Pinar Sut - İş Yatırım

Re-initiating Coverage
Equity / Mid Cap. / Beverages
14 July 2011
OUTPERFORM
Pinar Sut
Upside Potential*
Bloomberg: PNSUT TI
Reuters: PNSUT IS
Offers Healthy Growth at reasonable price
Stock Data
TRY
16.15
9.79
12-Month Target Price
19.64
12.55
440
Mcap (mn)
726
Float Mcap (mn)
232
Modernization is the major growth driver
Free Float (%)
The Turkish dairy industry is in a modernization process, presenting a
significant growth potential for modern dairy processors, considering only
27% of the total raw milk is processed by modern producers and 33% is
processed by small traditional operators. Thus, the shift from traditional
operators to modern producers will be the main growth driver of the Turkish
dairy industry, while allowing a better utilization of the existing capacity.
Avg.Daily Volume (3M, mn)
Being the first UHT milk and packaged dairy product processor utilizing
modern technologies, Pinar Sut is the leading dairy producer holding 16.5%
market share in terms of value thanks to its strong brand name and
recognition. Furthermore, the company realized 21% of Turkey’s dairy
products exports in 2010.
No. of Shares Outstanding
Guarantees to Yasar Group’s loans poses a risk
2009
481
70
58
3.7
5.1
1.29
4%
2010
2010
577
62
60
7.0
10.7
1.34
12%
2011
2011E
650
82
69
10.6
8.8
1.52
7%
0.7
TRY
63,261
US$ Spot Rate
1.6498
US$ 12-Month Forw ard
1.7287
Price Performance (%) 1 Mn
TRY
US$
Relative to ISE-100
1
-3
2
3 Mn
12 Mn
13
5
20
114
102
97
Price / Relative Price
TL
Relative
300
250
200
10.0
150
100
5.0
50
PNSUT
0.0
01-09
350
Relative to ISE 100
11-09
09-10
52 Week Range (Close TRY)
0
07-11
7.82
16.75
Ilyas Safa Urganci
[email protected]
+90 212 350 25 52
Esra Suner
Similar to other Pinar Group companies, Pinar Sut is guarantor for Yasar
Holding loans amounting to TL 633mn, as of end of March 2011. This intragroup relationship has been a factor causing a discount in trading multiples
of the company with respect to peers.
Key Estimates (TL mn)
PNSUT
Sales
EBITDA
Net Income
P/E (x)
EV/EBITDA (x)
EPS
Dividend Yield (%)
32.00
1.0
ISE 100
20.0
Revenues of Pinar Sut grew consistently at a CAGR of 12% between 2005
and 2010 thanks to both sales volume growth and price increases. Similar
15.0
to its past record, we project 12% top-line growth over the next ten years.
Determined by market conditions, the raw milk prices are volatile due to the
imbalance of supply and demand in the industry. Supply exceeds demand
during spring months due to high delivery rates, while the situation is just
the opposite during autumn with the start of the school season. In addition,
high feed costs are another disadvantage for raw milk producers. We deem
that any potential milk powder support by the government to the dairymen
may serve to stabilize the prices. Despite of its strong market position, the
company may not fully reflect the raw material price hikes to its product
prices due to the fierce competition in the market, as was witnessed back in
2010 following an increase in raw milk prices. In 2011, increased supply of
livestock through imports eased raw milk prices, supporting company’s
margins.
141
45 mn
Market Data
Sustainable revenue growth thanks to market share and pricing power
Volatility in raw milk prices and margins
US$
Price at 13 07 2011
We re-initiate our coverage for Pınar Sut with OUTPERFORM
recommendation, with a 12 month target share price of TL19.6,
implying 22% upside potential.
Market leader thanks to its strong brand recognition
22%
2012
2012E
743
92
78
9.3
7.9
1.73
8%
Please refer to important disclaimer at the end of this report.
[email protected]
+90 212 350 25 72
2013
2013E
842
102
85
8.6
7.1
1.89
9%
1
14/07/2011
Pinar Sut
Sum m ary of Key Financials (TL m n)
Incom e Statem ent (TL m n)
Revenues
EBITDA
Depreciation & Amortisation
EBIT
Other income (expense), net
Financial expenses, net
Minority Interests
Income before tax
Taxation on Income
Net income
Cash Flow Statem ent (TL m n)
Net Income
Depreciation & Amortisation
Indemnity Provisions
Change in Working Capital
Cash Flow from Operations
Capital Expenditure
Free Cash Flow
Rights Issue
Dividends Paid
Other Cash Inflow (Outflow )
Change in net cash
Net Cash
Balance Sheet (TL m n)
Tangible Fixed Assets
Other Long Term Assets
Intangibles
Goodw ill
Long-term financial assets
Inventories
Trade receivables
Cash & equivalents
Other current assets
Total assets
Long-term debt
Other long-term liabilities
Short-term debt
Trade payables
Total Debt
Other short-term liabilities
Total liabilities
Minority Interest
Total equity
Paid-in capital
Total liabilities & equity
Ratios
ROE (%)
ROIC (%)
Invested Capital
Net debt/EBITDA (x)
Net debt/Equity (%)
Capex/Sales (%)
Capex/Depreciation (x)
EBITDA Margin
EBIT Margin
Net Margin
Valuation Metrics
EV/Sales (x)
EV/EBITDA (x)
EV/IC (x)
P/E (x)
FCF yield (%)
Dividend yield (%)
*based on average Mcap during the year
2
3
2009A* 2010A*
481
577
70
62
13
13
56
48
10
17
5
6
0
0
71
71
(13)
(11)
58
60
4
5
2011E 2012E
650
743
82
92
16
18
66
74
15
17
4
7
0
0
86
97
(17)
(19)
69
78
6
2013E
842
102
20
82
19
5
0
106
(21)
85
58
13
1
(45)
27
(4)
31
0
7
(17)
7
(17)
60
13
2
23
98
31
67
0
51
3
19
2
69
16
0
49
133
50
83
0
51
(43)
(11)
(9)
78
18
0
(4)
92
30
62
0
55
0
8
(1)
85
20
0
(5)
100
34
67
0
62
(8)
(4)
(5)
212
12
0
0
38
37
136
3
3
479
15
31
5
72
20
2
129
0
350
45
479
231
12
0
0
53
50
120
17
4
533
13
34
2
93
15
1
148
0
385
45
533
265
56
0
0
53
57
77
20
5
580
14
38
14
105
28
2
177
0
403
45
580
277
55
0
0
53
66
88
22
6
620
14
43
9
120
23
2
194
0
426
45
620
290
62
0
0
53
75
99
25
6
672
15
49
15
136
30
2
224
0
448
45
672
18.3
15.0
314
0.24
4.78
-0.75
-0.3
14.5
11.7
12.0
16.3
12.4
309
-0.04
-0.59
5.44
2.4
10.7
8.4
10.4
17.4
17.6
295
0.11
2.13
7.70
3.2
12.6
10.2
10.5
18.8
19.5
310
0.01
0.19
4.00
1.7
12.3
9.9
10.5
19.4
20.5
328
0.05
1.08
4.00
1.7
12.1
9.7
10.1
0.7x
5.1x
1.1x
3.7x
14%
4%
1.1x
10.7x
2.1x
7.0x
16%
12%
1.1x
8.8x
2.5x
10.6x
11%
7%
1.0x
7.9x
2.3x
9.3x
9%
8%
0.9x
7.1x
2.2x
8.6x
9%
9%
Shareholder Structure
38.8%
61.2%
Yasar Holding A.S.
