ulker sanayi

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THIS REPORT IS PREPARED BY TEB INVESTMENT. IT IS BEINGINVESTMENT AND OUTSIDE TURKEY JOINTLY BY TEB INVESTME

COMPANY REPORTEQUITIES RESEARCH

ULKER TI

ULKER BISKUVI SANTURKEY / FOOD BEVERAGE & TOBACCO

HOLD

TA

CL

UP

INDUSTRY OUTLOOK

Reinventing its stren

CHANGEThe powerhouse of the Turkish snacks ma

With the acquisition of chocolate confectionary ( cake (Fresh Cake and AGS) operations, Ulker Bisk

ull-scale snacks company with a leading positiochocolate segments and a second position in thehas critical mass in production, marketing and di

CATALYSTNew strategy and accompanying major re

Taking inorganic growth, cost savings and new maccount, we expect Ulker to increase its revenues

average annual rate of 13.5% (org 7.6%) and 34.6TRY3,381m and TRY343m between 2011 and 201to improve as its new merchandising process tak

VALUATIONBecame stretched after strong run of the

We initiate on Ulker with a TP of TRY7.20, indicat

potential. We derive our TP using a blended valuweights to DCF and peer comparables valuations.

estimates include execution risk of the new stratand TRY weakness. Low commodity prices pose u

COMMENT Attractive growth potential in a market wi

Ulker, with an almost 48% market share, is the uTurkish snacks market for biscuit, cake and choc

increased at a CAGR of 10% over last three years

volume terms. Eti is the second and only other i28% share. No other single player has more than

Over next five years, we expect the market to gro

8.0% pa in value, thanks to favourable demograpcapita growth. Turkey’s population is growing 1.2income has increased sharply at a CAGR of 37.1%

INITIATION

Kenan [email protected]

+90 216 636 4531

BNP Paribas Securities (Asia) Ltd. research is available on Thoour salesperson for authorisation. Please see the important n

DISTRIBUTED IN TURKEY BY TEBNT AND BNP PARIBAS

YI A.S.

HOW WE DIFFE

Target Price (TRY)

EPS 2012 (TRY)

EPS 2013 (TRY)

P

Market Recs

RGET

SE

/DOWNSIDE

TRY7.20

TRY6.84

+5.3%

gths

rket

lker Chocolate) anduvi (Ulker) became a

in the biscuit andcake segment. It nowstribution in the sector.

structuring is underway

arketing initiatives intoand EBITDA by an

% (org 13.0%) to. We expect profitability

es hold.

tock

ing 5.3% upside

tion, assigning 50:50Downside risks to our

gy, commodity pricespside risk.

th high barriers to entry

disputable leader of thelate. This market has

in value terms and 6% in

portant player with a a 5% share.

w 3.5% pa in volume and

ics and income per% pa and its per capita in the last eight years.

son One, Bloomberg, TheMarkets.com, Factset and on http://eqreseotice on the inside back cover.

KEY STOCK DA YE Dec (TRY m)

Revenue

Rec. net profit

Recurring EPS (TRY)

EPS growth (%)

Recurring P/E (x)

Dividend yield (%)

EV/EBITDA (x)

Price/book (x)

Net debt/Equity (%)

ROE (%)

Share price performanc

Absolute (%)

Relative to country (%)

Next results

Mkt cap (USD m)

3m avg daily turnover (

Free float (%)

Major shareholder

12m high/low (TRY)

3m historic vol. (%)

ADR ticker

ADR closing price (USD)

Issued shares (m)

Sources: Bloomberg consInvestment/BNP Paribas

5.13

5.63

6.13

6.63

7.13

7.63

8.13

Jun-11 Sep-11

(TRY) Ul

R FROM THE STREET

BNPP Consensus % Diff

7.20 6.62 8.8

0.36 0.41 2.4

0.47 0.47 14.9

ositive Neutral Negative

3 6 1

rch.bnpparibas.com/index . Please contact

27 JUNE 2012

A 2012E 2013E 2014E

2,502 2,748 2,959

123 159 174

0.36 0.47 0.51

(85.3) 29.6 9.2

19.0 15.1 14.3

12.0 1.6 5.4

11.7 9.5 8.9

2.8 2.4 2.3

79.9 62.8 58.5

13.3 17.6 17.5

e 1 Month 3 Month 12 Month

18.4 42.6 42.1

8.6 49.2 47.4

August 2012

1,284

USD m) 3.2

21

Yıldiz Holding (45%)

7.78/4.80

58.0

-

-

342

ensus; Bloomberg consensus; TEBestimates

(9)

1

11

21

31

41

51

61

71

81

Dec-11 Mar-12 Jun-12

(%)ker Biskuvi Sanayi A.S.

http://equities.bnpparibas.com/





Ulker Biskuvi Sanayi A.S. Kenan Cosguner

2 BNP PARIBAS 27 JUNE 2012

CONTENTS

Investment theme highlights __________________________________________________________________ 3

