Indeks Computer Outperform (Maintained)

Transcription

1 Outperform (Maintained) A multi-pronged growth story Investment Thesis HQ plot to almost quadruple the bottom line in Indeks, Turkey s largest IT distributor, is poised to reap the benefits of its revenue sharing project at the site of its headquarters in Ayazaga Istanbul. The agreement was signed back in 2013 and Indeks will collect 40.5% of the revenues from the project by May 2017 at the latest. Half of the proceeds will be distributed as dividends after the tax deductions. The project s total saleable area is 62,362sqm and almost half of it (116 units out of 204 units) has already been sold. We calculate around TL205mn (USD81mn) in revenues from the project. We calculate a TL196mn consolidated net profit in 2017, almost quadrupling YoY. The real estate project will also boost the dividend yield. Indeks average pay-out ratio has been 81% for three years. Management is committed to distributing half of the profits to be collected from the real estate project. We thus calculate a USD30mn additional dividend in 2017, corresponding to a DPS of TL2.67 and a dividend yield of 39%. Management may also increase the dividend payout ratio using its retained earnings starting from FY15 to extend the attractive dividend yields for the coming years, rather than paying out a one-time high dividend in Datagate s operational performance brightened by Avea. Datagate (DGATE, Not Rated), an Indeks Group company, signed a distributorship agreement with Avea in July 2014 to provide mobile products and Avea GSM lines in Avea s centers in the Izmir, Antalya and Konya regions. With the distributorship agreement, DGATE s revenues tripled and its EBITDA almost quadrupled in 9M15. We expect Indeks consolidated revenues and EBITDA to follow a CAGR of 12.2% and 10%, respectively between Meanwhile, Datagate is Indeks major source of increasing working capital and financial debt, which emanates from Datagate s distributorship agreement with Avea, related to the financing of contracted mobile devices. However, Datagate started to use factoring tools in October 2015 and its working capital requirement and debt amount started to decrease and will further decrease in the coming quarters. Catalysts: i) Higher than expected revenues from the real estate project, ii) the extension of Datagate s distributorship agreement with Avea in the new regions might boost Indeks revenues, iii) a higher than expected dividend pay-out ratio and iv) strong 4Q15 results and v) liquidity provider agreement. Valuation: We reiterate our Outperform recommendation for Indeks while increasing our 12-month target price from TL8.25 to TL10.20, indicating a 52% upside potential. We have lowered our 30% small cap discount to our target value to 20% on the back of the rising trading volume with the liquidity provider agreement. Risks: The downturn in economic growth and a sharp depreciation of the TL could cause consumers to postpone their IT spending. Share Price TL6.81 TL381mn Bloomberg/Reuters: Rel. Performance: 1 mth 3 mth 12mth 12M Range (TL): 4% 30% 48% YTD TL Return: 8% Beta (2year, w eekly) 1.00 Weight in BIST Current M ago 17% 30% Nevres Erol Bilecik 36.3% Alfanor 24.2% Free Float 39.6% Financials and Ratios E 2016E 2017E Net Sales (TLmn) 2,206 3,352 3,950 4,448 YoY 37% 52% 18% 13% EBITDA (TLmn) YoY 20% 65% 11% 13% Net Income (TLmn) YoY 385% 81% 13% 281% EBITDA margin 2.6% 2.8% 2.6% 2.6% Net margin 1.1% 1.4% 1.3% 4.4% P/E (x) EV/EBITDA (x) EV/Sales (x) EPS (TL) DPS (TL) Div. Yield 5.6% 9.0% 10.1% 39.2% ROE 14.6% 24.9% 26.2% 80.8% Analyst: Halil Kahve Mcap Average Daily Vol (TLmn) 3 mth: Shares Outstanding (mn): Foreign Ow n. in Free Float : The Company in Brief Established in 1989, Indeks, w ith its w ide range of product lines, is the largest distributor company operating in the computer field in Turkey. The Company distributing all kinds of IT products to IT firms in Turkey. Indeks, being the second distributer of Apple products in Turkey, distributes more than 200 global brands, w ith more than 7,500 business partners. It is the leader in the Turkish IT sector w ith a market share of 19.4%. Shareholders Structure Sales Contact: +90 (212) (212) hkahve@garanti.com.tr 12M Target Price USD131mn Stock Market Data (February 04, 2016) icm@garanti.com.tr Potential Return TL % EV TL726mn INDES.TI / INDES.IS 4.95 / 6.81

