Pinar Et ve Un OUTPERFORM. 02 November A Meaty Long Term Alternative. Upside Potential* 51% Equity / Small Cap. / Food. Re-initiating Coverage

Transcription

1 Equity / Small Cap. / Food 02 November 2011 Bloomberg: PETUN TI A Meaty Long Term Alternative Well-recognized brand name in processed meat sector Established in 1985 as the first private integrated modern meat processing company, Pinar Et - a Yasar Holding company, one of Turkey s highly respected corporate groups - is one of the most reputable meat processors with a strong brand recognition. Having 29K tons annual production capacity in an enclosed area of 46K sqm including processing and slaughtering capacity of 102K cattle, 408K sheep and 1,836K turkeys, the company holds the leadership position with 18% market share in total delicatessen products and 53% market share in frozen ready meat category. Low per capita red meat consumption signals long-term future growth Since pork is not consumed in Turkey due to religious principles, meat consumption in Turkey is primarily focused on veal, lamb and poultry. Remaining well below with 32kg per capita meat consumption in Turkey compared to 83kg in European countries, the sector promises huge growth potential for meat companies. Per capita red meat consumption is foreseen to increase at a CAGR of 2% over the next ten years on the back of expected rise in the income level and production efficiency combined with rising number of corporate livestock companies. Shift in consumption habits towards packaged products There is a steady shift from unpackaged to packaged meat products thanks to increase in income level, education level and consumer trends towards value added products. Apart from that, growing disposable income, increase in number of working woman and urbanization is forecasted to upsurge the demand for ready meals in Turkey. Volatility in carcass meat prices may create pressure on margins Carcass meat prices and the company s ability to reflect hikes in carcass meat prices to product prices are the major determinants of gross margin. It should be noted that gross margin of the company declined sharply to 17% in 2010 from 21.1% in 2009, lowest level recorded over the past five years, mainly due to significant rise in carcass prices. Following the government s decision to allow carcass meat imports with lowered custom tax to 30% from 225%, deterioration of gross margin eased starting from 4Q10 (4Q10 Gross Margin:18.7% vs 3Q10 Gross Margin: 15.8%). Guarantees given to Yasar Group has been considered a discount with respect to peers Similar to other Pinar Group companies, Pinar Et is also guarantor for Yasar Group loans amounting to TL 674mn, as of end of June This intragroup relationship has been a factor causing a discount in trading multiples of the company with respect to peers. We are re-initiating coverage for Pinar Et with an OUTPERFORM recommendation based on a 12 months target price of TL8.79, implying 51% upside potential. Please refer to important disclaimer at the end of this report. Reuters: PETUN IS Re-initiating Coverage OUTPERFORM Upside Potential* 51% Stock Data TRY US$ Price at Month Target Price Mcap (mn) Float Mcap (mn) No. of Shares Outstanding Price / Relative Price TL Relative PETUN Relative to ISE mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data TRY ISE ,852 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to ISE Week Range (Close TRY) Ilyas Safa Urganci iurganci@isyatirim.com.tr

2 Summary of Key Financials (TL mn) Income Statement (TL mn) 2009A* 2010A* 2011E 2012E 2013E Revenues EBITDA Depreciation & Amortisation EBIT Other income (expense), net (1) Financial expenses, net Minority Interests Income before tax Taxation on Income (8) (7) (7) (8) (9) Net income Cash Flow Statement (TL mn) Net Income Depreciation & Amortisation Indemnity Provisions Change in Working Capital (16) (9) 3 (5) (7) Cash Flow from Operations Capital Expenditure Free Cash Flow Rights Issue Dividends Paid Other Cash Inflow (Outflow ) (19) (6) 0 (5) (10) Change in net cash 6 (0) 2 0 (7) Net Cash (9) (9) (7) (7) (13) Balance Sheet (TL mn) 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) 0.6x 0.9x 0.7x 0.6x 0.6x EV/EBITDA (x) 4.9x 7.9x 7.7x 7.0x 6.1x EV/IC (x) 1.1x 1.6x 1.4x 1.4x 1.3x P/E (x) 3.3x 6.4x 8.7x 7.8x 7.2x FCF yield (%) 24% 15% 14% 11% 11% Dividend yield (%) 5% 12% 10% 9% 10% *based on average Mcap during the year Shareholder Structure 33.2% 12.6% 54.2% Yasar Holding A.S. Other Pinar Sut Mam.San.A.S. Company Overview Production of meat, processed meat and frozen meat products under its ow n integrated facilities 2