Investment positives _____________________________________________________________________________________________ 3

Investment risks ________________________________________________________________________________________________ 3

Valuation ___________________________________________________________________________________ 5

DCF methodology _______________________________________________________________________________________________ 6

Peer comparison ________________________________________________________________________________________________ 6

Company dynamics __________________________________________________________________________ 8

Business structure ______________________________________________________________________________________________ 8

Ulker definitely had to change strategy to boost profitability ___________________________________________________________ 10

Profitability margins and commodity prices ____________________________________________________ 11

Working capital and procurement of raw materials __________________________________________________________________ 11 Exports have lower profitability but offer growth ____________________________________________________________________ 12

P&L, Balance Sheet and Cash Flow ____________________________________________________________ 13

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Investment theme highlights

Investment positives

We initiate coverage on Ulker Biskuvi (Ulker) with a HOLD recommendation and a target price of TRY7.20/share, indicating +5.3% upside. In our view, most of the potential improvement in operatingperformance and enhanced transparency in corporate structure has been discounted in the stock price,which has risen roughly 40% and outperformed the benchmark by 50% in last two months.

We estimate a remarkable improvement in EBITDA margin, from 4.3% in 2011 to 8.1% in 2012, due tothe increasing share of higher-margin chocolate in total sales as well as recent initiatives aimed atboosting profit margins by: 1) merging three distribution arms into a single entity to increase economiesof scale (should produce 15-20% savings in distribution costs by reducing the number of local distributors from 235 to roughly 100); and 2) focusing on high turnover-high margin SKUs while cuttingthe total number of SKUs (stock keeping units) from more than 500 to around 350. At the same time, theCompany increased the leverage of “star” SKUs (high turnover-high margin) with advertising andmarketing campaigns and eliminating unprofitable ones. Ulker also believes that the increasing share of high turnover products should also reduce product returns as average shelf life diminishes, resulting ina further improvement in profitability.

Over the next five years, we expect the snacks markets for biscuit, chocolate and cake to grow anaverage 3.5% pa in volume and 8.0% pa in value, thanks to favourable demographics and potential per

capita income growth. With more than 43% of all citizens under the age of 24, Turkey has an annual population growth of 1.2%. Its per capita income has increased sharply at a CAGR of 37.1% in the lasteight years. Between 2008 and 2011, the total snacks market for biscuits, chocolate confectionary andcake increased at a CAGR of 10% in value terms to TRY4.7b and 6% in volume terms to 505,000 tonnes in2011. Per capita biscuit and chocolate consumption in Turkey are 3kg and 2kg, respectively, versus 8.5kgand 4kg in Europe.

We see considerable barriers to the Turkish confectionary market. Although the capital expenditurerequirement for production facilities is relatively low, the challenge lies in: 1) brand building bydelivering products that satisfy consumer tastes; 2) establishing a large network and maintaining itseconomic viability by feeding it with high volumes and product variety; and 3) providing workingcapital. Moreover, intensive price and product competition between two major players – Ulker and Eti –also discourage others entering the sector and form another major barrier for potential entrants.

Although dividend yield was remarkably high in 2012, we do not expect it to be sustained at that level.

Investment risks

Past acquisitions were priced at the high-end of the range. Ulker acquired a 24.9% stake in Godiva at anacquisition multiple of 15.0x EV/EBITDA in late 2007. Last August, Ulker acquired a 91.7% stake in UlkerCikolata from Yıldız Holding and Dynamic Growth for TRY825m, valuing it at TRY900m. With roughlyTRY250m net debt and 2011 EBITDA estimate of TRY60m, we derived an EV/EBITDA multiple of 19.1x forthe acquisition. High acquisition multiples should also reflect Ulker’s synergy expectations from theacquisition. However, those transactions could be value dilutive for minority shareholders.

Any secondary public offering in the medium term. Yildiz Holding and the Ulker family members hold A-and B-type shares, which constitute less than 0.0001% of total outstanding shares. This entitles them toappoint five of the seven members of the board of directors. The remaining two independent membersof the board are elected by the General Assembly. Though we do not expect a secondary public offeringin the short term, Yildiz Holding and the Ulker family do not need to hold a significant stake to control the company.

Though we expect Ulker to be able to maintain its current high market share, the company has lost5-7ppt market share in biscuit, chocolate and cake categories to arch rival Eti over the last four years,according to AC Nielsen. There are certainly execution risks inherent regarding the new strategy thatmay further hurt Ulker’s market share. In our view, competitive response is a major risk factor with Etihaving previously pursued a similar (SKU-focused) strategy. As both Ulker and Eti focus on similar SKUsas their major source of income, competition could grow intense.

Last March Yıldız Holding merged all distribution arms serving traditional channels into a singlecompany, Horizon Dagitim (Horizon). Potential cost savings will be fully attained from 2013 onwards.