2 SUMMARY FINANCIALS (TLmn) Income Statement E 2016E 2017E Net Sales 2,206 3,352 3,950 4,448 Cost of Sales -2,103-3,194-3,771-4,245 Gross Profit (Loss) Operating Expenses Operating Profit Consolidated EBITDA Net Other Income/ Expense Profit (Loss) from Subsidiaries Net financial Income/ Expense Profit (Loss) before Tax Taxation on Continuing Operations Minority Interests Net Income Ratios EBIT Margin 2.4% 2.7% 2.5% 2.5% EBITDA Margin 2.6% 2.8% 2.6% 2.6% Net Income Margin 1% 1.4% 1.3% 4.4% Sales Growth 37% 52% 18% 13% EBITDA Growth 20% 65% 11% 13% Net Income Growth 385% 81% 13% 281% Balance Sheet E 2016E 2017E Current Assets 962 1,272 1,447 1,622 Cash and Cash Equivalents Short-Term Trade Receivables ,109 Inventories Other Current Assets Long Term Assets Total Assets 1,060 1,504 1,681 1,859 Short Term Liabilities 843 1,249 1,438 1,584 Short-Term Financial Loans Short-Term Trade Payables ,077 1,213 Other Short-Term Liabilities Long Term Liabilities Long-Term Financial Loans Other Long-Term Liabilities Shareholders Equity T. Liabilities & S.holders Equity 1,060 1,504 1,681 1,859 Cash Flow Summary EBITDA WC Change Operating Cash flow Capex Investing cash flow Dividends paid Change in net debt CF from financing activities Key metrics Net Debt/EBITDA (x) Net Debt/Equity (x) Capex/Sales (%) -0.9% 0.1% 0.1% 0.1% WC Change/Sales (%) 2.2% 1.1% 0.3% 0.4% ROCE (%) 11.6% 17.9% 21.1% 71.3% ROIC (%) 289.5% -65.1% -64.5% -42.8% FCF yield (%) 0.0% 10.5% 19.6% 8.5% 2

3 INVESTMENT POSITIVES Real estate project is in the spotlight Indeks 100% owned subsidiary, Teklos, signed a revenue sharing agreement with the contractor, Seba Insaat, in March 2013 for its 40,000sqm plot at the site of its headquarters in Ayazaga Istanbul. According to the revenue sharing agreement, Teklos will collect 40.5% of the revenues, with Seba Insaat collecting 53.6% and the other landlords collecting the remaining 6%. The contractor, Seba Insaat, received a construction permit in January 2015 and the project is scheduled to be completed in May The project s total saleable area is 62,362sqm and 46% of it has already been sold (116 units out of 204 units). The total sales amount was USD90mn and USD42mn has already been collected. Teklos is expected to collect at least USD80mn in revenues from the project and will receive the cash from the project by May 2017 at the latest without taking into account the project s sales performance. In line with the company guidance, we calculate around TL205mn (USD81mn) in revenues from the project. The contractor guarantees the payment of an estimated amount to Indeks, but if the total revenues from the project exceed the estimates, Indeks will collect further revenues from the project. With the revenue sharing model all the risk of the project is transferred to the contractor. Indeks expects to collect a profit of around USD60mn after the tax deduction. Half of these proceeds will be directed to its operations and another USD30mn will be distributed as a dividend. Therefore, Indeks is set to be one of the most generous dividend players on the BIST. Note that the cash collected from pre-sales is recorded on the balance sheet as a liability under advances received. When construction has been completed and all units have been delivered, revenues will be reflected on the income statement and the profits will be recognized. As the delivery of the project will be made in 2017, we expect a substantial increase in the Company s bottom line emanating from the profits. We expect a TL196mn net profit in 2017, implying a 281% increase over the 2016 net profit estimate of TL51mn. 3

