BGC Partners - PINAR SUT (Company Update - BUY (upgraded), 66% upside)

Capacity increases are on the way… Pinar Sut’s current capacity is 400mn liters, with the new 180mn liters from Sanliurfa and with some capacity expansion moves in its other two plants; the company aims to hit 900mn liters in the next 5 years. Under current set of assumptions, we expect 21% CAGR in the revenues by 2017-end.

 

Incentives in Sanliurfa (6th region) are likely to improve overall margins together with modernization in all facilities… The company’s EBITDA margin emerged at an average of 10.9% between 2000 and 2010 (11.5% between 2005 and 2011). We forecast an EBITDA margin of 9.4% in 2012 vs. the company guidance of 10% (1H12: 8.2%). For the following years, we conservatively forecast an EBITDA margin of 10.5%, which is below historic average. The incentives in the 6th region should have a positive impact on the margins (at least 2pp based on our preliminary assumptions) together with the modernization, efficiency and capacity investments in the other two plants; operating margins should improve slightly going forward.

Year-End guidance signals a better 2H… The company targets 18-20% TL revenue growth (1H12 revenue growth: 20.7%, BGC est: 19.2%) and 10% EBITDA margin (1H12 EBITDA margin: 8.2%, BGC est: 9.4%), which indicate a better operational profitability in 2H12 also confirmed by the consumer milk prices – raw milk prices difference. While raw milk prices were stable, milk product prices started to pick up in August elevating the spread in favor of Pinar Sut.

 

Upgraded to BUY with 66% upside… Using the new capacity expansion plans, we revised our blended valuation up by 17%. Strong top line growth, school milk project, the Government’s efforts to stabilize raw milk prices and improving corporate governance are the main positives. Pinar Sut is a good dividend payer with 6.1% yield on 2012 earnings (we assume payout ratio at 80% vs. 2011’s 89%).

 

Risks… Parent Yasar Holding’s leverage, intra-group transactions, low trading volume and potential future competition in the sector are the main risks.

BGC