Other
Company Overview
Production of all dairy products ( milk,
yoghurt, yoghurt drink, traditional and
modern cheeses, butter, cream) as w ell as
fruit
juices,
mayonnaise,
ketchups,
puddings, honey, sauces, jams and jellies,
desserts and pow dered products.
2
14/07/2011
Pinar Sut
Investment
Summary
INVESTMENT POSITIVES
The shift from traditional operators to modern producers promises large growth
potential for the dairy industry
The Turkish dairy industry is in a modernization process offering significant growth potential for modern dairy processors, considering that only 27% of the total raw milk is
processed by modern producers and 33% is processed by small traditional operators.
The shift from traditional operators to modern producers combined with improvement in
capacity utilization rates through increasing returns to scale will be the main growth
driver of Turkish dairy industry. In addition, growing trends towards packaged products,
increasing number of working woman, demand towards hygienic packaged products
through improved consumer awareness are expected to support the growth story of
modern dairy producers.
Market leader in total dairy products with a strong brand recognition
Being the first UHT milk and packaged dairy product processor utilizing modern technologies, Pinar Sut is the leading dairy processor holding 16.5% market share in terms of
value thanks to its strong brand recognition. Furthermore, the company realized 21% of
Turkey’s dairy products exports in 2010. A research made by Ipsos in 2010, suggests
that “Pınar” is the first dairy brand name that comes to people’s mind in Turkey. The Pinar brand is also well-recognized in international markets, especially in Gulf region,
thanks to its reputation of labaneh cheese.
Has adequate production capacity to accommodate growth
Pinar Sut has the capacity to process 1,100 tons raw milk per day in its Izmir and Eskisehir plants. Considering 56% CUR at the two facilities in 2010 on average, we believe that
the company has adequate capacity to meet rising demand. Indeed, total production
volume of the company increased continuously at a CAGR of 6% in the last five years
climbing up to 262K tons in 2010. The company plans TL45-50mn cap-ex in 2011, highest figure over the past five years, for modernization and renovation, in order to increase efficiency.
Sustainable revenue growth thanks to market share and pricing power
Revenues of Pinar Sut grew consistently at a CAGR of 12% between 2005 and 2010
thanks to both sales volume growth and price increases. Similarly, we project 12% topline growth over the next ten years.
Extensive distribution network via Yasar Group’s logistics company
Pinar Sut’s products are distributed by Yasar Birlesik Pazarlama, a group company,
throughout Turkey. YBP’s extensive sales and distribution network in Turkey brings a
comparative advantage to the company over its rivals as YBP distributes Pinar Sut’s
products to more than 150K sales points.
High dividend distribution policy
Similar to Yasar Group’s other listed food companies, Pinar Sut distributes generous
dividends pleasing its investors with high yields. While average dividend payout ratio of
the company stood around 65%, the dividend yield ranged between 4.0% and 11.8% for
the last five years. We expect the company to maintain its high dividend payment
strategy and estimate TL54mn dividends to distribute from its 2011E net income,
pointing out a dividend yield of 7%
Discounted multiples compared to international peers
PNSUT trades at large discount with its 2011E P/E and EV/EBITDA multiples of 10.8x
and 8.8x, compared to its global peers median of 26.2x and 14.7x, respectively. The
guarantee offered for the debt of the parent company has been the major reason for the
discount with respect to peers. However, the discount has narrowed down recently, as
Yasar Group, the parent, has succeded to roll-over its debt.
3
14/07/2011
Pinar Sut
Investment
Summary
INVESTMENT NEGATIVES
Inherent volatiliy in raw milk prices may pressure margins
Determined by market conditions, raw milk prices are volatile due to the imbalance of
supply and demand in the industry. Supply exceeds demand during spring months due
to high delivery rates, while the situation is just the opposite during autumn with the start
of school season. In addition, high feed costs are another crucial problem for raw milk
producers. We believe that the price of raw milk must be stabilized at a sustainable level
in the future so that the dairy industry can achieve healthy growth. In addition to that any
potential milk powder support by the government to the dairymen may ease the risk factor. Raw milk prices depicted a rising trend during 2010, soaring by 32% Y-o-Y, stemming from high stock-farming costs due to high feed prices. However, raw milk price
hikes eased in 4Q10 mainly due to the government’s livestock import allowance which in
-turn increased cattle supply. The rising trend of raw milk prices slowed down in 2011
and the prices are 15% lower compared to same period last year as of 1H11.
Guarantees to Yasar Group’s debt is a risk factor
Prior to the redemptions in 2009 and 2010, Yasar group had a total of €319mn debt,
including €200mn Troy Capital notes due 2011 and €119mn loans from Morgan Stanley
due 2013. On October 5th 2010, Yasar Holding used USD250mn loan participation notes
with a maturity of 5 years from Barclays Bank PLC which were used for the refinancing
of the loans. Yasar Holding closed out large portion of Troy Capital notes of which only
€76mn remains. Besides, the group redeemed €94mn of Morgan Stanley loans through
early redemptions in 2009 and 2010. Similar to other Pinar Group companies, Pinar Sut
is guarantor for Yasar Holding loans amounting to EUR95mn and US$275mn, as of
March 2011.