4 Higher dividend payments from the real estate project is the major expectation Indeks distributed TL21.2mn in gross cash dividends in May 2015 from its 2014 net earnings. The Company has been a regular dividend distributor since The average pay-out ratio in the last four years was 71% and the last three years average was 81%. The major expectation is the bulk dividend payment from the proceeds from the real estate project. In line with management s commitment to distributing half of the profits, we calculated a USD30mn additional dividend to be distributed. As the revenues from the project will be reflected on the income statement with the completion of the deliveries, 2017 will be the year of bulk dividend payments. Dividend Scenario Source: The Company, Garanti Securities 2015E 2016E 2017E 2018E Net Profit (Excl. Real Estate Project) Net Profit (Incl. Real Estate Project) Payout Ratio 75% 75% 75% 75% Gross dividend from the core business Additional 30mn USD dividend 103 Total Dividend Payment Payout Ratio including real estate 75% 75% 76% 75% DPS Dividend Yield 9.0% 10.1% 39.2% 13.4% However, management may choose to start the payment of an additional dividend from its retained earnings starting from 2015 in order to extend the attractive dividend yields for the coming years rather than paying out a one-time very high dividend in Datagate s operational performance brightened by Avea Datagate (DGATE, NR), an Indeks Group company, signed a distributorship agreement with Avea, the mobile arm of Turk Telekom, in July 2014 to distribute mobile products and services. Datagate entered the mobile products and services market with this distributorship agreement and began to distribute mobile products and Avea GSM lines in Avea centers as well as products under the Avea brand in the retail channels in the Izmir, Antalya and Konya regions. Datagate-Avea operating regions 4

5 RESEARCH Source: The Company The distributorship agreement has been signed for a period of years and covers the Izmir, Antalya and Konya regions, where 175 Avea centers are located. The duration and the region of the agreement could be further extended depending on datagate s performance. With the distributorship agreement, Datagate s revenues tripled and the EBITDA almost quadrupled in 9M15. Datagate aims to generate USD1.0bn in revenues by the end of Management also expects to extend the distributorship agreement in the new regions. The operational performance of DGATE directly impacts Indeks financials as it fully consolidates them. Datagate s revenue and EBITDA evolution with the Avea agreement Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q Sales (LHS) EBITDA Source: The Company, Garanti Securities 5

6 DGATE s working capital and financial debt will decline with the factoring company. Datagate is Indeks major source of increasing working capital and financial debt as it fully consolidates them. The increase emanates from Datagate s distributorship agreement with Avea within the scope of the financing of the contracted mobile devices. Avea sells smartphones to end users via month instalments (average is 24 months). To close the financial deficit between the customer collection period and vendor payment date, Datagate takes out bank loans. Avea negotiates the loan terms and interest rates with the banks and is the 100% guarantor for these loans. Avea pays these loans and interest expenses to Datagate. Later, Datagate pays loan and interest expenses to the related banks. This is the reason behind the sharp increase in working capital requirements and financial debt. Datagate started to use factoring tools in October 2015 and sell receivables to a factoring company with the same interest expense rates as the loans, which will bring additional financial costs. With the factoring tool, the debt amount in the balance sheet has started to decrease and will further decrease in the coming quarters. Therefore, when adjusting Datagate s TL291mn net debt as of 9M15 in Indeks financials, the EV/ EBITDA multiples will be more attractive. Indeks adjusted multiples E 2016E 2017E EV/EBITDA (x) Adjusted EV/EBITDA Indeks distributorship agreement with Apple increases competitiveness and revenues Indeks signed a distributorship agreement with Apple on October 10, 2012 and the company has become Apple s second distributor of products, such as the IPad, Mac and IPod (but not mobile phones) in Turkey. In November 2013, Indeks signed another agreement with Apple to distribute the Iphone and its accessories. Note that Bilkom Bilisim, which is the 69.94% subsidiary of Koc Holding (KCHOL), was the sole distributor of Apple products before Indeks signed a distributorship agreement with Apple. The prestigious distributorship agreement with Apple strengthens the company s position in the sector and contributes around USD mn to the top line. Indeks with its sound balance sheet is likely to remain Turkey s dominant IT distribution company going forward and to benefit from the expected growth in the IT sector. 6