Ulker has no stake in Horizon, where cost savings from the merger of distribution channels couldaccrue. Not that before that merger Ulker owned distribution arms serving traditional channels. Weassume that savings from the merger will help Ulker reduce distribution expenses, as Horizon will notbe profit-driven and will effectively return savings to Ulker.





The declining share of traditional channels over modern channels poses a major risk to Ulker’sprofitability as it derives almost 70% of its revenues and more than 85% of operational income fromtraditional channels (small retail and grocery stores), according to our estimates. The strong growth of hard discounters is another major risk: they tend to build their own private labels. However, Ulker’sexposure to private label production via Biskot, in which Ulker has a 44% stake, partly makes up for theadverse effect of private labels. Biskot accounts for roughly 11% of Ulker’s consolidated revenues in2012, according to our estimates. Biskot has its own brands and is a major supplier of the largest harddiscount and retail chain, BIM (BIMAS TI; BUY), which has a 14% share in the biscuit market.

Prices have increased below inflation in the between 2008 and 2011. Major raw materials accounts for70% of total production costs. Therefore, Ulker struggles to pass on any major increases in wheat,cacao, sugar and palm oil prices which subsequently hit profitability margins. Any major TRY weaknesswould also hurt profitability, as roughly 50% of raw material prices are USD-denominated.

Ulker procures almost 40% of its raw material requirements from sister companies and generates anyrevenue via sales and marketing companies owned by Yildiz Holding on an arm’s length basis.





Valuation

We derive our target price based on a blended valuation, assigning 50:50 weights to DCF- and peer-comparison methodologies.

EXHIBIT 1: Summary valuation

Method Value Weight Weighted value

(TRY m) (%) (TRY m)

Discounted cash flow 2,181.4 50 1,090.7

Peer group multiples 2,251.2 50 1,125.6

Estimated fair value 2,216.3

Issued shares (m) 342.0

Current price (TRY/share) 6.84

12-month target price (TRY/share) 7.20

Upside (%) 5

Source: TEB Investment/BNP Paribas estimates

EXHIBIT 2: Income statement forecasts

Year-end 31 Dec (TRY m) 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Sales volume (000 tonnes) 328 408 423 439 456 473 491 508 523 536

Growth (y-y %) 24 4 4 4 4 4 4 3 2

Biscuits 240 241 248 255 262 269 277 285 291 294

Growth (y-y %) 1 3 3 3 3 3 3 2 1

Chocolate 56 116 121 127 134 140 147 153 159 165

Growth (y-y %) 108 4 5 5 5 5 4 4 4

Cake 33 51 54 57 60 63 66 70 73 77

Growth (y-y %) 6 6 5 5 5 5 5 5

Revenues 1,799 2,502 2,748 2,959 3,167 3,381 3,610 3,844 4,043 4,237

COGs 1,435 1,866 2,024 2,178 2,322 2,475 2,638 2,804 2,947 3,088

Gross profit 364 636 724 781 845 907 973 1,040 1,096 1,149

Operating expenses 319 480 517 554 589 626 664 703 735 766

Operating profit 45 156 207 227 255 281 308 337 360 383

EBITDA 77 203 256 282 314 343 373 405 431 457

EBITDA margin (%) 4.3 8.1 9.3 9.5 9.9 10.1 10.3 10.5 10.7 10.8

Other income, net 54 22 20 20 20 20 20 20 20 20

Net financial income (exp.) 621 (12) (12) (12) (12) (12) (12) (12) (12) (12)

Profit before MI & tax 720 166 215 235 263 289 316 345 368 391

Minority interest (12) (10) (13) (14) (16) (17) (19) (21) (22) (23)

Tax expense (51) (33) (43) (47) (53) (58) (63) (69) (74) (78)

Net profit 657 123 159 174 195 214 234 255 272 289

Sources: Ulker Biskuvi; TEB Investment/BNP Paribas estimates

We assume the share of exports over total revenues declines gradually to 10% from 15%. Apart from costsavings from distribution and an increasing share of higher-margin chocolate sales, we expect the newmarketing strategy (leveraging high-margin high-turnover products and eliminating unprofitable ones) towork out well for profitability margins from 2013. We do not forecast a major increase in raw material costs that Ulker cannot pass through to customers, nor do we expect major competition from Eti to hurtprofitability.





DCF methodology

Utilization levels at production facilities are at a relatively low 70-75%. So, despite our forecasting a 20%increase in unit sales over the next five years, investment of just 2% of total revenues should cover anymajor capacity expansion. On the working capital front, we expect lower inventory and receivable days asthe company focuses on faster-moving products. Over the forecast horizon (between 2012 and 2020), we forecast a CAGR of 6.5% in revenues, 10% in EBITDA and 20% in free cash flow.

We adjust our DCF valuation for the value of Ulker’s Godiva stake and receivables from Yildiz Holding as

well as for non-controlling shareholdings In Biskot, in which they own a 56% stake.

