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.


Turkish Stocks: Banks v Industrials

One of the key market themes that marked this year has been the bank stocks trading with low multiples and the advancement in the industrials. Time and time again we uttered that the golden age of Turkish banking is over (see here and here) which was finally embraced by a top banker in Turkey. Given the banks capturing a dominant share of the Turkish stock market the BIST 100 index has expectedly performed poorly.


We also have seen the ratio of the Turkish banking index (BIST:XBANK) to industrials index (BIST:XUSIN) falling below 2 this year which may have seemed like an anomaly from a historical perspective. A part of analysts attributed this to the start of a bear market while the other part mentioned a changing overall market trend. Despite the fact that I have been long-term bear and clearly recommended investors to avoid from risky Turkish assets (and EM in general), I also believe the upheaval in Turkish market has begun forcing investor to be extremely selective to be able to make a winning pick.

Turkish Stocks Volume - Banks v Industrials

Turkish Stocks Valuations - Banks v Industrials

Interestingly, according to volume data the dominance of the banks are likely to continue. This may require the fund managers moving to a set of unconventional investment strategies such as smart-beta from typical index investing as hoping and holding bank stocks leave investors face a potential long-term bear market.