7 Indeks is the market leader in the IT distribution segment Indeks is principally involved in distributing all kinds of IT products to IT firms in Turkey. The Company distributes more than 200 global brands and operates with more than 7,500 business partners. Indeks commands a 23% market share in Turkey s IT hardware sector and a 19.4% share in the overall IT sector in Turkey. Other listed companies involved in the same business line are Armada Computer (ARMDA, NR) and Arena computer (ARENA, NR). Indeks s market share in the overall IT sector (left) and hardware sector Source: The Company, Garanti Securities IT sector with a high growth potential The PC ownership penetration in Turkey was around 50% in 2014 and is forecasted to increase to 55% in Internet penetration is also expected to increase from 60% to 68% in The PC penetration almost quadrupled since 2005, while internet penetration almost tripled in the same period. Despite the rapid increase in the penetration levels over last ten years, Turkey s pc ownership and internet usage are still lower than those of developed countries. Taking into account the young average age of Turkey s population, increasing GDP per capita with the increasing presence of local and retail stores selling computers, the IT sector offers a substantial growth potential. As the largest distributor, commanding a 23% market share in the hardware segment, we believe Indeks will reap the fruits. 7

8 PC and Internet penetration in Turkey 80% 70% 60% 50% 40% 30% 20% 10% 0% 68% 64% 58% 60% 55% 52% 50% 52% 44% 46% 40% 34% 25% 15% E 2016E PC Penetration Internet Penetration Source: The Company, Garanti Securities Differentiating itself with its logistic and service businesses Due to the nature of the distribution business, the profit margins of the sector s players are lower when compared to other business lines (while gross margin hovers at the 6%-9% levels and the EBITDA margin is at 3% - 5%). Therefore, creating value with value added businesses is crucial for the distributor companies to increase and maintain their profitability. We like the fact that Indeks differentiates itself with its logistics and services business. Teklos, the whole subsidiary of Indeks, is the logistics company and provides logistics services to group companies as well as third parties, such as Turk Telekom (TTKOM) and Vodafone. Teklos contribution to the overall top line was only 1%, but its contribution to the operating profit was 8% in 9M15. The liquidity provider agreement Indeks average three-month daily volume stands at approximately TL950,000 corresponding to just 0.025% of the three-month average daily volume of the BIST-100. The low trading volume presents a liquidity risk. Indeks signed a liquidity provider agreement with a brokerage house for 162,402 Indeks shares (corresponding to 0.29% of the total capital) at the end of November The liquidity provider agreement started supporting the daily trading volume. Subsequently, the three-month average daily volume of Indeks shares more than doubled since November

9 Indeks average daily trading volumes (mn TL) 14.0 Higher trading volumes with liquidity provider agreement Source: The Company, Garanti Securities 4Q15 results are expected to be promising Indeks is expected to disclose its 4Q15 results in the second week of March We expect strong results on the back of seasonality factors. Indeks revenues are subject to seasonality; the Company generates around 30-35% of its annual revenues in final quarter of the year. We expect revenues of TL1,065mn (39% higher QoQ), an EBITDA of TL28mn (up by 38% QoQ) and a net profit of TL18mn (up by 75% QoQ) in 4Q15. Indeks Change (mn TL) 4Q14 1Q15 2Q15 3Q15 4Q15E 12M14 12M15E 4Q15/4Q14 4Q15/3Q15 12M15E/12M14 Net Sales ,065 2,206 3,352 25% 39% 52% EBITDA % 38% 65% Net Income % 75% 81% EBITDA Margin 2.7% 3.3% 2.7% 2.6% 2.6% 2.6% 2.8% -0.1 pp 0 pp 0.2 pp Net Profit Margin 1.3% 1.4% 1.0% 1.3% 1.7% 1.1% 1.4% 0.4 pp 0.3 pp 0.2 pp Source: The Company, Garanti Securities RISKS The increasing geopolitical uncertainties, a possible downturn in GDP growth and a sharp depreciation of the TL against the USD could cause IT consumers to postpone their IT spending, which would put pressure on Indeks operational performance. 9

