Arçelik: White goods

THE COMPANY: Domestic demand for white goods correlates with GDP. In times of economic expansion, white goods demand growth outpaces GDP growth, whereas the decline in sales exceeds the decline in GDP at times of economic contraction. From 2003-10 the average multiplier of domestic white goods demand growth was 1.26 times GDP growth.

The domestic market is dominated by four local producers: Arçelik, Vestel, BSH-Turkey and Indesit. Arçelik is the leading household appliances producer, with an average market share of 50% as of 2011 and ranking as the third-largest white goods manufacturer in terms of production in Europe since 2006. The company produces, markets and offers after-sale service for a full range of household appliances, including consumer electronics.

Domestic demand continued at full throttle in 2011. Domestic white goods sales of four major products (refrigerators, washing machines, dishwashers and ovens) rose by 19% y-o-y to 6.47m units in 2011, in line with our growth expectation of 20%.

Construction permits are expected to reach 700,000 in 2011, the second-highest all-time figure after 2010’s 800,000. Having the record number of new permits two years in a row is expected to have an impact on white goods demand with an 18-month lag, and will support the domestic market in 2012. We forecast 4% growth within the domestic white goods market for the coming year.

DOMESTIC SALES: Two-thirds of domestic sales are believed to be driven by replacement demand, while the remaining third is new demand. In developed countries, replacement demand typically accounts for 90% of total sales. Faced with contracting demand in European markets, foreign players are aggressively marketing their products in Turkey, and this resulted in a decline in real prices in the domestic market in 2011. A similar trend is expected in 2012.

EXPORT GROWTH: Cumulative export volume for 2011 increased by 5% y-o-y, broadly in line with our year-end estimate of 6%. Close proximity to Europe, flexible production capability, high-quality products, low prices, and a relatively inexpensive and qualified labour force are all amongst the current advantages held by Turkish producers.

We forecast 6% y-o-y growth in exports in 2012, as European consumers trade down to less expensive brands during times of economic slowdown, as seen in the global financial crisis that began in 2008.

Demand conditions in developed countries have been deteriorating and consolidation is expected in the international markets. This may create opportunities for Arçelik, which has higher operating margins and lower leverage than its European peers.

The company had been seeking to acquire a premium brand in developed markets to help it gain access to the high-end segment, while looking for acquisitions or greenfield investments in Middle East, Africa and South Asia to add capacity.

The acquisition of Defy Appliances fits with the latter objective. Defy has a 40% market share in South Africa and the company produces refrigerators, freezers, dryers, ovens and cooking appliances in its three plants there. Arçelik wants to penetrate the sub-Saharan market through Defy.

This region is expected to add an additional 3-4% top-line growth for Arçelik in the long term. It is a fragmented market with no local manufacturers, and is dominated by Chinese and Korean companies. Consolidation of Defy will add 8% to Arçelik’s top line in 2012, while Defy itself has a higher earnings before interest, taxes, depreciation and amortisation margin of 12.5%.

Arçelik is aiming to improve Defy’s production efficiency by using its know-how in refrigeration technology. We use a blended approach to value the company, attaching a 50% weight to both discounted cash flow and peer multiple comparison analysis, and under this method we have reached a 12-month target share price amounting to TL9.23 (€3.92).