Volatile Costs Will Squeeze Margins Yet Undervaluation Spurs Recovery

Key Takeaways

• Ongoing inflation, currency volatility, and regulatory pressures threaten revenue growth, margins, and sales stability in core and international markets.
  
• Competitive pressures and volatile raw material costs may offset gains from innovation, automation, and sustainability efforts, constraining earnings and market share.
  
• Persistent input cost and currency volatility, combined with structural volume declines and rising expenses, threaten profitability and future growth without effective innovation or margin management.

Catalysts

Manufactures, markets, and sells biscuits, chocolates, chocolate coated biscuits, wafers, and cakes in Turkey and internationally.

• While Ülker has benefited from rising disposable incomes and urbanization in its core emerging markets, persistent inflationary pressures and currency volatility, especially in Turkey and Central Asia, have led to volume declines and weaker revenue growth in international business. These macroeconomic headwinds may continue to pressure top-line growth as fragile consumer confidence dampens demand.
  
• Although the company continues to focus on innovation and healthier product launches aimed at capturing the growing preference for health-conscious snacking, there is a risk that competition from both global players and private labels-who are aggressively targeting this consumer shift-will erode market share and blunt the impact on net margins.
  
• Despite investments in automation, digitalization, and logistics to enhance operational efficiency and control costs, unpredictable spikes in raw material prices-particularly cocoa, which more than doubled year-over-year-can quickly neutralize margin gains, as evidenced by the recent significant inventory build-up and increased working capital requirements.
  
• While Ülker's strong ESG credentials and sustainability initiatives have received international recognition, mounting regulatory scrutiny on sugar content, packaging waste, and agricultural sourcing could drive up compliance and innovation costs, constraining profitability and hampering future earnings growth.
  
• Even as the company's disciplined approach to hedging and leverage has helped maintain financial stability, dependence on export sales subjects Ülker to ongoing geopolitical and macroeconomic uncertainties that could disrupt supply chains and sales channels, putting both net margins and long-term earnings at risk.

Ülker Bisküvi Sanayi Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ülker Bisküvi Sanayi compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ülker Bisküvi Sanayi's revenue will grow by 25.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.1% today to 12.9% in 3 years time.
• The bearish analysts expect earnings to reach TRY 21.4 billion (and earnings per share of TRY 43.23) by about August 2028, up from TRY 6.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.3x on those 2028 earnings, down from 6.3x today. This future PE is lower than the current PE for the TR Food industry at 19.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 29.56%, as per the Simply Wall St company report.

Ülker Bisküvi Sanayi Future Earnings Per Share Growth

Risks

• Persistently high input cost volatility, especially the dramatic increase in cocoa prices-nearly tripling year-on-year-creates significant pressure on cost of goods sold, which, if not fully offset by pricing, could erode gross margins and ultimately compress net earnings over time.
  
• Sustained foreign exchange volatility, particularly the exposure to Turkish lira devaluation and the company's short foreign currency debt position, increases financial risk and could lead to higher financial expenses, thus negatively impacting net income and cash flow.
  
• Ongoing structural volume decline in core categories, as seen in a nine percent year-on-year drop in volumes for Q1, may signal broader shifts in consumer preferences away from traditional biscuits and sweets, threatening long-term revenue growth if not countered by significant portfolio innovation.
  
• Working capital requirements are rising sharply due to higher raw material inventories, especially cocoa, and may strain liquidity if elevated commodity prices persist or if inventory turnover slows, potentially restricting the company's ability to fund operations or make strategic investments.
  
• Increased marketing and innovation spending, while necessary for brand development, could place pressure on operating margins if revenue growth does not accelerate sufficiently to cover the higher expenses, possibly resulting in lower net profitability in a competitive and inflationary environment.

Valuation

• The assumed bearish price target for Ülker Bisküvi Sanayi is TRY142.9, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ülker Bisküvi Sanayi's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of TRY265.0, and the most bearish reporting a price target of just TRY142.9.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be TRY165.6 billion, earnings will come to TRY21.4 billion, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 29.6%.
• Given the current share price of TRY116.2, the bearish analyst price target of TRY142.9 is 18.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.