10 VALUATION We valued Indeks using a combination of DCF and peer group comparison methods, attaching a 50% weighting to each. We also included the real estate project in our valuation. In our previous valuations, we had applied a 30% small cap discount to our target value due to the lower trading volume as it presents a liquidity risk. As the trading volume is rising with the support of the liquidity provider agreement signed in November 2015, we decided to lower our 30% small cap discount to our target value to 20%. Thus, we determined a target Mcap of TL571mn for Indeks, corresponding to a 12-month target share price of TL10.20, implying a 50% upside potential. Valuation Summary Value (TLmn) Weight Contribution (TL mn) DCF Analysis % 302 Peer Comparison % 212 Company Value 514 NPV of the real estate project 200 Target Value Small Cap Discount 20% 143 Target Value after Small Cap Discount 571 Target Share Price (TL) Current Share Price (TL) 6.81 Upside potential 50% DCF Valuation We calculated a target value of TL604mn for Indeks based on DCF analysis. Our valuation assumed a 3% terminal growth rate, a Beta of 1.0, an equity risk premium of 5.5% and a risk free rate of 10.0%. Under our assumptions, the implied WACC for Indeks stands at 13.7%. 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales 3,352 3,950 4,448 4,915 5,431 6,001 6,631 7,327 8,097 Operating Profit Taxes NOPLAT Depreciation Gross Cash Flow Change in WCR Capex Free Cash Flow EBITDA EBITDA Margin 2.8% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% Assumptions and Results (TL mn) Weight of equity 75% PV of FCF 407 Cost of Equity 16% PV of Terminal Value 461 Beta 1.00 Implied Firm Value 868 Risk free rate 10.0% Net Cash -345 Market Risk Premium 5.5% 12M Target Mcap 604 Cost of Debt after tax 8.4% Tax rate 20.0% WACC 13.7% Terminal Value Growth 3.0% 10

11 Peer Valuation We compared Indeks with other global players in the IT sector based on the EV/EBITDA multiple of a group of IT companies based on our 2016 and 2017 forecasts. Accordingly, we arrived at a valuation of USD130mn for Indeks based on our peer comparison analysis. Source: Bloomberg, Garanti Securities Real Estate Project MCap EV/EBITDA P/E Company Name US$mn 2016E 2017E 2016E 2017E Esprinet Spa Synnex Thailand Pcl Ab Sa Action Sa Datatec Ltd Abc Data Sa Average INDES Implied Value (USD mn) 130 We also included the company s HQ plot which has a total saleable area of 62,362sqm in our valuation. Based on the revenue sharing agreement with the contractor, Indeks will collect 40.5% of the revenues from the project. In our valuation, we assumed there will be no change in the project s 62,362sqm saleable area to be completed in three years. We assumed an average sales price of USD3,216 per sqm to reach a TL200mn valuation for Indeks. Note that considering the increasing attractiveness of the location, the increase in the project s average sales price will provide a further upside for our valuation. TL mn 2015E 2016E 2017E Cash Proceeds Indes's Share 40.5% Opex Taxes Cash Flow Discount Factor PV CF Sum of PV CF (TL) 200 Source: The company, Garanti Securities 11