Competitive pressures challenging margins
In order to defend its strong market share, the company may face with higher marketing
expenses in the future due to higher competition from increasing number of brands in
packaged dairy products industry. Moreover, despite of its strong market position, the
company may not fully reflect the raw material price hikes to its product prices due to the
competitive pressures. Please recall that, while raw milk prices soared by 12% on average within past five years, average retail prices of the drinking milk increased only 5%
according to TURKSTAT, which is well below average CPI figure, implying that the companies were not able to reflect rising raw milk prices on product prices due to competition. In 2011, increased supply of feedstock through imports eased raw milk prices, supporting company’s margins.
4
14/07/2011
Pinar Sut
Valuation &
Recommendation
We have used discounted cash flow (DCF) analysis method to value Pinar Sut, as we
believe it will be an appropriate method to reflect the growth potential of the company.
We reached an equity value of TL883mn for PNSUT corresponding to 12 month target
price of TL19.6, implying 22% upside potential.
Key Assumptions for our DCF model:
•
Our projection period is ten years from 2011 to 2021.
•
We have assumed total raw milk production and consumption volume of Turkey
to increase at a CAGR of 3.2% during our projection period which is lower than
the estimated GDP growth rate. However, more importantly, we estimate the
share of raw milk used by modern processors such as Pinar Sut to reach 44% by
2021 from the current level of 27%. We believe that main growth potential of
Pınar Sut will come from the rising share of modern processors in the industry,
supported by the convergance to EU.
•
We anticipated per capita milk consumption ( milk equivalent dairy products ) to
be 211 lt by 2021 from estimated 173 lt in 2011, growing at a CAGR of 2%.
•
Pinar Sut’s value share of 16.5% in total dairy products processed by modern
processors is kept constant during our forecast period.
•
We projected an annual 12% top-line growth over the next ten years similar to its
past track, which is driven by 6% sales volume growth and 6% average price
hike, which is in-line with our average CPI inflation estimate.
•
The key factor affecting the profitability of Pinar Sut is the level of raw milk prices.
As mentioned earlier, the raw milk prices are volatile due to the imbalance of supply and demand conditions in the industry. Please recall that, average raw milk
prices surged by 34% Y-o-Y in 2010 which in turned led to a sharp decline in
gross margin to 18% in 2010 from 22% in 2009. However, raw milk price hikes
eased starting from 4Q10 mainly due to the government’s livestock import allowance which in-turn increased cattle supply. The rising trend of raw milk prices
slowed down in 2011 and the prices are 15% lower during the first half of the year
compared to same period last year. Accordingly, we anticipate gross margin to
recover 19.5% in 2011, thanks to the decline in raw milk prices. Besides, we forecast gross margin to improve 20% in 2021 from 18% in 2010 due to balancing of
supply and demand in the raw milk production.
•
The company managed to lower its operational expenses / sales ratio from 13.4%
in 2005 to 9.6% in 2010 with the help of the decline in distribution expenses
thanks to the centralized distribution of Yasar group companies products conducted by Yasar Birlesik Pazarlama. In order to defend its strong market share,
the company may face with higher marketing expenses in the future due to competitive pressures from increasing number of brands in packaged dairy products
industry. Thus, we estimated opex / sales ratio to float in the range of 9%-10%
during the projection period.
5
14/07/2011
Pinar Sut
•
Thanks to improving gross margin, we projected company’s EBITDA margin to
climb to 12.6% in 2021 up from 10.9% in 2010.
•
The company’s capacity utilization rate was 56% in 2010, while the facilities have
adequate infrastructure to meet the expected production growth during our ten
year projection period. Accordingly, our cap-ex assumptions comprise of only
maintenance and infrastructure cap-ex. Pinar Sut expanded its production capacity by 30% at its Eskisehir plant reaching a total processing capacity of 300mn
liters with an investment of TL14mn in 2010. The company budgeted TL45-50mn
cap-ex for 2011 regarding to modernizations, renovations and infrastructure. We
forecast an average cap-ex / sales ratio of 4%, during the projection period.
•
The average working capital requirement over sales ratio of the company ranged
between 7% and 20% between 2005 and 2010. The company had an average
receivable days of 33, payable days of 60 and inventory days of 36 for the past 5
years, resulting in a cash conversion cycle of 9 days. Changes in short term trade
receivables from related parties due to restructurings of the parent company’s
debts are the main reason of fluctuations in working capital over sales ratio. We
foresee the company will be able to maintain its WCR / sales at 10.9% during the
forecast period.
•
We have incorporated financial assets portfolio of the company to our valuation.
The company has 12.6% and 8.8% stakes at listed Pınar Et (PETUN) and Pinar
Su (PINSU), respectively. Pinar Sut has also stakes at group compnaies,
including YPB and Desa Enerji, which are included in our valuation based on their
book values. All in all, we calculate TL 55mn total value contribution from
subdiairies.
•
We have calculated a TL based WACC of 12.7% in our analysis for PNSUT,
based on a risk free rate of 9.5% and equity risk premium of 6%.
•
We have projected 5% terminal growth rate after 2021.
