Tat Gida: A Small Cap With Solid Prospects

Company Overview

Tat Gida Sanayi AS, formerly Tat Konserve Sanayi AS, (BIST:TATGD) is a Turkey-based food processing company. The company engages in producing and marketing tomato sauce, tomato products and canned food under tomato segment and has synergies between the trademarks with SEK and Pastavilla. SEK is engaged in the production of milk and dairy products and Pastavilla is engaged in the production of pasta, semolina, durum clear flour and batter flour. It is part of Koc Group (BIST:KCHOL) of companies. In August 2014, the company sold its Maret brand to Namet Group Companies. It merged with wholly owned unit Moova Gida Sanayi ve Ticaret AS.

Tat Gida is a company with a market cap of $265 million and a free-floating rate of 41.25%. Average daily trading volume for the stock has been $1.6 million in the past three months.

Since April 2015, Tat Gida has widely outperformed the broader market due to favorable raw material cost and improved revenue streams. However, the stock lost roughly 35% of its value following the outbreak of political crisis between Russia and Turkey. We believe that risks related to the export to Russia are overblown for Tat, and consider the current stock price as a great entry point.


Solid Growth Prospects

Given that exports averagely only represent 10% of total revenues of Tat Gida, the rising tension in the Middle East is not a huge threat. With that said, Tat Gida even managed to grow its export in 2015. The company simply took the advantage of operating in a safe and stable industry.

The company recorded double-digit growth rates in tomato and dairy segments (revenues figures were TRY367 million and TRY492 million, respectively). The acquisition Moova and newly contributed product helped the company boost its sales in the dairy segment, also provided a tax shield as the company book a loss of TRY114 million from the acquisition.

Tomato prices was sharply down in 2015 and continue to remain at low levels. In addition, raw milk prices also have remained unchanged since the beginning of 2015. Tat Gida’s businesses should continue to benefit from favorable raw material costs.

The company improved its balance sheet structure by showing continued progress on debt reduction. Net financial debt to EBITDA ratio lowered from 6.7x in 2011 to 1.0x in 2015.

We expect that aforementioned favorable developments will portend well for the growth of Tat Gida’s margin and EBITDA growth would be in the 10%-12% range over the course of next three years in Tat Gida.



The stock is trading at huge discount to its peers with 2016E P/E of 8.9x, and 2016E EV/EBITDA of 8.2x. Given the solid growth prospects of the company, we believe that the current valuation are not justified by the fundamentals of the company, and Tat Gida should be an outperformer.


Above is the DCF analysis for Tat Gida which produced a fair value of TRY 7.7 per share, offering 61% upside potential. Ultimately, Tat Gida is interesting as a small cap play for investors looking for diversifying their portfolio and betting on a safe industry in Turkey.


Halkbank: Not A Good Play for the Current Trends

Halkbank has performed poorly since last November and now the stock trades slightly below its book value and is one of the worst performing stocks among Turkish blue-chip stocks.

Halkbank - Stock Price

The bank closed 2011 with 14.4% return on equity and an aggregate net income of 2,206 million liras, which was 22% lower compared to the posted number a year earlier. Net interest margin stood at 4.2% at yearend thanks to solid fourth quarter margin of 4.5%. The bank saw its loan portfolio growing 19.9% on yearly basis. Loans to deposits ratio rose to a record level of 98.1% as deposits grew moderately by 2.9% year-over-year. Not surprisingly, the reported capital adequacy decreased to 13.6% thanks to the rise in risk-weighted assets arising out of the wildly growing loan portfolio.

Halkbank - Valuations

The worrisome point is that the return on equity figures have been on steady decline in Turkish banks, but more remarkably in Halkbank. For the last four quarters the bank has been posting a figure below 20%. Following that the stock has been interestingly most volatile one among large-cap Turkish banks stocks that deteriorates the outlook of the stock through its impact on beta which is a component of the cost of equity.

Turkish banks reported the highest 12-month trailing net income ever in February with remarkably rising fee income. Given its lower exposure to credit cards compared to those of its peers, Halkbank operates with lower fee income generation. Thus, I believe Halkbank is not fully benefiting from the improving sector outlook.