EXHIBIT 3: DCF valuation

Year-end 31 Dec (TRY m) 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Revenues 1,799 2,502 2,748 2,959 3,167 3,381 3,610 3,844 4,043 4,237

Growth (y-y %) 18.1 39.1 9.8 7.7 7.0 6.8 6.8 6.5 5.2 4.8

EBITDA 77 203 256 282 314 343 373 405 431 457

Margin (%) 4.3 8.1 9.3 9.5 9.9 10.1 10.3 10.5 10.7 10.8

EBIT 39 160 211 234 263 290 318 347 371 395

Unlevered taxes (8) (32) (42) (47) (53) (58) (64) (69) (74) (79)

Effective tax rate (%) (20) (20) (20) (20) (20) (20) (20) (20) (20) (20)

NOPAT 31 128 169 187 211 232 254 278 297 316

Capital expenditures 65 77 76 74 72 73 73 72 71 70

Depreciation & amortisation 38 43 46 48 50 53 55 58 60 62

Change in working capital 15 (51) 27 23 23 24 25 26 22 21

Unlevered free-cash-flow (10) 145 111 138 166 188 212 238 264 287

WACC at target D/TC of 20% (%) 9.7 10.9 12.3 12.2 11.4 10.9 10.6 11.3 11.2 11.2

Discount multiplier 1.00 0.90 0.80 0.72 0.64 0.58 0.52 0.47 0.42 0.38

Cost of equity (%) 10.4 11.5 13.2 13.3 12.4 11.8 11.4 12.2 12.1 12.1

Cost of debt (after tax) (%) 7.1 8.4 8.5 7.8 7.4 7.0 7.6 7.5 7.5 7.5

NPV

FCF 979

Terminal value@%3 1,380

Value of company 2,463

Minority interest 172

Equity participation & receivables 392

Net debt 501

Implied equity value 2,181

Sources: Ulker Biskuvi; TEB Investment/BNP Paribas estimates

Peer comparison

We select a wide array of global food and confectionary companies as Ulker’s peers. However, we note:

there are not many comparable confectionary companies of a similar size, business structure andproduct portfolio; and

Ulker fundamentally differs from many of its peers in two aspects: 1) many global peers have lowgrowth rates in their major markets, although they have a significant exposure to emerging marketswhere they enjoy significant growth rates; and 2) Ulker enjoys a moderate level of growth in its majormarket but does not have any direct exposure to emerging markets.





EXHIBIT 4: Peer comparison

Market ---------------- P/E ---------------- -------------- EV/EBITDA ----------- ------------- EV/Sales --------------

Company BBG code cap 2011 2012E 2013E 2014E 2011 2012E 2013E 2014E 2011 2012E 2013E 2014E

(USD m) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x)

Developed markets

Kraft Foods KFT US 66,771 16.5 14.9 13.4 12.3 10.5 9.9 9.2 8.6 1.7 1.7 1.6 1.5

General Mills GIS US 24,643 15.0 14.5 13.5 12.7 10.2 9.8 9.2 8.7 2.2 1 .9 1.8 1.8

Kellogg Co K US 17,290 14.1 14.4 13.3 12.3 9.7 9.7 8.9 8.4 1.7 1.6 1.5 1.4

Hershey Co HSY US 14,822 22.9 20.2 18.5 17.4 12.6 11.4 10.6 10.0 2.7 2 .5 2.4 2.2

Flowers Foods FLO US 3,037 22.5 21.2 18.3 17.4 11.1 10.0 8.8 9.0 1.2 1.1 1.0 1.0

Campbell Soup Co CPB US 9,953 12.1 13.0 13.0 12.5 7.9 8.4 8.3 7.9 1.6 1.6 1.6 1.6

Conagra Foods Inc CAG US 10,330 13.4 13.9 13.0 12.5 7.7 7.8 7.3 6.9 1.0 1.0 0.9 0.9

Nestle Sa NESN VX 185,338 17.4 16.7 15.5 14.2 11.8 11.3 10.5 9.6 2.2 2.2 2.0 1.9

Barry Callebaut Ag BARN SW 4,479 16.3 16.7 14.5 12.8 10.8 11.8 10.8 9.8 1.1 1.1 1.0 1.0

Lindt & Spruengli Ag LISP SW 7,602 28.0 26.6 24.3 22.2 15.0 14.6 13.5 12.5 2.5 2.5 2.3 2.2

Petra Foods Ltd PETRA SP 1,077 17.5 15.1 13.4 13.0 12.8 10.9 10.1 9.5 0.9 0.9 0.8 0.8

Mayora Indah Pt MYOR IJ 1,706 39.3 24.9 18.9 15.1 21.1 14.3 11.5 9.5 2.0 1.6 1.3 1.1

Want Want China Holdings 151 HK 15,613 39.8 28.9 23.3 19.1 27.6 19.7 15.7 13.1 5.3 4.2 3.4 2.9

Grupo Bimbo BIMBOA MM 10,038 20.5 22.6 17.9 15.8 10.9 10.8 9.6 8.0 1.3 1.1 1.0 0.9