FIGURE 1: WACC
WACC
Risk Free Rate
Equity Risk Prem ium
Beta
Cost of Equity
After Tax Cost of Debt
D/(D+E)
Term inal Grow th
12.6%
9.5%
6.0%
0.50
12.5%
14.4%
7%
5%
FIGURE 2: DCF ANALYSIS
DCF Analysis ( TLm n )
2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
2021
Net Revenues
650
743
842
947
1,059
1,181
1,316
1,457
1,613
1,776
1,955
Gross Profit
127
142
162
183
206
230
258
287
319
354
391
66
74
82
92
103
115
127
142
159
179
202
-13
-15
-16
-18
-21
-23
-25
-28
-32
-36
-40
16
18
20
23
25
28
32
34
37
41
45
2
-10
-11
-11
-12
-13
-15
-16
-17
-18
-20
-50
-30
-34
-38
-42
-47
-53
-58
-65
-71
-78
EBIT
Tax on EBIT
Depreciation Expenses
Change in WC
CAPEX
Free Cash Flow
21
37
41
47
53
59
66
73
83
95
109
Discount Factor
1.0
1.1
1.3
1.4
1.6
1.8
2.0
2.3
2.6
2.9
3.3
DCF
21
33
32
33
33
33
32
32
32
33
33
Firm Value
Net Debt (2011e)
Core Business Equity Value
Financial Assets and Subsidiaries
Target Equity Value - 1H12
1,495
455
782
-9
773
58
883
12 mnth Share Price
19.64
Current MCAP - TL
16.15
Upside
TV
22%
Source: IS Investment Estimates
6
14/07/2011
Pinar Sut
FIGURE 3: Valuation Assumptions
2010A
Raw Milk Consumed - mn ton
2011E
2012E
2013E
2014E
2015E
2019E
2020E
2021E
CAGR
3.2%
12
13
13
14
14
15
17
17
18
3.2%
3.2%
3.2%
3.2%
3.2%
3.2%
3.2%
3.2%
3.2%
Farmers
20%
19%
18%
17%
16%
15%
11%
10%
9%
Direct Street Sales
20%
19%
18%
17%
16%
15%
11%
10%
9%
Mandıras
33%
34%
34%
35%
35%
36%
38%
38%
39%
M odern Processors
27%
29%
30%
32%
33%
35%
41%
42%
44%
Per Capita Milk Consumption - kg
170
173
177
180
184
187
203
207
211
growth %
Distribution of Raw Milk
Pınar Sut Sales Volume - ton
Market Share - volume based
261,641 277,398 295,578 314,642 334,628 355,576 449,833 476,242 503,886
16.5%
16.5%
16.5%
16.5%
16.5%
16.5%
16.5%
16.5%
16.5%
Revenues - m n TL
577
650
743
842
947
1,059
1,613
1,776
1,955
growth %
20%
13%
14%
13%
12%
12%
52%
10%
10%
Gross Margin
18.0%
19.5%
19.1%
19.2%
19.3%
19.4%
19.8%
19.9%
20.0%
Opex / Sales
9.6%
9.6%
9.4%
9.7%
9.8%
9.9%
10.2%
10.1%
9.9%
63
82
92
102
115
128
196
220
247
10.9%
12.6%
12.3%
12.1%
12.1%
12.1%
12.2%
12.4%
12.6%
EBITDA - m n TL
EBITDA Margin
Cap-ex / Sales
3.9%
7.7%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
WCR / Sales
12.7%
11.0%
10.9%
10.9%
10.9%
10.9%
10.9%
10.9%
10.9%
2.0%
6.2%
11.6%
Source: IS Investment Estimates
INTERNATIONAL PEERS
PNSUT trades at large discount at 2011E P/E and EV/EBITDA of 10.6x and 8.8x, respectively compared to its global peers median of 26.2x and 14.7x. We deem that company’s guarantees for Yasar Group’s debt, smaller size in comparison to global players,
and low trading volume are the main reasons behind the discount. However, the discount
has been narrowing down recently, supported by positive operating performance and
Yasar group successfully rolling over its debt.
FIGURE 4: PEER COMPARISON
MCAP
TICKER
COMPANY
USD m n
EV/Sales
COUNTRY
EV/EBITDA
2011
2012
2013
2011
P/E
2012
2013
2011
2012
2013
DF US
DEAN FOODS CO
1,887
USA
0.5
0.5
0.5
8.0
7.4
6.9
16.7
13.0
10.3
LWAY US
LIFEWAY FOODS
150
USA
2.7
2.6
n.a
15.3
14.4
n.a
27.8
30.4
n.a
MJN US
MEAD JOHNSON
12,110
USA
4.2
3.8
3.6
15.9
14.3
13.3
25.2
22.0
19.9
WBDF RU
WIMM-BILL-CLS
5,588
RUSSIA
2.2
1.8
1.7
17.1
13.8
11.7
31.6
24.2
n.a
600887 CH INNER MONG YIL-A
4,304
CHINA
0.8
0.7
0.6
14.1
11.5
9.4
27.2
21.1
16.6
2319 HK
4,947
HONG KONG 0.9
0.8
0.7
12.1
9.6
7.9
23.8
19.0
15.7
1.5
1.3
0.7
14.7
12.7
9.4
26.2
21.6
16.2
CHINA MENGNIU DA
MEDIAN
PNSUT TI
440
Discount/Prem ium to global peers
TURKEY
1.1
1.0
0.9
8.8
7.9
7.1
10.6
9.3
8.6
-28%
-26%
29%
-40%
-38%
-25%
-60%
-57%
-47%
Source: Bloomberg & IS Investment Estimates
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14/07/2011
Pinar Sut
Sectoral Overview
The Turkish dairy processing industry (which includes both drinking milk processing and
dairy products and excludes non-registered milk processing at homes and farms) constitutes about 0.4% of GDP and around 0.2% of total employment as of 2010. Turkey is the
15th largest raw milk producer in the world with 12.5 mn tons of production in 2010, while
total world production p.a. is approximately 714 mn tons. Raw milk production in Turkey
has grown at a CAGR of 2.8% during the last 10 years, while per capita consumption of
raw milk surged at a CAGR of 2%. Raw milk production accounts for approximately 45%
of total livestock operations in Turkey and 10% of country’s agricultural production.
FIGURE 5: Number of Animals & Raw Milk Production
tons
'
000 head
13,500,000
17,500
13,000,000
17,000
12,500,000
16,500
12,000,000
16,000
11,500,000
15,500
11,000,000
15,000
10,500,000
14,500
10,000,000
14,000
2005
2006
2007
2008
Raw Milk Production
2009
2010E
2011E
Number of Animals Milked
Source: TUIK
According to the figures of SETBIR (2010), 20% of total raw milk production is utilized on
-farm by farm members, 20% is sold by direct sales (mainly on streets), 27% is processed in modern processors and remaining 33% is processed in small traditional operators-mandiras. A considerable amount of raw milk is processed by small-scale, labor
intensive processing units, mandıras, majority of which are run unregistered. Besides,
mandıras do not possess milk collection or distribution systems.