Halkbank - Price Target

My price target for the stock is 14 TRY implying a not convincing upside potential of 9%. I arrived at this price target based on 1.1x price to book multiple, 9% assumed growth rate, and 15% cost of equity which is derived from a beta of 1.4x, an equity risk premium of 6%, and a risk-free rate of 7.5%.


Of the 36 analysts covering the bank, 23 have a buy ratings, while 11 recommend to hold and 2 think the stock should be sold, according to the company’s Investor Relations website.

Finally, do not forget to read our disclaimer.

The Curious Case of Asya Bank

Asya Katilim Bankasi A.S. (ASYAB) is the third largest Islamic lender in Turkey by assets which is backed by Gulenist capitalists making it become a target as the government declared war against Gulen movement and called it public enemy number one.

As well known, the breaking point was the graft investigation conducted by the prosecutors linked to Gulen movement in late 2013. Since then it has been speculated that Asya Bank was facing difficulties mostly created by the government. One wouldn’t expect to hear such speculations in a country where a banking crisis sank the economy in 2001. However, first, state-run companies were being told to cut the business relationships with the bank. Then Turkey’s Banking Watchdog’s banning the collaboration between Asya Bank and Qatar’s Islamic Bank followed. After that the Prime Minister Recep Tayyip Erdogan made a straight-out comment about the company, saying that the bank is not in good shape. The rest of story is even more complicated. Deputy Prime Minister Ali Babacan announced that the biggest state-run lender Ziraat is in talks to acquire Asya. But hours later we saw Erdogan’s advisor Yigit Bulut denying Babacan. A detailed articled published on Wall Street Journal can be viewed here. All sounds like a endless story? Sure it is a messy problem the has no easy solution. In other respects Asya is the 12th most traded stock in Borsa Istanbul with representing 3% of total traded volume.

Provided that second quarter results has not been reported yet, let us take a look at how things have gone for Asya for the first three months of the year.

Asya Bank First Quarter Results

As expected it has been some kind of meltdown for Bank Asya thanks to villainous government-led efforts, with corporate customers responding to government pressure by withdrawing deposits and not rolling over loans. In just three months of times total assets of the bank saw a decline around 18%. Considering the all catalysts mentioned above the year to date stock performance full of ups and down comes as no surprise.

Asya Bank Stock Performance

At the moments trading the stocks of the company is suspended until further notice and none has no idea about when this trading halt will actually finish. Meanwhile unofficial information (or noise) release still continues that would affect the stock price significantly. Ziraat’s acquisition is still in focus, on the other hand many are weighing the possibility of bankruptcy.

From a broader fundamental perspective, we saw return on average equity slumping at 6.5% and 7.4% in 1Q14 and 2Q13, respectively. Before taking this into valuation, one may derive a cost of equity of 15.3% derived from 9% inflation rate, 6% equity premium and 1.05x beta (first two components of derivation is in line with all Turkish banks while the last one is Asya-specific). With the great uncertainty about future growth, I directly take RoE/CoE ratio as target P/BV for the stock and exclude the excess capital as the bank will probably more capital to meet requirements in next 24 months. As a result I think the bank would be fairly priced in case of hanging around 0.42-0.49 times its book value. At the time being the bank is traded 0.44 times its book value at 1.24. According to my calculation it will trade between 1.20 and 1.38 which is not offering an attractive risk/reward profile under these circumstances.


The bank reportedly earned 10 million liras on 337.4 million liras of revenue, making the bank beat the expectations. Analysts expect the company to report a loss of 50 million liras.

The stock has been removed from all indexes by the Borsa Istanbul management in order to prevent it from fluctuatingly influence the market.

The talk to acquire the bank by Ziraat keep going according to the various sources.

UPDATE 2 (2/4/2015):

The management of the bank is seized by the Turkey’s official deposit insurance foundation (TMSF).

Going into more detail, TSMF takes over the management of 63% of the company’s preferred shares, citing violations of banking regulations on transparency in organizational and partnership structure. The action came after an order from the main banking regulator. Therefore, it is important to note that bank is not facing any financial problems. The bank will reportedly continue its operations. The developments for now are not to be considered as worrisome by neither equity nor bond holders.

The whole action is simply seen political-based as the country’s psuedo-independent banking regulator takes over the control of bank because of its Gulen ties in order to fulfill Erdogan’s wishes. A very briefing piece is released on Bloomberg.