3 Investment Positives Leader of delicatessen market with a well recognized brand name Established in 1985 as the first private integrated modern meat processing company, Pinar Et - a Yasar Holding company, one of Turkey s biggest and highly respected corporate groups - is one of the leading meat processors with a strong and reputable brand name. Having 29K tons annual production capacity in an enclosed area of 46K sqm including processing and slaughtering capacity of 102K cattle, 408K sheep and 1,836K turkeys, the company holds the leadership position with 18% market share in total delicatessen products and 53% market share in frozen ready meat category. Significant cost benefit through efficient procurement of live animals from cattle farmers with which the company has contractual agreements and from Camlı Yem Besicilik - the agribusiness unit of Yasar Group and one of Turkey s biggest stockbreeders - brings competitive advantage to Pinar Et over its competitors. Growing charcuterie market and low per capita red meat consumption signals long-term future growth Since pork is not consumed in Turkey due to religious principles, meat consumption is primarily focused on veal, lamb and poultry. Remaining well below with 32kg per capita meat consumption in Turkey compared to 83kg in European countries, the sector promises huge growth potential for meat processing companies. Per capita red meat consumption is foreseen to increase at a CAGR of 2% over the next ten years on the back of expected rise in the income level and production efficiency with increasing number of corporate livestock companies. Apart from that, charcuterie market (delicatessen market) where Pinar Et s products most belong to, is estimated to have a size of c.200k tons including unregistered sales as of 2011-year end and expected to grow at a CAGR of 3.3% over the next ten years, in-line with the total red meat market. Shift in consumption habits towards packaged products will spur the growth There is a steady shift from unpackaged to packaged meat products thanks to increase in income level, education level and consumer trends towards value added products. Apart from that, growing disposable income, increase in number of working woman and urbanization is forecasted to upsurge the demand for ready meals in Turkey. Being the market leader in mostly consumed packaged meat products categories (salami, sausages, soudjouk), Pinar Et will be the main beneficiary of the change in consumer trends towards packaged products. Flexible procurement is an advantage however volatility still poses risk on margins On the contrary to Banvit and Tat Konserve s stock-farming operations, Pinar Et supplies cattle from third party husbandry companies based on contractual agreements. While domestic livestock companies margin contracted sharply due to not being able to compete with low cost imported meat, Pinar Et benefited from import regime thanks to declining carcass meat prices in 2H10 and 1H11. However, sharp depreciation of TL against Euro and higher custom taxes on carcass meat imports raised the cost of import meat in 2H11. Therefore, volatility of carcass prices on the back of volatile regulation regarding import allowance still remains and appears to be the most significant risk factor on profitability. Moreover, high op-ex/sales ratio (10.8% in 2011 vs 8.3% in 2010) stemming from increase in marketing and advertisement expenses is expected to erode EBITDA figure in Accordingly, we project EBITDA margin to deteriorate to 9.0% in 2011 from 11.4% in Generous dividend payer similar to other Yasar Group companies Similar to other Yasar Group companies, Pinar Et distributed significant amount of dividends to its shareholders regularly with high dividend yields. While the company s average dividend payout ratio stood around 60%, the dividend yield ranged between 5.3% and 11.4% over the last five years. The company paid TL33.4mn dividends in 2011 with a payout ratio of 84% and with a dividend yield of 10.1%. We anticipate TL22mn dividend payment from estimated 2011 net income which corresponds to 9% dividend yield at its current Mcap. 3