FIGURE 6: Raw Milk Usage - 2010
On-farms
20%
Open
markets
20%
Smallscale
traditional
operators
'mandıras'
33%
Modern
processors
27%
Source: ASUD
While modern dairy processors are quite productive, mandıras operate at only one-third
of the modern dairy processors’ productivity. We believe that EU conformity will foster
the development in Turkish dairy industry. In addition, changing consumption habits in
favor of more hygienic packaged products, thanks to the improvement in education, urbanization and income level also affects positively the sector on going forward.
8
Pinar Sut
Per capita milk equivalent dairy products consumption in Turkey stands at 166 lt in 2010
(26lt drinking milk, 140 lt dairy products (milk equivalent)) which is far below 255 lt in US
and 262 lt in EU. The main difference comes from drinking milk consumption, considering per capita drinking milk consumption rates of 89 lt in EU and 83 lt in US. On the other
hand, per capita cheese consumption in Turkey was 92 lt constituting around 55% in
total milk equivalent dairy consumption in 2010. According to a study by Tetrapak, per
capita drinking milk consumption is estimated to grow at a CAGR of 2.4% in three years
reaching 28 lt by 2013.
FIGURE 7: Per Capita Drinking Milk Consumption - lt - 2010
UK
Germany
India
Iran
Canada
Argantina
USA
Australia
EU 27
Turkey
liter
0
20
40
60
80
100
120
Source: TUIK & International Dairy Federation
The quality of raw milk and high seasonality of raw milk prices are the major problems of
Turkish dairy sector. The raw milk prices in Turkey are determined by free market conditions. Raw milk supply exceeds demand during spring months due to high delivery rates,
while the situation is just the opposite during autumn as a result of beginning school season. This supply – demand imbalance causes serious price instability in the industry.
Milk producers accuse milk processors of forming a monopoly and pushing prices down.
In Turkey reference prices are set about three months in advance via negotiations between major producers and processors. Biga and Burdur are the main provinces where
milk processors and producers negotiate milk prices. Additionally, high feed prices
causes high stock-farming costs for raw milk producers, leading volatility in profit margins
of both raw milk producers and dairy processors. It is noteworthy to note that, average
raw milk prices soared 32% Y-o-Y in 2010, while average retail prices of drinking milk of
the industry increased only 8% Y-o-Y due to aggressive price competition in the market.
FIGURE 8: Raw Milk Prices
TL/lt
0.9
0.8
0.7
0.6
0.5
0.4
0.3
Jan
Apr
July
October
Jan
Apr
July
October
Jan
Apr
July
October
Jan
Apr
July
October
Jan
Apr
July
October
Jan
Apr
July
October
Jan
April
July
14/07/2011
2005
2006
2007
2008
2009
2010
2011
Source: Setbir
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14/07/2011
Pinar Sut
Raw milk prices depicted a declining trend in the first half of 2011 declining 13% Y-o-Y to
the average of TL0.64 liter on the back of increase in the number of herds as a result of
imported livestock. We anticipate raw milk prices to be at TL0.70 on average in 2011,
lower than the average of TL0.76 in 2010.
In order to prevent instability of milk prices arising from supply-demand imbalance, Turkish Ministry of Agriculture allocated TL50mn incentives for 18K tons milk powder production for domestic consumption and 20K tons exports. The government projects to take off
380K tons of milk through the incentives. However, we believe that the price of raw milk
must be stabilized at a sustainable level in the future so that the dairy industry can survive and thrive.
According to FAO, there are more than 200 enterprises in the dairy processing industry
of Turkey. Yet according to SET-BIR, five big scaled enterprises produce 41% of the
dairy products in the processing industry. Being the market leader in terms of raw milk
processing capacity, Ulker Group has a daily dairy products processing capacity of 2,100
tons per day and targets to expand its total processing capacity to 3,500 tons per day
with its new plant opened in Kahramanmaras. Since most of the milk produced is used
internally by the group companies for biscuits and chocolate production, Ulker holds second place in terms of market share following Pınar Sut.
FIGURE 9: Raw Milk Processing Capacities tons/day
2,500
2,000
2,100
1,500
1,000
1,200
1,100
Sutas
Pinar Sut
1,000
1,000
Yorsan
Danone
500
Ulker Group
Source: State Planning Organization
Pinar Sut is the market leader in the domestic market having a market share of 16.5% in
total dairy products in terms of value, based on Nielsen - September 2010 data, while it
realized 21% of Turkey’s dairy exports in 2010. Ulker, Sutas, Danone and Yorsan are
major rivals of Pinar Sut in the domestic market. When we look at product categories,
Pınar Sut is the market leader in total UHT and UHT Light Milk categories with 26% and
59% market shares respectively. Besides, the company holds the major share by 39% in
Market leader in the domesthe spreadable cheese segment.
tic market having a market
share of 16.2%
FIGURE 10: Market Shares
Pınarsut
16.5%
Others
44.2%
Ulker 15.6%
Danone
Sek
7.3%
6.5%
Source: AC Nielsen
10
14/07/2011
Pinar Sut
Company Profile
YASAR GROUP
Established in 1945, Yasar Holding is one of Turkey’s leading food, beverages and consumer products group. Besides food and beverage, the Group engages in paint and tissue paper businesses. The Group is also involved in tourism activities, operating a holiday resort, named Altınyunus, located at Cesme/ Izmir.
Food Division
The group started its food operations in the dairy sector with the establishment of Pınar
Sut back in 1975. Later on, the group entered meat segment founding Turkey’s first integrated meat processing facility in 1985. Having built up a strong brand recognition over
the years, Pınar’s Food & Beverage companies produces and sells dairy products ( milk,
yoghurt, cheese, butter ), processed meat products ( charcuterie, ready meals, red meat,
turkey, fish ), bottled water, natural mineral water and other food and beverage products.
Coating Division
Founded in 1927 by Durmus Yasar who opened his first coating shop in Izmir, Dyo Byo
was built and commenced its operations in 1954 being Turkey’s first coating factory. To
meet the growing demand for its products, the company established Turkey’s biggest
coatings manufacturing plant in 1997. The company conducts its manufacturing operations at the company’s Izmir-Çi li and Gebze-Dilovası plants.