Peer group average 17.1 15.8 14.2 13.1 10.2 10.0 9.3 8.6 1.5 1.4 1.4 1.3

Ulker Biskuvi ULKER TI 1,284 3.4 19.0 15.1 14.3 28.8 11.7 9.5 8.9 1.2 1.0 0.9 0.9

Premium/discount to

Peer group average (%) (80) 21 7 9 181 17 2 4 (18) (34) (35) (34)

Target value, TRY m 2,251

Sources: Bloomberg consensus estimates; except for Ulker Biskuvi which are TEB Investment/BNP Paribas estimates





Company dynamics

Business structure

Ulker Biskuvi is the largest snacks and confectionary producer with a 49% market share in biscuits andcrackers, a 49% share in chocolate confectionary and a 39% share in the cake market in Turkey. Thecompany is controlled by Yildiz Holding, the largest FMCG food and beverage group in Turkey with morethan TYR11b of revenues in 2011.

Apart from snacks and confectionaries, the Yildiz group is also a major player in dairy products, edible oils,beverages, ice cream and frozen foods. Yildiz Holding is also the major shareholder of Bizim Toptan,Turkey’s largest cash and carry chain and Sok, a hard discount retail chain. The group formed a JV withleading international food players Hero, Kelloggs, McCormick and Granini. Yıldız Holding also owns Godiva Chocolate, a luxury, hand-made chocolate producer, in which Ulker has a 19.2% stake.

Ulker Biskuvi controls Biskot Gida, which produces biscuits, chocolates, cakes and non-Ulker brands. Forthe marketing of Ulker and non-Ulker brand products, the company employs Horizon for traditional channels (small retail shops and corners), and Pasifik Dagitim for modern channels (retail chains and cashand carry markets). Export sales are made by Istanbul Gida.

EXHIBIT 5: Business structure

Companies controlled by Ulker Biskuvi are shown in greenSource: Ulker Biskuvi Sanayi A.S.

Ulker created a much simpler business structure by divesting non-core businesses and shareholdings inlast three years. Using proceeds from the divestitures, Ulker acquired other production entities to completeits product portfolio. This was also positive for Yildiz Holding as the acquisitions eliminated internal competition between production companies and distribution companies, paving the way for synergies.

Recently, Ulker Cikolata and Fresh Cake were acquired from Yildız Holding. Also, Ideal (biscuit producer)and Birlik (flour producer) were merged with Ulker while Biskot acquired a non-Ulker brand cakemanufacturer. As a result, all the group’s snack companies, except candy and gum, are now fullyconsolidated under Ulker.

Biscuit and cake production(Ulker brandonly)

Ulker Cikolata (91.7%)Chocolate production

(Ulker brand only)

Biskot Biskuvi (43.9%)Biscuit, cake and chocolate

production

Production

Pasifik DagitimModern channels

Horizon DagitimTraditional channels

Istanbul Gida (91.4%)Export sales

Marketing & sales





EXHIBIT 6: Shareholders of Ulker

Source: Ulker Biskuvi Sanayi A.S.

Biscuit, chocolate confectionary and cake consumption has increased respectively over the last three yearsat CAGRs of 4%, 6% and 9% by volume and 9%, 10% and 15% by value.

EXHIBIT 7: Biscuit, chocolate and cake sales by volume

Sources: AC Nielsen; Ulker Biskuvi; TEB Investment/BNP Paribas estimates

EXHIBIT 8: Biscuit, chocolate and cake sales by value

Sources: AC Nielsen; Ulker Biskuvi; TEB Investment/BNP Paribas estimates

Turkish snacks market for biscuit, cake and chocolate have been dominated by two large players, namely,Ulker and Eti (not listed), which together currently account for 88% volume market share in biscuits, 88% incake and 60% in the chocolate confectionary market.

Yıldız Holding44.5%

Onem Gida2.1%

Dynamic GrowthFund

20.9%

Ülker Family11.8%

Free Float20.7%

0

50

100

150

200

250

300

2008 2009 2010 2011

(000 tonnes)Biscuit Chocolate Cake

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011

(TRY m)Biscuit Chocolate Cake





Based on 2011 estimates of AC Nielsen (market data excluding BIM) for the biscuit segment, Ulker is theleading player with a 49% volume share followed by Eti’s 39% share, while private labels, Bifa, Saray, andSolen among others share the remaining pie. International players have almost no presence in the segment.

EXHIBIT 9: Volume share in snacks market for biscuits, cake and chocolate

Sources: AC Nielsen; Ulker Biskuvi and TEB BNP Paribas estimates

In the chocolate segment, Ulker is the market leader with a 49% share, followed by Eti and Nestle, eachwith an 11% market share. In the segment, some other international (Kraft, Mars) and local players (Solen,Sanset) as well as private-label products exist. The chocolate confectionary segment is not as concentratedas the biscuit and cake segments.

In the cake segment, Eti has the largest share with 49%, followed by Ulker with 39%. Among others, Bifa,Saray, Uno, Solen and private-label products share the rest of the pie. Some multinationals are also activein the segment, but their presence is not significant.