4 Investment Negatives Fierce competition in the market challenges strong market presence Fierce competition in the processed meat market is significantly challenging the strong market presence of Pinar Et. According to AC Nielsen, the company s market share in processed meat category (frozen ready meal, salamis, sausages and soudjouk) declined to 18% from 20% as of June The processed meat market in Turkey is composed of national peers such as Aytac, Polonez, Banvit and Maret. Domestic players dominated processed meat market since they are more equipped than multinationals to meet the demand of Turkish consumers and they know which product types and flavors most appeal to consumers, and also more attuned to which marketing strategies and packaging designs are likely to be most effective. Accordingly, stiff competition leading to aggressive pricing and higher marketing charges on the back of increase in advertisement expenses may lead to a erosion in profitability. Volatility in carcass meat prices may create pressure on margins Carcass meat prices and the company s ability to reflect hikes in raw meat prices to product prices are the major determinants of gross margin. It should be noted that gross margin of the company declined sharply to 17% in 2010 from 21.1% in 2009, lowest level recorded over the past five years, mainly due to significant rise in carcass prices. Following the goverment s decision to allow carcass meat imports with lowered custom tax to 30% from 225%, deterioration of gross margin eased starting from 4Q10 (4Q10 Gross Margin:18.7% vs 3Q10 Gross Margin: 15.8%). As a result, gross margin climbed to 17.3% in 1H11 from 16.8% in 1H10 thanks to lower carcass prices which is driven by the allowance of carcass imports. However, cost of imported meat increased in 2H11 due to sharp depreciation of TL against Euro and increase in custom duty on import regime ( the government raised customs duty on carcass meat to 75% from 30% in order to support domestic cattle breeders in July ). Accordingly, we anticipate the company s gross margin to decline 17.1% in 2011FY from 17.3% in 1H11. Higher marketing charges may hurt the margins The company focuses on advertisement and marketing expenses in order to maintain and strengthen its position in highly competitive processed meat market. Advertisement expenses were the largest item in total operational expenses with a share of 26% in Meanwhile, higher marketing charges may hurt the EBITDA margin of the company. Guarantees given to Yasar Group may be regarded negatively by the investors Similar to other Pinar Group companies, Pinar Et is also guarantor for Yasar Group loans amounting to TL 674mn, as of end of June This intra-group relationship has been a factor causing a discount in trading multiples of the company with respect to peers. However, it should be noted that 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 affirmed the Holding s long term foreign and local currency Issuer Default Ratings at B in October Low trading volume should be taken into account The stock has US$0.5mn average daily trading volume within one year period which is very low compared to its international peers. Considering small scale, low liquidity and discount by the investors due to the guarantees given to Yasar Group loans, the stock has been trading at large discounts. However, the discount narrowed recently thanks to increased confidence to Yasar Group companies as the parent company showed its repayment capability of the loans. The stock trades at 27% discount compared to its peers based on 2012E P/E. However, the stock trades at 16% premium compared to its peers based on 2012E EV/EBITDA of 7.1x. 4

5 Valuation & Recommendation We reached an equity value of TL378mn by using discounted cash flow (DCF) method as we believe that it will be the most appropriate tool to reflect the growth potential of the company. We are initiating coverage for Pinar Et with an OUTPERFORM recommendation based on a 12 months target price of TL8.79 per share implying 51% upside potential. We have used discounted cash flow (DCF) to value Pinar Et s core business and added the company s stakes at its subsidiaries to our target valuation. We have calculated a TL based WACC of 13.4% in our analysis for PETUN, based on a risk free rate of 9.5%, terminal growth of 5%, and equity risk premium of 6%. FIGURE 1: DCF ANALYSIS PETUN DCF Analysis (TLmn) 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E TV Net Revenues Gross Profit Operating Expenses EBIT Tax on EBIT (-) Depreciation Expenses (+) Change in WC (+/-) CAPEX (-) Free Cash Flow -TL Discount Rate DCF Firm Value - TL 288 Debt (2011E) -7 Core Business Value 281 Subsidiaries mnth Target Equity Value - TL 378 Current Mcap 252 Number of Shares (mn) Source: IS Investment Estimates mnth Target Equity Value - TL 8.79 Current Price 5.82 Upside Potential 51%. Pinar Et has two financial assets (Yatas and Bintur ) and four subsidiaries namely YBP, Camlı Yem, Desa Enerji, Pinar Foods and Pinar Anadolu. We have taken into account the book value of subsidiaries and the value driven by DCF method for financial assets. Accordingly, we end up with a total value of TL59mn by taking into account 1H11 financials. FIGURE 2: Subsidiaries and Financial Assets Financial Assets Valuation Method Value TL mn Participation Value Attributable to PETUN - TL mn Yatas DCF % 0.34 Bintur DCF % 0.05 Subsidiaries YBP Book Value % Camlı Yem Book Value % Desa Enerji Book Value % 3.51 Pınar Foods Book Value % 3.31 Pınar Anadolu Book Value % 0.24 TOTAL Source: Company Financials 5

