MIGROS / 3Q12 Results & Update / BUY (Maintained)

 Migros reported a net loss  of TL17mn in 3Q12 (vs. 3Q11 net profit of TL91mn including TL243mn one-off gain on Sok sale), below our estimate due to higher fx losses and hedging expenses than we predicted. Otherwise, operating items were in line.

·         The management maintains FY12 guidance after the results, but adds that new store additions will reach c160 (rather than the guidance at 150) and gross margin will be at the high end of the 25.5%-26% target range. Migros opened 147 stores (gross) as of 9M12 while the gross margin was 26.2%.

·         We have slightly reduced our long-term revenue forecasts (1%-2%) to incorporate slower sales area expansion as the new store additions in smaller formats are likely to dominate the expansion agenda at the expense of larger stores.

·         As for 2012E and 2013E, we have revised earnings estimates to reflect our new currency forecasts after the investment grade rating upgrade from Fitch. We expect 47% higher net profit at TL179mn in 2012E now, as we expect TL to appreciate in 4Q12. Our 2013E net profit forecast, however, is 28% lower at TL68mn as we incorporate slightly higher depreciation in TL in 2013E. The large swings in earnings result from the mostly non-cash fx gains/losses on the company’s EUR1.1bn debt. Near-term repayments are light at EUR5mn in 4Q12 and EUR58mn in 2013.

·         We raise our 12-mth target price for Migros to TL25.7/share from TL23.7/share as we now use a lower risk-free rate of 8.5% in our DCF vs. 9% before. We maintain BUY rating with 36% upside.

·         The stock has underperformed the ISE-100 by 4% and 8% in the last 1 and 3 months respectively. Yet, the investment grade rating from Fitch calls for stronger TL in the near term and presents an opportunity to refinance debt, going forward, in our view. Furthermore, 3Q12 results do not show any negative impact from the new Commercial Code imposing shorter payment terms, as yet. Thus, we expect Migros shares to rebound.

·         We also believe that Migros could deliver higher growth than predicted ahead of an exit of its owners private equity group BC Partners which could take place in 2013E.

·         The main risks to our valuation are a weaker TL than expected resulting in larger fx losses and a less smooth transition to lower payment terms with the new Commercial Code.