Tissue and Other Services
Viking Ka ıt was Turkey’s first privately-owned paper mill. Originally founded in 1969 in
zmir’s Alia a township, Viking Ka ıt commenced production in 1971 with a variety of
wrapping, printing, and laminating paper for industrial uses. In 1982 Viking Ka ıt joined
the Ya ar Group and thereafter began taking strategic steps to achieve growth within the
framework of that group’s fundamental business principles.
In 2010, Yasar Holding generated TL2.03bn revenues and TL230mn EBITDA. Six companies of the Group are listed on ISE with a combined market cap of over US$900mn,
including PNSUT, PETUN, PINSU, DYOBY, VKING and AYCES.
FIGURE 11: Yasar Group Divisions
Coatings
Food & Beverages
Tissue & Other Services
• PINAR SÜT
• DYO BYO
• Viking
• PINAR ET
• BORNOVA MATBAA
• Altinyunus
• PINAR SU
• KEMIPEX Joint Stock Co
(Russia)
• Ya ar Dı Ticaret
• PINAR ANADOLU
• PINAR FOODS (Germany)
• YBP (Sales and Marketing)
• Çamlı Yem
• MTP Co
• DYO Balkan ( Romania )
• DYO Matbaa
• Yadex (Trade Business )
• Desa Enerji (Energy)
• Bintur
• DYO A.S.
• HDF FZCO (Sales and
Marketing, Dubai )
Source: Company Presentation
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14/07/2011
Pinar Sut
Guarantees by subsidiaries for Yasar Holding’s Debt
After the takeover of Group’s bank, Yasar Bank, by the State Savings Deposit Insurance
Fund (SDIF) in 2001, the Group became liable to the Fund. In order to finance payments
the Group issued €319mn debt in total, including €200mn Troy Capital notes due 2011
and €119mn the Morgan Stanley loan due 2013 and cleared its liabilities to SDIF in
2006. The Group has accomplished its full commitment related to these loans since the
inception back in 2006.
The Group issued the Troy Capital Notes in August 2006 to redeem short term debt. The
notes bear a 9.5% interest, paid annually and have a maturity of 10/8/11. Guarantors of
the loan were five Public Companies: PETUN, PNSUT, PINSU, DYOBY, VKING, and 2
un-listed companies: Yasar Birlesik Pazarlama Dagıtım Turizm ve Ticaret A.S and Çamlı
Yem Besicilik San. ve Tic. A.S.
Morgan Stanley loan agreement was signed on 27 September 2006 with a termination
date of 27 September 2013. Proceeds from the loan was largely distributed to the
subsidiaries where Pınar Süt received EUR6mn, Pınar Et received EUR5mn, DYO
receive EUR48mn, Viking received EUR22mn. Guarantors of the loan are the same as
the ones on the Troy Capital Notes 5 listed group companies and 3 un-listed companies
including Yasar Holding.
On 5 October 2010, Yasar Holding contracted USD250mn loan participation notes with a
maturity of 5 years with an interest rate of 9.63% from Barclays Bank PLC to be used for
the refinancing of existing loans. Yasar Holding closed out a large part of Troy Capital
notes, of which only €76mn remains and redeemed €94mn of Morgan Stanley loans
through early redemptions in 2009 and 2010. 5 listed companies are announced as guarantors for new loan participation notes.
The indebtedness of Yasar Holding improved thanks to the cash generation power of the
Group. Net debt declined to TL675mn as of end of 2010 from TL730mn as of 2009-year
end. Please recall that, both Fitch and Moody’s confirmed Yasar Holding’s repayment
capability. While Moody’s assigned B2 rating for corporate family and probability of default rating in September 2010, Fitch has rated the holding’s long term foreign and local
currency Issuer Default Ratings at B back in October 2010.
FIGURE 12: Detail of Guaranteed Loans
Details of Guaranteed Loans of Yasar
Holding Companies as of 1Q11
EUR mn
USD mn Total TL Equivalent
PINSU
101
275
646
PNSUT
95
275
633
PETUN
96
275
635
DYOBY
87
250
557
VKING
101
250
608
Source: Company Financials
12
14/07/2011
Pinar Sut
PINAR SUT
Pınar Sut founded in Izmir in 1975 establishing one of the most advanced dairy processing facility in Europe and Middle East. The company started to produce UHT milk, processed cheese and chocolate milk in Turkey’s first packaged dairy products manufacturing plant. Expanding its production facilities to Eskisehir in 1997, the company became
the leading dairy products supplier in Turkey with a total raw milk processing capacity of
1,100 tons per day. Pınar Sut produces and supplies all dairy products ( milk, yoghurt,
yoghurt drink, traditional and modern cheeses, butter, cream) as well as fruit juices, mayonnaise, ketchups, puddings, honey, sauces, jams and jellies, desserts and powdered
products.
The company firstly started to export milk, cheese, butter and yoghurt to Central Europe,
Cyprus and Middle East in 1982 and currently exports over 10K tons of dairy products to
many countries around the world.
FIGURE 13: PINAR SUT MILESTONES
1980
1975
The first UHT milk and packaged
dairy products plant in Turkey was
founded with PINAR SUT
Kraft - Pınar
Cooperation
was
established
1984
Production of Labne,
butter, cheese,
mayonnaise and
cream
1997
2008
Pınar Sut New
Plant was
founded in
Eskisehir
Pinar Milk for Kids, a milk
specially designed for child
nutrition, is introduced to the
market
Source: Company
Yasar Holding is the main shareholder of Pınar Sut holding 61.18% stake while free float
stands at 38.82%.
FIGURE 14: Shareholder Structure
Free
Float,
38.82%
Yasar
Holding,
61.18%
Source: Company
Participations
Pinar Sut has a participation portfolio consisting of stakes at other Yasar Group companies, including 12.58% stake at Pınar Et and 8.77% stake at Pınar Su, as well as the
unlisted Camlı Yem, Yatas and Bintur Turizm. Besides, the company has four participations, YBP, Pınar Foods, Pınar Anadolu and Desa Enerji, which are consolidated according to equity method.