6 FIGURE 3: WACC WACC 13.4% Risk Free Rate 9.5% Equity Risk Premium 6.0% Beta 0.6 Cost of Equity 13.3% After Tax Cost of Debt 14.4% D/(D+E) 5% Terminal Grow th 5% Source: IS Investment Estimates Valuation Assumptions Our projection period is ten years covering 2011 to We estimated Turkey s total red meat consumption to grow at a CAGR of 3.2% during our projection period depending on rising population and income level. Besides, we projected per capita red meat consumption to be 13.4kg by 2021 from estimated 11kg in 2011 at a CAGR of 2.0%. According to AC Nielsen, delicatessen market is estimated to be 200K tons including unregistered sales figures. Thanks to increase in disposable income, consumer trends towards value-added products and urbanization, charcuterie market is forecasted to grow at a CAGR of 3% over the next ten years reaching 320K tons. Pinar Et s market share in overall charcuterie market declined to 18% during the first half of 2011 from 20% in 2010 due to stiff competition in the sector. We projected the company s market share constant at 18% during our forecast period thanks to marketing activities and strong brand name. We projected the company s sales volume to grow at a CAGR of 3.1% -parallel to the delicatessen market s growth reaching 54K tons in 2021 from 40K in We forecasted sales prices to grow in-line with average CPI rate. Accordingly, we anticipated sales revenues to grow at a CAGR of 8.8% over the next ten years depending on both volume growth and sales price hike. Gross margin is expected to improve gradually to 17.8% by 2021 from 17% in 2010 on the back of the company s ability to reflect increase in raw material costs to product prices thanks to stabilization of carcass meat prices. Opex/sales ratio is estimated to be 11% in 2011 due to increased marketing and advertisement expenses in order to maintain strong market position. After 2013, we assumed opex/sales ratio to be 10% on the back of economies of scale. Hence, we projected EBITDA margin to improve 10.1% by 2021 from estimated 9.0% in Our capex figures consist of maintenance and modernization investments. We assumed capex/sales ratio to be 2.2% during our forecast period except The company budgeted TL5-7mn cap-ex for 2011 regarding to new product initiations, modernizations and renovations for the facilities. FIGURE 4: Valuation Assumptions E 2012E 2013E 2014E 2015E 2020E 2021 CAGR Total Red Meat Consumption - K tons ,089 1, % growth% -9% 3% 3% 3% 3% 3% 3% 3% Per Capita Red Meat Consumption % growth% -10% 2% 2% 2% 2% 2% 2% 2% Charcuterie Market - K tons % grow th% -7% 11% 1% 3% 3% 3% 3% 3% Market Share 20% 18% 18% 18% 18% 18% 18% 18% Company Sales Volume - ton 40,008 39,638 40,010 41,764 43,111 44,501 52,152 53, % Sales Revenues - mn TL % growth% 15% 5% 9% 11% 10% 10% 8% 7% Gross Margin 17.0% 17.1% 17.3% 17.4% 17.5% 17.6% 17.8% 17.8% Opex Opex/Sales -8% -11% -11% -11% -10% -10% -10% -10% EBITDA % EBITDA Margin 11.4% 9.0% 9.1% 9.4% 9.6% 9.7% 10.0% 10.1% Capex Capex/Sales 0.8% 1.5% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% WCR WCR / Sales 15% 13% 13% 13% 13% 13% 13% 13% Source: IS Investment Estimates 6

7 International Peers Source: Bloomberg & IS Investment Estimates Comparing PETUN with its domestic and international peers, the stock trades at 27% discount compared to its peers based on 2012E P/E. However, Petun trades 16% premium compared to its peers based on 2012E EV/EBITDA of 7.1x. FIGURE 5: Peer Comparison EV/Sales EV/EBITDA P/E TICKER COMPANY COUNTRY BANVT TI BANVIT BANDIRMA TURKEY n.a PPC US PILGRIM'S PRIDE USA n.a n.a 15.2 n.a BRFS3 BZ BRF - BRASIL FOO BRAZIL TSN US TYSON FOODS-A USA HRL US HORMEL FOODS CRP USA HKSAV FH HKSCAN OYJ-A SHS FINLAND FLEUF US FLEURY MICHON SA FRANCE n.a n.a n.a n.a n.a n.a JT NIPPON MEAT PACK JAPAN SLE US SARA LEE CORP USA CFG SM CAMPOFRIO FOOD SPAIN SFD US SMITHFIELD FOODS USA MFI CN MAPLE LEAF FOODS CANADA n.a JBSS3 BZ JBS BRAZIL CRM LN CARR'S MILLING BRITAIN ATRAV FH ATRIA PLC FINLAND n.a Median PETUN TI TURKEY Discount/Premium to global peers 58% 53% 41% 13% 16% 12% -43% -27% -19% FIGURE 6: Discount to Peer Multiples 40% 20% 0% -20% -40% -60% -80% Historical multiples indicate that the stock has been trading at large discounts compared to its global peers due to being guarantor to parent company Yasar Group s loan. However, the discount narrowed recently thanks to increased confidence to Yasar Group companies as the parent company showed its repayment capability of the loans. Similar to other Pinar Group companies, Pinar Et is also guarantor for Yasar Group loans amounting to TL 674mn, as of end of June This intra-group relationship has been a factor causing a discount in trading multiples of the company with respect to peers. 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 affirmed the Holding s long term foreign and local currency Issuer Default Ratings at B in October While the agency has also upgraded the Holding s national long-term rating to 'BBB+(tur)'from 'BBB(tur)', the outlook on Yasar's IDRs and national long-term rating has been revised to positive from stable. Jan 09 Apr 09 Dec 09 Mar 10 June 10 Dec 10 Mar 11 June 11 Sep 11 Source: Bloomberg Discount to global peers (EV/EBITDA) Discount to global peers (P/E) 7