12 Appendix I - 3Q15 Financial Statements Indeks Bilgisayar Summary Financials Change (mn TL) 3Q14 4Q14 1Q15 2Q15 3Q15 9M14 9M15 3Q15/3Q14 3Q15/2Q15 9M15/9M14 Net Sales ,353 2,287 63% -1% 69% Gross Profit % -6% 67% Operating Profit % -3% 103% EBITDA % -3% 98% Net Other Income/Expense n.m. n.m. n.m. Financial Inc./ Exp. (net) n.m. n.m. n.m. Tax n.m. n.m. n.m. Net Income % 35% 99% Net Cash Working Capital Shareholders Equity Ratios Gross Margin 4.7% 4.4% 5.1% 4.8% 4.5% 4.8% 4.8% -0.2 pp -0.3 pp -0.1 pp Operating Margin 2.2% 2.7% 3.2% 2.6% 2.5% 2.3% 2.8% 0.4 pp -0.1 pp 0.5 pp EBITDA Margin 2.3% 2.7% 3.3% 2.7% 2.6% 2.4% 2.9% 0.3 pp -0.1 pp 0.4 pp Net Profit Margin 0.9% 1.3% 1.4% 1.0% 1.3% 1.0% 1.2% 0.4 pp 0.4 pp 0.2 pp Datagate Bilgisayar Summary Financials Change (mn TL) 3Q14 4Q14 1Q15 2Q15 3Q15 9M14 9M15 3Q15/3Q14 3Q15/2Q15 9M15/9M14 Net Sales % 9% 284% Gross Profit % -9% 234% Operating Profit % -3% 387% EBITDA % -3% 384% Net Other Income/Expense n.m. n.m. n.m. Profit (Loss) from Subsidiaries n.m. n.m. n.m. Financial Inc./ Exp. (net) n.m. 2728% n.m. Tax n.m. n.m. n.m. Net Income % 22% 498% Net Cash Working Capital Shareholders Equity Ratios Gross Margin 3.5% 4.0% 2.9% 4.0% 3.3% 3.9% 3.4% -0.1 pp -0.7 pp -0.5 pp Operating Margin 2.2% 3.2% 2.1% 2.7% 2.4% 1.9% 2.4% 0.2 pp -0.3 pp 0.5 pp EBITDA Margin 2.2% 3.2% 2.1% 2.7% 2.4% 1.9% 2.4% 0.2 pp -0.3 pp 0.5 pp Net Profit Margin 1.5% 2.3% 1.9% 1.9% 2.2% 1.3% 2.0% 0.6 pp 0.2 pp 0.7 pp 12

13 Disclaimer Recommendation History Definition of Stock Ratings OUTPERFORM (OP) MARKET PERFORM (MP) The stock's return is expected to exceed the return of the BIST100 over the next 12 months. The stock's return is expected to be in line with the BIST100 over the next 12 months. UNDERPERFORM (UP) The stock's return is expected to fall below the return of the BIST100 over the next 12 months. 13

14 Disclaimer RESEARCH This document and the information, opinions, estimates and recommendations expressed herein, have been prepared by Garanti Securities Research Department, to provide its customers with general information regarding the date of issue of the report and are subject to changes without prior notice. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This document and its contents do not constitute an offer, invitation or solicitation to purchase or subscribe to any securities or other instruments, or to undertake or divest investments. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind. Investors who have access to this document should be aware that the securities, instruments or investments to which it refers may not be appropriate for them due to their specific investment goals, financial positions or risk profiles, as these have not been taken into account to prepare this report. Therefore, investors should make their own investment decisions considering the said circumstances and obtaining such specialized advice as may be necessary. The information in this report has been obtained by Garanti Securities Research Department from sources believed to be reliable. However, Garanti Securities cannot guarantee the accuracy, adequacy, or completeness of such information, and cannot be responsible for the results of investment decisions made on account of this report. The market prices of securities or instruments or the results of investments could fluctuate against the interests of investors. Investors should be aware that they could even face a loss of their investment. Transactions in futures, options and securities or high-yield securities can involve high risks and are not appropriate for every investor. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances, investors may be required to pay more money to support those losses. Thus, before undertaking any transaction with these instruments, investors should be aware of their operation, as well as the rights, liabilities and risks implied by the same and the underlying stocks. Investors should also be aware that secondary markets for the said instruments may be limited or even not exist. This report is to be distributed to professional emerging markets investors only. This report is for private use only and intended solely for the individual(s). No information in this report may be copied, modified, republished or exploited in anyway without the prior consent of Garanti Securities. Additionally, with respect to our statements above, all our claims and plea rights are covered in the regulations which apply in the countries that this report has been sent to. Garanti Securities Etiler Mah. Tepecik Yolu Demirkent Sokak No: Besiktas, Istanbul / Turkey Phone: +90 (212) Fax: +90 (212)