13
14/07/2011
Pinar Sut
FIGURE 15: Participations & Financial Assets
Subsidiaries TL m n
Stake
YBP
31.95%
Book Value Valuation Method Participated Value
30.5
BV
1.2
9.8
Desa Enerji
30.52%
4.0
BV
Pinar Foods
44.94%
3.0
BV
1.3
Pinar Anadolu
20.00%
0.5
BV
0.1
Pinar ET
12.58%
312.9
Current Mcap
39.4
Çamlı Yem
5.47%
10.1
BV
0.6
61.1
Current Mcap
5.4
0.0
Financial Assets TL m n
Pinar Su
8.77%
Yata
1.76%
0.5
BV
Bintur
1.33%
0.1
BV
0.0
Others
0.00%
0.0
BV
0.0
Total
57.7
Source: Company Financials
Pinar Foods
Established in Germany in 2000, Pinar Foods GMBH produces and sells dairy products
under the Pinar brand and meat products under Solen brand. Besides, the company
sells Pinar branded bottled water that are exported from Turkey.
Yasar Birlesik Pazarlama Dagitim, Turizm ve Ticaret ( YBP )
Yasar Birlesik Pazarlama is a sales and distribution company distributing Pinar products
in the domestic market. In addition to Pınar products, the company sells and distributes
Italian chocolate company Ferrero’s products such as Nutella and Kinder.
Desa Enerji
With an installed capacity of 9.8MW electricity and 17MW heat, Desa Enerji supplies the
energy demand of the group companies.
Pinar Anadolu Gıda
Founded in 2000 in Yozgat, Pınar Anadolu Gıda involved in dairy and meat production.
The group aims to provide cheaper products to consumers from middle and lower socioeconomic classes in meat and dairy segment. Following the end of rental agreement with
Yozgat Municipality, the company continues the production of dairy products in its Eskisehir plant and meat products in its Izmir plant.
Camli Yem Besicilik
Being one of the biggest animal feed producers in Turkey, Camli Yem produces feed for
dairy and meat cattle feed, fish feed and poultry feed.
Yasar Dis Ticaret—”Yatas”
Exports of Yasar Group’s products are performed by Yasar Dis Ticaret.
Bintur Turizm
Bintur Turizm involved in travel agency and hotel management activities in Izmir since
1964.
14
14/07/2011
Pinar Sut
Financial Analysis
Capacity and Production
Procuring raw milk twice a day from more than 200 contracted farms, Pınar Sut has the
capacity to process 1,100 tons of raw milk per day. Total production volume ( milk and
dairy products ) reached 262K tons in 2010 growing at a CAGR of 6% in the last five
years. The milk and dairy products, fruits juices, cream and puddings hold the majority in
total production volume, constituting approximately 75% of the total volume. Average
capacity utilization rate of the Izmir and Eskisehir plants were 56% in 2010. In 2010, Eskisehir plant’s total capacity in all product categories was increased by 30%, up to 300 mn
liter with TL14mn investment. We anticipate total sales volume of the company to grow
at a CAGR of 6% in the next ten years, similar to its past track record. Since the company does not provide breakdown of sales volume figures for product groups, we took
production figures as sales volume figures assuming no inventory is kept.
FIGURE 16: Production Volumes
tons
300,000
250,000
194 K
200,000
251 K
245 K
2007
2008
262 K
274 K
231 K
213 K
150,000
100,000
2005
2006
2009
2010
2011E
Milks & Fruit Juices, cream, puddings Butters, sauces,honey, jams&jellies
Yoghurt & Cheeses
Powdered Products
Source: Company Annual Reports & IS Investment Estimates
The company achieved to increase its revenues at a CAGR of 12% between 2005 and
2010 thanks to both volume growth and price increases. Although the company is the
market leader in many dairy product categories, the fierce competition in the market prevents the company to reflect fully raw material costs on the product prices leading to
volatile gross margins in case of sharp cost hikes.
In general, exports have a share of c.8% in total revenues. Pinar Sut by itself accounted
for 21% of Turkey’s milk and dairy product exports in 2010. The company exports its
products mainly to the countries in the Middle East region. The leading export region of
the company is Saudi Arabia having a share of 29% and Kuwait with a share of 18% in
total exports.
FIGURE 17: Sales Volume
'
000 tons
300
250
200
150
194
100
50
0
2005
FIGURE 18: Net Revenues
TL mn
800
CAGR: 6.1%
262
213
251
245
277
CAGR: 12.4%
600
400
231
'
000 tons
300
200
358
452
483
481
321
2005
2006
2007
2008
2009
577
650
200
0
2006
2007
2008
2009
2010 2011E
Sales Volume
250
150
Revenues
2010 2011E
Sales Volume
Source: Company Annual Reports & IS Investment Estimates
15
14/07/2011
Pinar Sut
Financial Analysis
The company’s gross margin ranged in the interval of 18% to 22.2% between the years
2005 and 2010 reflecting the volatile raw milk prices in the sector. Average raw milk
prices surged consistently in the last five years reaching TL0.76/liter in 2010 from
TL0.45/liter in 2005 on the back of substantial rise in feed costs, changes in government’s milk incentive premium and shortage of animal stock. As mentioned earlier, raw
milk prices are set via negotiations between major producers and processors by free
market conditions. The raw milk prices are volatile depending seasonal supply and demand balances and feed costs. While raw milk prices soared by 12% on average within
last five years, average retail prices of the drinking milk increased only by 5% according
to TURKSTAT figures, which is well below average CPI figure, signaling that the companies couldn’t be able to reflect rising raw milk prices on product prices due to competition. However, starting from 4Q10 Pinar Sut reflected raw milk price hikes on sales
prices similar to other players. Meanwhile, average retail prices of drinking milk rose by
4% Q-o-Q whereas raw milk prices remained same at TL0.735 on quarterly basis. The
rising trend of raw milk prices reversed in 2011 and average prices are 15% lower compared to same period last year thanks to rising animal stock through livestock import as
of June 2011. We anticipate average raw milk prices to remain at these low levels
throughout the remainder of the year.
FIGURE 19: Raw Milk Prices and Gross Margin
TL
0.80
0.60
23%
22.2%
21.5%
19.4%
21%
20.1%
19.5%
0.40
19%
18.5%
0.20
18.0%
17%
0.00
15%
2005
2006
2007
2008
Raw Milk Prices
2009
2010
2011E
Gross Margin
Source: Company Financials & Is Investment Estimates
Since the company invests in brand name and recognition, advertising expenses are the
major item in operational expenses constituting 2.6% share in sales revenues. We anticipate the ratio of advertising expenses over sales to remain at these levels. Personnel
expenses are the second largest cost item having a share of 1.9% in total revenues.