8 Sectoral Overview Total size of the Turkish red meat market is estimated to be around US$8.5 billion while total red meat production including unregistered slaughtering is c.800k tons based on Turk Stat Figures in Although red meat consumption increases in domestic market due to rise in population and income levels, red meat production declined substantially in recent years mainly due to wrong agricultural policies and inadequate and inefficient production in spite of the suitable climate conditions for cattle breeding. Total number of cattle is estimated to be currently around 10.9 mn heads and lamp sheep is around 29.5 mn heads in Turkey. FIGURE 7: Total Red Meat Production tons 1,000, , , , , E 2011E TurkStat Registered Registered and Unregistered Source: TurkStat & Is Investment Estimates Per capita meat consumption of Turkey stands at c.32kg (10 kg red meat and 22 kg poultry meat) which is well below compared to its peer countries that have the same GDP per capita such as Brazil at 87kg and Argentina at 99kg. It is noteworthy to note that, per capita meat consumption in world is c.32kg and pork has 37% share within the total world consumption. Since pork is not consumed in Turkey due to religious principles, meat consumption is primarily focused on veal, beef, lamb and poultry. Per capita red meat consumption is foreseen to increase at a CAGR of 2% over the next ten years on the back of expected rise in the income level and production efficiency with increasing number of corporate livestock companies. The Turkish red meat market is largely fragmented and the share of organized producers is below 1%. Thus, the sector offers potential for large organized players. P e r c a p i t a m e a t consumption of c.32kg in Turkey remains well below c o m p a r e d t o p e e r countries... FIGURE 8: Per Capita Meat Consumption-kg kg USA Argentina Australia Canada Brasil EU Saudi Arabia Per Capita Meat Consumption (Veal and Poultry ) Per Capita Red Meat Consumption (excluding pork) Source: Fabri Outlook, TZOB, TUIK Turkey 8

9 FIGURE 9: Carcass meat prices & import allowance Over the last 20 years, the number of bovines and dairy cows in Turkey declined 13% and 33% respectively. Accordingly, average retail prices of red meat are surged 25% in 2009 and 14% in 2010 due to supply shortage and inefficient cattle breeding operations. Besides, high feed costs and increasing red meat consumption stimulated the price hike of red meat and the retail prices reached its historical high levels during In order to curb ever rising hikes of red meat prices, the government allocated to the Meat and Fish Institute (EBK) an import quota for livestock on April 30, However, the EBK tenders did not result in a decrease in meat prices, so on August 7, 2010 the customs duty for imported livestock was decreased from 135% to 40% until April 1, Livestock imports with lowered customs duty did not ease the hike in red meat prices and the government decided to reduce customs duty on carcass meat from 225% to 30%. As a result of these steps, red meat prices declined 10% Y-o-Y since April 2010 thanks to import allowance of carcass and livestock. On the other hand, domestic livestock companies suffered significantly from the import allowance since they cannot compete with imported red meat due to imbalanced cost structure. Note that, while average cost of domestic production is 15TL/kg, imported red meat s cost stood at around 10TL/kg. Ministry of Agriculture supported the domestic farmers by giving loans with zero interest bearings and over 20K farmers had utilized this credit. In order to increase the competitiveness of domestic livestock operators, the government initially increased custom tax to 60% and then to 75% on July 2, Stockbreeders wanted the government to take measures through only importing breeding livestock rather than carcass red meat in order to not create an import dependent industry. TL/kg custom duty on livestock decreased to 40% from 135% the custom tax on carcass meat increased from 45% to 60%. the custom tax on livecattle decreased to 15% from 30% livestock import allowance custom duty on livestock decreased to 30% and on carcass meat reduced to 30% from 225% the custom tax on carcass meat increased from 30% to 40%. the custom tax on carcass meat increased from 60% to 75%. Jan Feb Marc Apr May June July August Sept Oct Nov Dec Jan Feb March Apr May June July August Source: TurkStat Average Retail Prices of Red Meat 9