Reaching 175,000 sales points, Ulker’s distribution system is its major competitive advantage. Like all other food companies, Ulker uses two distribution channels to sell its products in the local market: 1) traditional channels (include small grocery and convenience stores) account for 70% of its total domestic revenue, and

2) modern channels include retail chains and supermarkets.

Ulker definitely had to change strategy to boost profitability

Despite Ulker’s large distribution network, well-recognized brand and cost advantages, Eti pursued a successful sales and marketing strategy that helped it not only to increase market share across all categories but also to produce higher profitability than it would have otherwise. According to AC Nielsendata, in the last four years, Eti has gained 5-7ppt market share in biscuit, chocolate and cake categories atthe expense of Ulker’s market share in biscuit, chocolate and cake, which slid from 57%, 56% and 47% in2008 to 49%, 49% and 39% in 2011. According to Eti, consumers are indifferent between Ulker and Etibrands and would substitute one for the other and, hence, product availability, freshness and visibility arekey success factors for the products. To make the best out of its total shelf-space, Eti managed three majorsubstitute snack categories – biscuits, chocolates and cakes – under a single category, among whichboundaries get blurred with the increasing number of hybrid products occupying the shelves. Eti used a single distribution channel and network for all the three categories so as to be more responsive toconsumer demand. The company reduces the number of SKUs (stock-keeping-units) and focuses on high-margin fast-moving products to boost profitability in order to employ self-space more efficiently andeffectively. Eti limits the number of SKUs and drops unprofitable SKUs to make room for potentiallyprofitable new ones. The company also identifies key profitable products and concentrates its advertisingand marketing efforts on those products to support them.

Ulker48.0%

Eti28.0%

Saray5.0%

Nestle4.0%

Others15.0%





Profitability margins and commodity prices

Prices of chocolate confectionary products, on average, are twice as much as those of biscuit product. Cakeprices are slightly higher than biscuit prices in general. While chocolate products have the highest grossprofit margin, private label and export products have the lowest gross profit margins, at less than 20%.Gross profit margins of chocolate confectionaries vary from 23 to 30%, while that of biscuit from 20 to 25%and that of cake from 15 to 20%.

EXHIBIT 10: Breakdown of production costs

Sources: Ulker Biskuvi Sanayi A.S.; TEB Investment/BNP Paribas estimates

Major production inputs are sugar, palm oil, packaging, flour, nuts and cacao. Nuts and cacao are majoringredients for chocolate confectionary while flour is major ingredient for biscuits and cakes. Sugar, palmoil and packaging are main ingredients and inputs for all categories. According to our estimates, rawmaterials account for 85% of total production cost and roughly 50% of the total raw material cost isdenominated in USD.

Our analysis also shows that unit price increases in the snacks market for biscuit, chocolate and cake

products remained below consumer inflation and increases in input costs in the last three years. Weestimated that average unit prices increased 5.1% while input costs and consumer prices increased 7.4%and 7.7%, respectively in the past three years.

Despite the weak TRY against the USD, the recent decline in commodity prices due to global economicslowdown help the profitability margins of producers in the sector. We do not expect an adverse impact from commodity prices on profit margins. However, it is an important risk factor to the company’sprofitability. We expect unit prices to move in tandem with unit costs.

EXHIBIT 11: Commodity Price changes and the impact of a potential 10% increase in prices on EBITDA*

(%) Price increase in last three years Impact on the company’s EBITDA*

Flour 7.5 (8.9)

Palm oil 16.5 (11.9)

Cacao 14.5 (6.5)

Sugar 5.0 (12.1)

Nuts 13.0 (7.7)

*Assuming that the company does not pass through any cost increaseSource: TEB Investment/BNP Paribas estimates

Working capital and procurement of raw materials

We assume the cash cycle of Ulker will be 40 days based on 70 collection, 70 inventory and 100 paymentdays. We expect a major improvement in the cash cycle on the back of the new strategy that wouldincrease inventory and receivable turnover.

Ulker procures wheat from the local market during the harvest season between May and September andholds it on inventory for use until the next harvest season. The company does not need to hold inventory for palm oil, sugar or cacao. The company supplies sugar from the local market and palm oil and cacao from its sister companies.

Flour11.2%

Palm oil15.0%

Cacao8.2%

Sugar15.3%

Packaging13.3%

Nuts9.7%

Other15.3%

Overhead & labour12.0%





Exports have lower profitability but offer growth

The share of exports in Ulker’s total revenue ranged from 14% to 17% in the last four years. As exports offerlittle to profitability, we believe Ulker would have no major drive to grow its export sales significantly in themedium term. As chocolate product exports are much lower share in total revenues, the share of exports intotal revenues will decline to 10% level, going forward.

The company exports to more than 80 countries mainly in the Middle East and Gulf, Europe and South Africa. Ulker’s exports mostly target the Turkish population in the Middle Eastern countries and Germany.

