ARCELIK - Another 4Q miss: HOLD

In 4Q12, Arcelik’s net profit grew 8% y-y to TRY100m (our estimate: TRY133m, CNBC-e consensus: TRY141m). Unadjusted EBITDA, at TRY242m, (+24% y-y) lagged our TRY268m estimate (consensus: TRY277m). Low tax expense (effective tax rate 2.2%) partially compensated for one-offs reported under “net other expense.”

One-offs contributed to the weakness in 4Q12
Adjusted 2012 EBITDA margin was 9.6% (guidance: 10.5%, our estimate: 10.2%). Arcelik attributes 4Q12 weakness to mix impact in white goods and continuing pressure in electronics from high trade inventory. Arcelik made a TRY15m provision due to the product recall issue, and doubtful A/R provision was high at TRY17m, partly due to Comet’s bankruptcy.

ARCELIK - Downgrading on valuation: REDUCE

Durables GPM improves, electronics GPM deteriorates
In 3Q12, the electronics segment’s revenue growth slowed as expected (+13% y-y, vs +59% in 1H12). The business saw GPM decline by 4ppt y-y, which the company attributed to increased competition as the market slowed. On a positive note, durables GPM improved 1.9ppt q-q thanks to a decline in commodity costs and favourable pricing.

Downgrade to REDUCE (from Hold) on stretched valuation
We raise our 12-month TP to TRY10.36, mostly on a rerating of peers and higher KFS valuation. We think the solid market-share gain in Europe is more than reflected in the share price after the recent outperformance. Arcelik is trading at a premium to peers on 2013E P/E, vs a discount historically. The key risk is inorganic growth creating shareholder value.

We reduce 2012E EPS by 8%, reflecting 3Q12 results
Arcelik maintained its 2012 EBITDA margin guidance at about 10.5% and revenue growth guidance at minimum 20% (our estimate: 27%). Management is aware of the challenges, but believes the margin guidance can still be reached with only a slight miss. However, given the weak seasonality and the fact that one-off costs are usually booked in 4Q12, we lower our EBITDA margin estimate by 0.2ppt to 10.0% and our 2012 EPS estimate by 8%. Working capital sales ratio declined 1.4ppt q-q in 3Q12 to 37.3% (Sep-11: 41%) on 12-month trailing sales. Net debt was almost unchanged at TRY2,473m (Jun-12: TRY2,534m). Arcelik paid TRY43m in dividends to minorities and incurred TRY116m capex in 3Q12.

 

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Arçelik Report

·         Domestic market trends: The latest White Goods Association data pointed to 10% y/y contraction in domestic demand in Turkey in July 2012 (-1% in Jan-Jul ’12). Arcelik states that this is the wholesale data and the data they track at the dealer level (retail data) is much better.

·         Market share gains in Europe is not just because consumers are trading down but also because Arcelik has improved distribution coverage significantly. The retailers win from extended warranties they sell for Arcelik products as the product quality is good. That has enabled them to allocate more shelf space to Arcelik products. Therefore, Arcelik has been able to put a bigger selection on display rather than a limited number as before. That is what is usually referred to as ‘improved mix’.