10 Delicatessen Market According to AC Nielsen, registered delicatessen market reached to a size of 100K tons while total size of the market including unregistered sales is estimated to be 200K tons. Meat and processed meat products hold the majority within the FMCG by 18% share. Within the meat product categories, rapid growth in delicatessen segment is observed in 2010, raising its volume share to 51% in total market from 40.9% in Total size of the registered delicatessen market is estimated to be around USD1.0billion where at least one charcuterie product has entered to 88% of the homes. FIGURE 11: Meat Products Value Shares FIGURE 12: Delicatessen Value Shares 100% 100% 80% 60% 75% 73% 70% 71% 70% 80% 60% 59% 55% 51% 49% 49% 40% 20% 0% 25% 27% 30% 29% 30% % 20% 0% 41% 45% 49% 51% 51% Packed Unpacked Packed Unpacked Source: IPSOS - KMG Source: IPSOS - KMG The processed meat market in Turkey is composed of national peers such as Aytac, Polonez, Banvit and Maret. Domestic players dominated processed meat market since they are more equipped than multinationals to meet the demand of Turkish consumers and they know which product types and flavors most appeal to consumers, and also more attuned to which marketing strategies and packaging designs are likely to be most effective. According to AC Nielsen, Pinar Et had an overall market share of 18% in processed meat category as of June 2011 (frozen ready meal, salamis, sausages and soudjouk). According to Euro-monitor, Pinar Et is the market leader in chilled processed meat market having a market share of 22% as 2010-year end. The market is largely fragmented and there are many small and mid-size local producers especially in soudjouk segment. Market leader in chilled processed meat market... FIGURE 13: Processed Meat Producers (1H11) Pinar Et, 18% Others, 41% Aytaç, 12% Polonez, 10% Banvit, 7% Maret, 10% Source: AC Nielsen 10

11 Thanks to growing trends towards packaged products for health and hygiene reasons, increasing number of working woman and urbanization, consumer spending on processed meat products is expected to increase in Turkey especially in frozen meat category. According to Euro-monitor, chilled processed food market is estimated to grow at a CAGR of 6.2% over the next five years. Apart from that, increasing disposable income, consumer trends towards value-added products and urbanization is anticipated to raise the demand for ready meals in Turkey. Meanwhile, fierce competition may lead the players to increase advertising and promotional activities in order to grab more share in the growing industry. Chilled processed food market is estimated to grow at a CAGR of 6.2% over the next five years... FIGURE 13: Chilled Processed Meat - Market Shares - Retail Value % Pinar Et Maret Aytac Banvit Coskun Source: Euromonitor 11

12 Company Profile...the first private integrated modern meat processing company of Turkey... PINAR ET VE UN Being the first private integrated modern meat processing company of Turkey, Pinar Et was established in 1985 under Yasar Holding in Izmir. The company is involved in the production of meat, processed meat and frozen meat products under its facilities having slaughtering and processing capacity of 102K cattle, 408K sheep and 1,836K turkeys per annum. Pinar Et doesn't procure carcasses from the market but itself carries out all of its slaughtering in its own facilities for all of the meat that it uses for production. The company obtains live animals mainly from cattle farmers with which the company has contractual agreements. The company procures some part of livestock and all live turkeys from its subsidiary Camlı Yem Besicilik which is the agribusiness unit of Yasar Holding. FIGURE 14: Milestones 1985 Turkey's first private integrated modern meat processing plant was established 2008 First company in food industry to undertake a Lean 6 Sigma operational excellence 1987 First hamburger meatball was produced in cooperation with McDonalds 2000 Production of sliced delicatessen varieties for the first time using clean room technology 1988 Birmas meat market chain is set up to sell carcass meat varieties produced by Pinar Et 1998 Yasar Group established the country's first fullyintegrated facility for meat products Source: Company Shareholder Structure Yasar Holding and Pinar Sut are the shareholders of the company holding stakes at 54.18% and 12.58%, respectively, while free float stands at 33.24%. FIGURE 15: Shareholder Structure Free Float, 33.24% Pinar Sut, 12.58% Yasar Holding, 54.18% Source: Company 12

13 Financial Analysis Capacity and Production Having the processing capacity of 102K cattle, 408K sheep and 1,836K turkeys in an enclosed area of 46K sqm, the company s total production in all categories stood at 40K tons in 2010 with a capacity utilization rate of %58. Finished products hold the majority with 73% share within total production volume while meat and rendering production had 17% and 10% share, respectively. The company is the market leader in processed meat category having an overall market share of 18% and also leader in frozen ready meal meat segment with 53% market share. Having strong brand name and diversified supplier of animals, Pinar Et is the market segment leader in FMCG market in which meat products consumption constituted 17.7% share in FIGURE 16: Capacity and Production tons 50,000 40,000 30,000 20,000 10, E Finished Products Meat Rendering Source: Company Annual Reports & IS Investment Estimates FIGURE 17: Market Shares by Categories % 40% 20% 0% 53% Frozen Ready Meals 34% 24% 18% 19% 21% Pinar Et Source: Company Presentation & IS Investment Estimates 14% 10% Salami Sausages Soudjouk Nearest Competitor Sales Volume Revenues Although total sales volume of the company declined 2% Y-o-Y, revenues grew 15% Y-o -Y thanks to increase in product prices in Except sharp price hikes in 2006 and 2010, average sales price growth remained slightly below the average CPI growth. We estimated the company sales prices to grow in line with CPI inflation throughout our forecast period. 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 considering rapid consumption of meat products. Overall turnover of the company increased at a CAGR of 10% over the past 5 years thanks to increase both in sales prices and volume. Delicatessen products are the major contributor to the top-line with an increasing share of 52.5% in 2010 from 50.5% in Advanced processed products had a portion of 31% in overall sales for the last three years, more stable compared to other product segments. And fresh meat constitute 13.4% share in overall sales in 2010, down from 17% in FIGURE 18: Sales Volume and Avg Sales Prices tons 43,000 42,000 41,000 40,000 39,000 38,000 37,000 36,000 35,000 35K 36K 42K 42K 40K 40K Source: Company Financials & Is Investment Estimates 41K E Sales Volume Avg Sales Prices TL/kg FIGURE 19: Revenues TL mn 400 CAGR:10% E 13

