Teknik Analiz - Migros

Load Up Your Baskets;

We are upgrading Migros to BUY/OP from Hold/MP, on the back; of its i) attractive valuation -- trading at about half BIM’s 2012F; EV/EBITDA; ii) recent share price underperformance -- 42%; since the SPO in Apr’11; and iii) earnings outlook -- improved; margins following SOK divestiture.;

Supermarket focus -- Following the sale of discounter SOK to; Yildiz Group, Migros renewed its focus on the supermarket; segment, where it maintains its leadership position. The Company; currently has 717 stores branded Migros, Tansas, and the new; convenience store concept M-Jet, which we believe fills the gap; between traditional groceries (expensive) and discounters (small; SKU), especially in small neighbourhoods. We forecast 102 new; store openings for 2012 (+14.2% yoy).;

Margin improvement -- Being a loss-making entity, SOK had; been hurting Migros’ margins recently: an average of 4.4% EBITDA; margin over 4Q10-1Q11, which surged to 7.2% in 3Q11.; Sustainable levels could be lower at c.6.5%, in our view, as; management could reinvest into prices to generate traffic during; economic slowdown.; 

EUR debt is long-term -- As at 3Q11, Migros had EUR1.05bn of; long-term debt, with interest payments of Euribor+3.95. The loan; schedule involves no repayments until Nov’13 (EUR58mn), with the; majority (71%) due after 2016. Moreover, assuming the recent; EUR weakness against the TRL would continue throughout; 2012, we could see a large positive swing at the bottom; line driven by FX gains.;

Share overhang? -- The 80.5% stakeholder BC Partners’ plans to; sell a further stake is not an immediate concern, in our view. We; calculate that BC has made a net cash outflow of EUR324mn until; now, while selling the shares at the current price level would imply; a mere 9.1% IRR.; § Marked underperformance -- The share price has dropped 55%; since the SPO in Apr’11, underperforming the ISE-100 by 42%.; Moreover, it has underperformed 9.2% ytd.;

Risks -- Slower-than-expected store openings, stiffer price; competition, EUR/TRL volatility, and further SPO discount.

EFG Istanbul Securities