Valuation

Sahibinden: On the Cusp of Becoming Turkey’s First Unicorn

Sahibinden.com is an online shopping in platform in which people and businesses buy and sell real estate, cars and broad variety of goods and services, headquartered in Istanbul and owned by Aksoy Group. Sahibinden’s e-commerce business relies solely on third-party sales in Turkey, in other words, a model similar to Alibaba is being followed. We’ll covering the details about the company for the remainder of this article, but let’s take a look what see in Turkey’s demographics and how capable it is when it comes to fueling growth in e-commerce business.

Turkey’s Demographics

As summarized on the figure above, Turkey’s young and fast-growing population and internet accessibility will be the key driver of the growth and deliver favorable conditions for companies that want to tap into a dynamic market of eager new consumers. Thus, it is not hard to imagine the country in the coming years with half of its population shopping online.

Turkey’s e-commerce business volume is expected to be around $10.2 billion, however, representing only 1.8% of total volume in retail sector. Considering the fact that online shopping accounts for +4% of total business across the emerging markets, Turkey still has a huge room for growth. In 2015 multi-channel online retailing business saw an increase of 45% on annual basis, also building a supportive case for our investment thesis for Sahibinden.

Turkish Online Marketplaces

Turkish ecommerce market is dominated by online marketplaces and multi-category retailers. Turkey some online retail heavyweights whose business include first-party sales (like HepsiBurada, Trendyol, Markafoni) while some others solely rely on third-party sales (like Sahibinden, GittiGidiyor, N11, Letgo). HepsiBurada is a typical multi-category retailer while Trendyol and Markafoni stand for online fashion stores. The distinguished feature of Sahibinden that it is also involved in real-estate and vehicle sales.

Turkish internet companies have received remarkable investments to date. The following is a list of the biggest deals ever made in Turkish tech space.

About Sahibinden

Sahibinden differs from other e-retailers owing to its exposure to intermediary of real property trades. As its name, which means “by owner” in Turkish, suggests that Sahibinden is well-developed positioning in its market. When search engines and social media sites excluded, Sahibinden tops the most popular keywords league table.

Its solid position in property sales over the internet provides significant advantages to Sahibinden. As well known, the core business of online marketplaces is mediating the trade where they charge traders with fees establishing the main source of revenue for themselves. Some other businesses have different streams such as ad sales, real estate listings, motors listings, financing fees, off-platform payment fees etc. These so-called non-marketplace revenues should be expected to be high in Sahibinden given its concentration on property trade.

In a nutshell, Sahibinden is well-positioned business with diversified revenue streams in a fast-growing environment.

This is where we feel like we are the end of our rope, since lack of data remains as a pretty straightforward issue for valuing the company. At this stage, we will be applying some peers’ (Ebay, Alibaba and MercadoLibre) data gathered from Statista and the US SEC (Note that shares of all the peers mentioned is traded in Nasdaq, with quotes of EBAY, BABA and MELI, respectively).

There are several metrics to look for when valuing a marketplace, but Gross Merchandise Volume (GMV) appears to be the most important metric. We have gathered data on publicly traded comps (MELI, EBAY) and found the valuation multiple is 0.8x the run rate GMV. However, note that there have been transactions that took the metric up to 2x.

Another important input is that Turkey’s e-commerce represent only 1.6% of total traded which is remarkably low, even compared to the emerging markets, like Brazil, where 3.2% of total shopping is done online. With that being said, e-commerce volume growth in Turkey as almost doubled that of global, which builds a supportive case for a premium valuation.

According to the official statistics, total e-commerce volume is expected to be $10.2 billion in 2016 in Turkey. Sahibinden’s market share is not higher than 5% but remember that Sahibinden’s non-marketplace revenue base is stronger than those of its competitors. So, the market share should not be what is driving the valuation strategy.

Due to similarities between two companies we chose to use MercadoLibre for valuation comparison purposes. Both companies operate in developing economies (MercadoLibre operates in Latin America countries, Argentina and Brazil represent 80% of the revenues) with middle-income populations. We think the valuation would be a function of number of Internet users and nominal GDP per capita. MercadoLibre operates in a region with number of internet users of 340 million whose income averages $6.900 per annum while 40 million users averagely earn $8.700 in Turkey. Given MercadosLibre’s average stock market valuation of $5.8 billion last year, Sahibinden could worth $860 million.

One critical point is that MercodoLibre generated a GMV of $7.1 billion last year, which means that the company is valued at 0.8 times GMV. Our estimated worth for Sahibinden would possible signal a considerably premium valuation on this multiple, which is, in our view, justified given Turkey’s e-commerce business’ potential growth. Also, increasing risk appetite in global funding market could lead a significant markup for Sahibinden, and then, we might able to see it among so-called unicorns, a term being used for tech companies whose valuation exceed $1 billion. Though there is not enough data making it hard to fully assess, Turkey’s strong demographic profile and its strong positive relative to other prominent e-commerce companies make Sahibinden a good play for venture capitalists looking for multi-million investments in emerging markets.

State-Owned Banks under Pressure

Considering the fact that poor performance from main bank stocks is more able to drag the whole market down in Turkey than anywhere else, I have been trying to provide comprehensive information about the key themes in the industry in order to measure the changing dynamics. From this point I find analyzing of state-owned banks’ recent performance extremely necessary as it is already seen as the biggest threat to Turkish markets.

Halkbank and Vakifbank are the state-owned banks whose shares also traded in Borsa Istanbul with free-float rates of 49% and 25%, respectively. Their poor performance compared to the peers on a year-to-date basis had been already eye-catching, but, it has been even clearer following the general elections which ended up with no single party majority. As being run by the state share prices of both banks were amenable to the outcome of the elections.

Above is the visualized form of year-over-year stock performances of Tier-1 banks in Turkey where two state-owned banks’ are shown in different shades of red. Vakifbank and Halkbank along with Yapi Kredi seem to be underperformers and all three have provided a negative return to investor through this period. Reviewing the stock performance with the fundamental data is here to be a key to fully discover the pricing dynamics and what actually lies behind.

According to 1Q15 results Halkbank posted a ROE figure of 15.7% that made it one of the most profitable banks in CEEMEA region, however, this could not have prevented the stock from trading below its book value. On the other hand Vakifbank with a ROE of 13.6% is traded a significant discount of 26% to its book value. In light of this information two stocks are not fairly valued, offer a huge potential upside, and each indeed would be a great buying opportunity for investors who are eager to take hard to predict political risks.

In a previous note about Halkbank, I mentioned that the stock should not have been the conviction call among Tier-1 Turkish banks, and it was not likely benefit from the current trends in the industry. The current valuation is definitely beyond the framework I had proposed. As a matter of fact it is safe to say that political worries could be overblown.

On the other hand, there is evidence that shows Halkbank has always been valued with a company specific risk premium. The following charts show that the bank is traded with modest multipliers when compared to Tier-1 banks. Moreover, now Halk is not exceptionally far from historical averages in valuation terms.

With so many upside and downside catalysts it is tough to allocate funds perfectly in emerging markets as the transformation in global monetary policy is likely to a game changer. Most particularly in Turkey it is crucially important to walk on eggs where the stock market is set to navigate in choppy waters. Within this context I believe the short term potential and longer term risks in Turkey’s state-owned banks stocks should be realized.

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.

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.

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.

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%.

Valuation

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.

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