14 Supplies cattle from third party husbandry companies based on contractual agreements and main beneficiary of declining trend in carcass meat prices... Costs and Gross Margin Carcass meat prices and the company s ability to reflect hikes in carcass meat prices to product prices are the major determinants of gross margin. On the contrary to Banvit and Tat Konserve s stock farming operations, Pinar Et supplies cattle from third party husbandry companies based on contractual agreements. Therefore, the company is the main beneficiary of declining trend in carcass meat prices through import allowance. It should be noted that the company prccured only live animals through imports. Gross margin of the company declined sharply to 17% in 2010 from 21.1% in 2009, lowest level recorded over the past five years, mainly due to significant rise in carcass prices. Following the goverment s decision to allow carcass meat imports with lowered custom tax to 30% from 225%, deterioration of gross margin eased starting from 4Q10 (4Q10 Gross Margin:18.7% vs 3Q10 Gross Margin: 15.8%). And gross margin climbed to 17.3% in 1H11 from 16.8% in 1H10 thanks to lower carcass prices which is driven by the allowance of carcass imports. The company s gross margin is still prone to risks from the volatiliy of carcass meat prices due to i) the government raised customs duty on carcass meat to 75% from 30% in order to support domestic cattle breeders, ii) sharp depreciation of TL against Euro increased the cost of import meat. FIGURE 20: Carcass Prices & Gross Margin TL/kg % 20.6% 22.1% 21.3% 21.1% 17.0% 17.1% 25% 20% 15% E Carcass Prices Gross Margin Source: TurkStat - Company Financials 10% 5% 0% Advertisement expenses had the lion s share with 26% in total op-ex Operational Expenses Advertisement expenses were the largest item in total operational expenses with a share of 26% in The company focuses on advertisement and marketing expenses in order to maintain and strengthen its position in the market. Personnel expenses ranked second with a share of 21% within overall sales and personnel expenses over sales ratio stood at 1.8% in Consulting and advisory expenses constituted the third largest cost item with 16% share in Overall opex / sales ratio declined to 8.3% in 2010 from 10.2% in 2009 thanks to 30% decline in advertising expenses. However, we anticipate overall opex/sales ratio to be 10.8% in 2011 on the back of higher marketing expenses related to new product initiations. FIGURE 21: Operational Expenses Breakdown (2010) Repair and Rent Exp, 1.4% Maintenance, 3.9% Outsourced Services, 4.8% Dep and Amortisation, 6.0% Energy Exp, 5.1% Severance Payment, 6.1% Source: Company Financials Others, 9.0% Consulting and Advisory, 16.3% Advertisement Exp, 26.3% Personnel Exp, 21.1% 14