Profitability of exports is lower than domestic sales, due to the higher transportation and distribution costs.In the short term, Ulker is unlikely to expand its international operations via a JV/ acquisition or establish a production facility since it is focused on implementing a new strategy for its domestic operations. However,Yildiz Holding has a significant presence in the region with production facilities in KSA, Egypt, Romania,Ukraine, Kazakhstan, and Pakistan. The group also built its own distribution systems in those countries. TheGroup’s ambition to grow in these regions is evident by recent acquisitions. Ulker may invest in one of thoseproduction facilities in the future.





Financial statementsUlker Biskuvi Sanayi A.S.

Profit and Loss (TRY m) Year Ending Dec 2010A 2011A 2012E 2013E 2014E

Revenue 1,576 1,799 2,502 2,748 2,959

Cost of sales ex depreciation (1,161) (1,396) (1,823) (1,978) (2,130)

Gross profit ex depreciation 415 402 679 769 829

Other operating income 4 54 22 20 20

Operating costs (266) (319) (480) (517) (554)

Operating EBITDA 153 137 221 273 295

Depreciation (36) (38) (43) (46) (48)

Goodwill amortisation 0 0 0 0 0

Operating EBIT 117 99 178 227 247

Net financing costs 179 621 (12) (12) (12)

Associates 0 0 0 0 0

Recurring non operating income 0 0 0 0 0

Non recurring items 0 0 0 0 0

Profit before tax 296 720 166 215 235

Tax (32) (51) (33) (43) (47)

Profit after tax 264 669 133 172 188

Minority interests (7) (12) (10) (13) (14)

Preferred dividends 0 0 0 0 0Other items 0 0 0 0 0

Reported net profit 258 657 123 159 174

Non recurring items & goodwill (net) 0 0 0 0 0

Recurring net profit 258 657 123 159 174

Per share (TRY)

Recurring EPS * 0.96 2.45 0.36 0.47 0.51

Reported EPS 0.96 2.45 0.36 0.47 0.51

DPS 0.00 0.00 0.82 0.11 0.37

Growth

Revenue (%) 9.9 14.1 39.1 9.8 7.7

Operating EBITDA (%) 46.1 (10.7) 61.3 23.4 8.2

Operating EBIT (%) 11.5 (15.8) 80.5 27.6 8.7Recurring EPS (%) 162.8 155.1 (85.3) 29.6 9.2

Reported EPS (%) 162.8 155.1 (85.3) 29.6 9.2

Operating performance

Gross margin inc depreciation (%) 24.0 20.2 25.4 26.3 26.4

Operating EBITDA margin (%) 9.7 7.6 8.8 9.9 10.0

Operating EBIT margin (%) 7.4 5.5 7.1 8.3 8.3

Net margin (%) 16.3 36.5 4.9 5.8 5.9

Effective tax rate (%) 10.9 7.1 20.0 20.0 20.0

Dividend payout on recurring profit (%) 0.0 0.0 228.1 23.1 73.2

Interest cover (x) - - 14.8 18.9 20.6

Inventory days 47.4 39.5 46.8 59.3 59.9

Debtor days 74.7 94.7 78.7 69.0 69.7

Creditor days 109.1 89.3 94.7 102.1 103.1Operating ROIC (%) 14.2 8.5 12.2 15.4 16.2

Operating ROIC - WACC (%) - - - - -

ROIC (%) 6.4 5.3 10.1 12.8 13.5

ROIC - WACC (%) - - - - -

ROE (%) 19.9 53.4 13.3 17.6 17.5

ROA (%) 3.0 1.7 5.5 6.8 7.0

*Pre exceptional, pre-goodwill and fully diluted

Sources: Ulker Biskuvi; Bloomberg consensus; TEB Investment/BNP Paribas estimates

Taking inorganic growth,cost savings and new

marketing initiatives into

account, we expect Ulker to

increase revenues and

EBITDA by 39.1% and 61.3%

y-y in 2012

In 2011, sale of Bimas stake

boosted the bottom line





Ulker Biskuvi Sanayi A.S.

Cash Flow (TRY m) Year Ending Dec 2010A 2011A 2012E 2013E 2014E

Recurring net profit 258 657 123 159 174

Depreciation 36 38 43 46 48

Associates & minorities 0 0 0 0 0

Other non-cash items 0 0 0 0 0

Recurring cash flow 294 695 166 205 222

Change in working capital (66) (362) 51 (27) (23)

Capex - maintenance 0 0 0 0 0

Capex - new investment (75) (65) (77) (76) (74)Free cash flow to equity 153 268 140 102 124

Net acquisitions & disposals 0 (94) 0 0 0

Dividends paid 0 (55) (280) (37) (127)

Non recurring cash flows 240 378 0 0 0

Net cash flow 393 497 (140) 65 ( 3)

Equity finance 7 26 10 13 14

Debt finance 178 75 0 0 0

Movement in cash 577 598 (130) 78 11

Per share (TRY)