Distribution costs are well-managed by the company thanks to increased productivity by
the mass distribution of Yasar Birlesik Pazarlama. Overall, opex/sales ratio declined to
9.6% in 2010 from 13.4% in 2005 propelled by the decline in distribution costs and
higher revenue growth.
FIGURE 20: Opex Breakdown ( % of 2010 revenues )
Severance
Payments
0.3%
Rent 0.3%
Others
1.3%
Deprec. And
Amort 0.5%
Advertising
Expense
2.6%
Distribution
Costs 0.7%
Outsourced
Services
0.7%
Consultancy
1.3%
Personnel
Expenses
1.9%
Source: Company Financials
16
14/07/2011
Pinar Sut
Financial Analysis
We estimate 12.1% EBITDA margin in 2011 considering raw milk prices will remain at
current low levels. Thanks to improved gross margin, we projected company’s EBITDA
margin to climb to 12.5% in 2021 up from 10.9% in 2010.
FIGURE 21: EBITDA & EBITDA Margin
90
80
70
60
50
40
30
20
10
0
12.6%
14.7%
12.5%
11.3%
8.7%
36
10.7%
71
56
10.7%
66
16.0%
14.0%
12.0%
79
52
10.0%
8.0%
6.0%
4.0%
31
2.0%
0.0%
2005
2006
2007
2008
2009
EBITDA
2010
2011E
EBITDA Margin
Source: Company Financials & Is Investment Estimates
The company’s capacity utilization rate was 56% on average for both plants in Eskisehir
and Izmir in 2010. Pinar Sut expanded its production capacity by 30% in its Eskisehir
plant reaching a total processing capacity of 300mn liters with an investment of TL14mn
in 2010. The company budgeted TL45-50mn capex for 2011 regarding to modernizations, renovations and infrastructure. We deem that the company has sufficient production capacity to meet the future demand.
FIGURE 22: Cap-ex & Cap-ex / Sales
TL mn
60
7.2%
6.6%
50
6%
40
4.9%
30
20
10
0
8%
3.8%
50
3.4%
2.7%
9
2005
24
2006
22
2007
Cap-ex
1.1%
17
2008
2%
23
5
2009
2010
Cap-ex/Sales
4%
0%
2011E
Source: Company Financials & Is Investment Estimates
The working capital requirement over sales ranged between 7% and 20% between 2005
and 2010. The company had average receivable days of 33, payable days of 60 and
inventory days of 36 for the last five years. Shifts in short term trade receivables from
related parties due to the restructuring of Yasar Holding’s debt are the main reasons for
fluctuations in working capital over sales ratio. Working capital requirement declined to
TL73mn as of 2010-year end from TL97mn in 2009, in-line with the restructuring of the
parent company’s debt.
17
14/07/2011
Pinar Sut
Financial Analysis
FIGURE 23: Working Capital Requirement
TL mn
120
23%
20%
100
20%
80
20%
17%
15%
60
12%
40
14%
10%
11%
20
8%
7%
0
5%
2005
2006
2007
2008
2009
Working Capital TL mn
2010
2011E
Working Capital / Sales
Source: Company Financials & Is Investment Estimates
Pinar Sut is one of the most generous dividend payers in ISE. The company’s dividend
yield ranged between 4% and 11.8% for the last five years. The company paid TL51mn
dividend in 2010, implying a payout ratio of 88%. We expect the company to maintain its
high dividend payment strategy and estimate TL54mn dividends to distribute from its
2011E net income, pointing out to a dividend yield of 7%
FIGURE 24: Dividend & Dividend Yield
TL mn
60
10%
40
20
13%
11.8%
51
51
8.6%
7.0%
5.6%
4
16
2005
2006
9%
31
20
7.0%
4.0%
7
0
2007
Dividend
11%
2008
2009
7%
5%
3%
2010
2011
Dividend Yield
Source: Company Financials & Is Investment Estimates
18
Pinar Sut
Financial Analysis
2011 Outlook
Sustainable revenue growth thanks to strong market share and pricing power
We project Pınar Sut to achieve c.6% sales volume growth in 2011 in-line with domestic
dairy market growth. Additionally, top-line is assumed to reach TL650mn in 2011, up by
13% Y-o-Y, ahead of volume growth thanks to higher pricing.
Margins to improve due to both better pricing and lower raw milk prices
The increase in number of herds as a result of imported livestock caused an upsurge in
the supply of raw milk during 1H11 and consequently 13% decline in raw milk prices. We
forecast average raw milk prices to remain at these levels throughout the year, resulting
in 1.5pp enhancement in Pinar Sut’s gross margin to 19.5% in 2011 over 2010. Operating expenses are assumed to increase parallel to revenues in 2011, while EBITDA is
projected to grow by 27% in 2011 compared to 2010. Accordingly, EBITDA margin is
estimated to be at 12.1% in 2011, up by 1.4pp over 2010, in-line with the company’s
target.
Ambitious to grow with expanded production capacity
The company plans to spend TL45-50mn cap-ex in 2011, highest cap-ex figure in the
past five years, to be used for modernization, renovation and infrastructure, signaling to
FIGURE 25: Retail Prices & Raw Milk Prices
TL / liter
TL / liter
2.3
0.9
2.1
0.8
1.9
0.7
1.7
0.6
1.5
0.5
Jan
Feb
Marc
Apr
May
June
July
August
Sept
October
Nov
Dec
Jan
Feb
Marc
Apr
May
June
July
August
Sept
Oct
Nov
Dec
Jan
Feb
March
April
May
June
14/07/2011
2009
Source: TurkStat & SETBIR
2010
2011
ambitious growth plans.
19
14/07/2011
Pinar Sut
This report has been prepared by “ Yatırım Menkul De erler A. .” ( Investment) solely for the information of clients of Investment.
Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services
are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies,
investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who
supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be
suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and
with the assistance of independent advisors, as they believe necessary.
The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital
Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of
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its accuracy or completeness guaranteed.
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s.
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