15 EBITDA and EBITDA Margin EBITDA grew at a CAGR of 6% between 2005 and 2010, lower than the revenue growth, and its margin declined to 10.9% in 2010 from 13.3% in 2005 mainly due to sharp rise in carcass meat prices, agressive pricing and inability to reflect hikes in raw material costs to product prices due to depressed consumer demand and fierce competition in the market. Despite operational expenses over sales ratio came down to 8.3% in 2010 from 10.3% in 2009, EBITDA margin declined 2.2pp Y-o-Y due to large amount of deterioration at gross margin. Benefiting from the decline in carcass meat prices thanks to red meat imports, gross margin is expected to improve by 0.5pp Y-o-Y in However, we anticipate higher operational expenses over sales ratio in 2011 (10.8%) compared to 2010 (8.3%) on the back of higher advertisement and marketing expenses. Therefore, we forecast EBITDA margin to be 9.0% in 2011 compared to 11.4% in 2010, which is slighly lower than the company target interval of 11-12% (Both our and the company s EBITDA figure includes Provisions for Severance Pay ) FIGURE 22: EBITDA & EBITDA Margin TL mn % 12.9% % % 13.7% % 9.0% E 33 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: Company Financials and Is Investment Estimates Capital Expenditure Capital expenditures was highest at TL20.9mn in 2008 due to the investments regarding to the modernizations of the production facilities. Capex over sales ratio floated in a range of 0.5% and 6.8% over the last five years. Capital expenditures regarding to renovations amounted TL2.7mn in 2010 corresponding to 0.8% capex / sales ratio. In order to maintain its strong market presence, the company budgeted TL5-7mn cap-ex for 2011 regarding to new product initiations, modernizations and renovations for the facilities. Other than that the company operates currently at a CUR of 58% and there is no need for an investment for capacity increase rather than maintenance and renovations. FIGURE 23: Capital Expenditures EBITDA EBITDA Margin TL mn % % 2.1% 1.9% % 0.8% % E Capex Capex/Sales 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Company Financials and Is Investment Estimates 15

16 Working capital over sales ratio floated from 7% (2007) to 15% (2010) over the past five years. The company had 38 days receivables period, 46 days payables and 29 days inventory period on average between 2005 and In 2009, working capital over sales ratio increased to 14% from 8% in 2008 due to increase in other short term receivables stemming from non-trade receivables from parent company Yasar Holding. FIGURE 24: Working Capital / Sales TL mn % 15% 53 13% % % 8% 7% E Working Capital TL mn WCR / Sales 20% 15% 10% 5% Source: Company Financials and Is Investment Estimates As of end of June 2011, Pinar Et has a net debt position of TL6.8mn, implying a Net Debt to Equity figure of 2%. The company managed to reduce its net debt position to TL9.1mn in 2010 from 59.5 in 2005 thanks to closing out large portion of long term financial loans. FIGURE 25: Net Debt Position Net Debt Net Debt / Equity TL mn M 2011E Source: Company Financials and Is Investment Estimates 0% -10% -20% -30% -40% Similar to other Yasar Group companies, Pinar Et distributed significant amount of dividends to its shareholders regularly with high dividend yields. The company paid TL33.4mn dividends in 2011 with a payout ratio of 84% and with a dividend yield of 10%. We anticipate TL22mn dividend payment from estimated 2011 net income which corresponds to 9% dividend yield at its current Mcap. FIGURE 26: Dividend & Dividend Yield TL mn % 8.7% 8.2% 10.1% 12.0% 10.0% 9% 16% 12% 8% % 4% E 0% Dividend Dividend Yield Source: Company Financials and Is Investment Estimates 16

17 2H11 Outlook Sharp depreciation of TL against Euro and higher custom taxes on carcass meat imports raised the cost of imported meat... Top-line growth driven by higher volumes and price increases In-line with the low range of the company guidance interval of c. 5%-7% for net sales growth, we expect the company s revenues to increase 5% in 2011 on annual basis on the back of 2% total volume growth and 3% price increase. Higher carcass meat prices will drag on gross margin in 2H11 Benefiting from declining carcass meat prices through livestock and carcass meat import allowance in 1H11, the company s gross margin improved to 17.3% in 1H11 from 16.8% in 1H10. However, sharp depreciation of TL against Euro and higher custom taxes on carcass meat imports raised the cost of import meat in 2H11. Therefore, we anticipate lower gross margin in 2H11 lowering the figure to 17.1% in 2011FY from 17.3% in 1H11. Intense marketing activities will weigh on EBITDA margin We expect higher operational expenses over sales ratio in 2011 (10.8%) compared to 2010 (8.3%) on the back of raise in advertisement expenses. Therefore, we forecast EBITDA margin to decline 9% in 2011 compared to 11.4% in 2010, in-line with the company target interval of 11-12% ( EBITDA figure includes Provisions for Retirement Payment ) Determined to distribute high dividends Pinar Et had a significant dividend payment record and the company is expected to continue distributing significant amount of dividends to its shareholders. We estimate TL22mn dividend payment from estimated 2011 net income which corresponds to 8% dividend yield. FIGURE 27: Financial Figures TL mn 2011E 2010 Y-o-Y 1H11 1H10 Y-o-Y Revenues % % Gross Margin 17.1% 17.0% 0.1pp 17.3% 16.8% 0.4pp EBITDA % % EBITDA Margin 9.0% 11.4% -2.4pp 9.1% 11.0% -1.9pp Net Income % % Source: Company Financials and Is Investment Estimates 17

18 This report has been prepared by Yatırım Menkul Deerler 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 Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of Investment. ( This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. 18