Recurring cash flow per share 1.09 2.59 0.48 0.60 0.65

FCF to equity per share 0.57 1.00 0.41 0.30 0.36

Balance Sheet (TRY m) Year Ending Dec 2010A 2011A 2012E 2013E 2014E

Working capital assets 892 1,418 1,476 1,555 1,622

Working capital liabilities (334) (497) (606) (658) (703)

Net working capital 558 921 870 897 920

Tangible fixed assets 301 543 576 607 633

Operating invested capital 860 1,463 1,446 1,504 1,553

Goodwill 0 0 0 0 0

Other intangible assets 0 0 0 0 0

Investments 369 275 275 275 275

Other assets 704 29 29 29 29

Invested capital 1,933 1,768 1,750 1,808 1,857

Cash & equivalents (619) (405) (275) (353) (364)

Short term debt 451 764 764 764 764

Long term debt * 508 270 270 270 270

Net debt 340 629 759 681 670Deferred tax 0 0 0 0 0

Other liabilities 65 41 41 41 41

Total equity 1,459 1,003 845 968 1,014

Minority interests 68 95 105 118 132

Invested capital 1,933 1,768 1,750 1,808 1,857

* includes convertibles and preferred stock which is being treated as debt

Per share (TRY)

Book value per share 5.43 3.73 2.47 2.83 2.97

Tangible book value per share 5.43 3.73 2.47 2.83 2.97

Financial strength

Net debt/equity (%) 22.3 57.3 79.9 62.8 58.5

Net debt/total assets (%) 11.8 23.5 28.8 24.2 22.9

Current ratio (x) 1.9 1.4 1.3 1.3 1.4

CF interest cover (x) - - 19.1 15.8 17.6

Valuation 2010A 2011A 2012E 2013E 2014E

Recurring P/E (x) * 7.1 2.8 19.1 14.7 13.5

Recurring P/E @ target price (x) * 7.5 2.9 20.1 15.5 14.2

Reported P/E (x) 7.1 2.8 19.1 14.7 13.5

Dividend yield (%) 0.0 0.0 12.0 1.6 5.4

P/CF (x) 6.3 2.6 14.1 11.4 10.5

P/FCF (x) 12.0 6.9 16.7 23.0 18.8

Price/book (x) 1.3 1.8 2.8 2.4 2.3

Price/tangible book (x) 1.3 1.8 2.8 2.4 2.3

EV/EBITDA (x) ** 15.1 17.5 13 .0 11.6 10.6

EV/EBITDA @ target price (x) ** 15.8 18.3 13.5 12.1 11.1

EV/invested capital (x) 1.2 1.4 1.8 1.7 1.7

* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income

Sources: Ulker Biskuvi; Bloomberg consensus; TEB Investment/BNP Paribas estimates





NOTES

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Disclaimers and Disclosures

ANALYST(S) CERTIFICATION Kenan Cosguner, TEB Investment, BNP Paribas JV, +90 216 636 4531, [email protected].

The analyst(s) or strategist(s) herein each referred to as analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflectthe personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; (ii) no part of thecompensation of the analyst(s) was, is , or will be, directly or indirectly, relate to the specific recommendation or views expressed herein; and (iii) is notaware of any other actual or material conflicts of interest concerning any of the subject securities, companies or issuers referenced herein as of the time of this certification.

Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to

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IMPORTANT DISCLOSURES The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in thisreport:

Company Disclosure (as applicable)

- -

BNP Paribas represents that:1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees.2. It had an investment banking relationship with this company in the last 12 months.3. It received compensation for investment banking services from this company in the last 12 months. 4. It beneficially owns 1% or more or the market capitalization of this company. 5. It makes a market in securities issued in respect of this company.6. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in

securities issued by this company or derivatives thereof.7. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company.

Additional DisclosuresWithin the next three months, BNP Paribas may receive or seek compensation in connection with an investment banking relationship with one or more of the companies referenced herein.

Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available inour most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of thisnote or your BNP Paribas representative.

All share prices are as at market close on 25 June 2012 unless otherwise stated.





RECOMMENDATION STRUCTURE

Stock RatingsStock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price.BUY (B). The upside is 10% or more.HOLD (H). The upside or downside is less than 10%.REDUCE (R). The downside is 10% or more.

Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.

* In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our

recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Industry RecommendationsImproving ( ): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months.Neutral ( ): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months.Deteriorating ( ): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months.

Country (Strategy) RecommendationsOverweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determinemarket recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and indexreturns relative to the market cost of equity.

Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine marketrecommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returnsrelative to the market cost of equity.

Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determinemarket recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and indexreturns relative to the market cost of equity.

RATING DISTRIBUTION (as at 26 June 2012) Total BNP Paribas coverage universe 540 Investment Banking Relationship (%)

Buy 306 Buy 4.20

Hold 174 Hold 1.70

Reduce 60 Reduce 3.30

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.

© 2012 TEB Investment BNP Paribas



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