margin and EBITDA margin level. We believe this is mainly due to the acquisition of the higher-margin chocolate business, stable raw material prices, the streamlining of operations and the simplification of the corporate structure, especially the restructuring of domestic distribution channels.

More restructuring and margin improvement to come: In 2012 Ulker Biskuvi carried out restructuring on three fronts - the corporate structure, the share structure and the distribution channel. This has unlocked considerable value. We believe there is further scope for corporate restructuring as well as restructuring of the distribution channel, which could lead to further margin expansion. The company has guided for an EBITDA margin of 12% in 2014 and we believe that Ulker will deliver on its guidance.

ULKER BISKUVI SANAYI A.S. - Valuation is still unattractive: HOLD

Volume growth remained strong in 3Q12
In 3Q12, the company posted TRY42m in net income, above our net income estimate of TRY24m and consensus estimate of TRY28m, due to higher than expected operating performance, fx gains and other income. EBITDA came in at TRY52m, above ours and consensus estimates of TRY41m on strong growth in unit sales across all categories.

Improved profitability thanks to synergies in distribution operation
Despite seasonally weak high margin chocolate confectionary sales, profitability remained decent on volume growth across all categories. New merchandising strategy and low prices of cacao and flour, which account for roughly 20% of total production costs, also helped profitability.

Raising our TP on better than expected earnings growth
We raise our net income and EBITDA estimates by 11% and 44% for 2012 and by 5% and 5% for 2013. Downside risks to our estimates include execution risk of the new strategy, commodity prices and TRY weakness. Low commodity prices pose an upside risk.

Valuation is stretched
We maintain our HOLD rating on the company, which trades on 16.6x P/E and 12.1x EV/EBITDA on 2013 estimates. In our view, most of the potential improvement in operating performance has been discounted in the stock price. We derive our TP using a blended valuation, assigning 50:50 weights to DCF and peer comparable valuations. Higher earnings estimates lead to an 8% increase in our valuation.

Ulker Report - 17/08/2012

In 2Q12, Ulker Biskuvi posted TRY43.3m net income, in line with our net income estimate of TRY43.2m. However, operating performance was better than our expectation. Posted EBITDA of TRY62.0m was above our estimate of TRY48m and consensus estimate of TRY45m as the level of decline in production costs and operating expenses was impressive and unexpected. However, it remains to be seen that decline in operating expenses and production costs was sustainable.

Note that 2Q12 was the first period that the synergies from the merger of distribution and sales arms as well as new merchandising strategy (focusing on high turnover-high margin products) took hold. Moreover, low prices of cacao and flour, which account for roughly 20% of total production costs, also helped the profitability.  Yet, the improvement in profit margins was largely attributed to the cost benefits derived from the merger of distribution and sales arms.

Both y/y and q/q comparison of financials is not possible due to several corporate actions that took place in last one year.

Net debt of the Company increased from TRY218m to TRY414m due to a dividend payment of TRY280m.

Net/Net: As we find the valuation of the Company stretched, we maintain our "HOLD" rating on the Company, which trades on 17.3x P/E and 10.9x EV/EBITDA on 2013 estimates.

Ülker Raporu - Ulker Biscuits

Ulker Biscuits

· Old share type structure: Ülker Biscuits has five share classes: A, B,; C, D and Founders’ shares. Class A, B and Founders’ shares have; privileged dividend rights. Additionally, class A shareholders can; appoint four members of the Board while class B holders can appoint; one member. All classes of shares have voting rights except Founders’; shares.;

 · Cancellation of privileged shares: Under the approved share swap,; holders of class A, B and Founders’ shares, namely Yildiz Holding and; the Ülker family, will relinquish their privileged dividend rights in; exchange for additional class C shares. As a result, the company will; issue 73 million new shares, increasing the total number of outstanding; shares from 269 million to 342 million. Subsequently, Yildiz Holding; and Ülker family ownership will increase to 47.0% and 11.4%; respectively while Dynamic Growth Fund’s shareholdings will decrease; to 20.9%. Free float will decrease to 20.7% although absolute number of; tradable shares will remain unchanged.;

· Financials and valuation: We restate our EPS forecasts based on the; new share count while maintaining all our underlying operational; assumptions; 2012E EPS decreases from TL0.25 to TL0.20 per share.; Based on our DCF methodology and the new number of outstanding; shares we derive a new Dec-12 PT of TL7.00 per share. We remain; Neutral on the stock.

Valuation Methodology and Risks;

Ulker Biscuits (Neutral Price Target: TL7.00);

Valuation Methodolgy :

We rate Ülker Biscuits Neutral. We apply a Discounted Cash Flow valuation to; derive our price target, in order to account for the ongoing margin expansion of the; company. Applying a WACC of 12.0% and terminal growth rate of 5.0%, we derive; a price target of TL 7.00.;

Risks to Our View :

Upside risks to our view: 1) Higher than anticipated growth in the biscuits and cake; markets; 2) Strengthening of the company’s competitive position across markets; 3); Higher growth and margin outlook from the consolidation of Ülker Çikolata; 4); Increase in its free float.;

Downside risks: 1) Potential deterioration of the macroeconomic backdrop in; Turkey; 2) Intensifying competition in the biscuits, chocolate and cake markets; 3); Execution risk of company’s strategy; 4) Potential appreciation of the USD which; would negatively impact exports as well as non-cash FX losses.

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