Şişecam 2023/q4

Türkiye Şişe ve Cam Fabrikaları A.Ş. was founded in 1935 by İş Bank and currently consists of a holding company with 56 subsidiaries, 1 joint venture (Rudnik Krecnjaka Vijenac D.O.O.), 3 associates (Saint Gobain Glass Egypt S.A.E, ICRON Teknoloji Bilişim Anonim Şirketi and Solvay Sisecam Holding AG) and 2 joint activities (Pacific Soda LLC and Stockton Soda Ash Port LLC).

Şişecam is among the world’s most prestigious manufacturers and with its 89 years of corporate history, it has a considerable experience and high degree of specialisation. As a global company Şişecam has production activities spanning 14 countries on 4 continents, and sales in more than 150 countries.

Following the merger, which was completed as of 01 October 2020, Şişecam is on track to become one of the top three global producers in all its core business lines. As it is already in top five, and investments keep rolling on, this goal is within the reach.

After this brief introduction, now let me cover the financials of the company for 2023/q4. But a quick reminder: Due to application of inflation accounting in accordance with TFRS, TAS 29 and the announcements made by the Public Oversight Accounting and Auditing Standards Authority, financial statements are adjusted. There are changes to figures and as the quarterly data are not revealed, I have avoided presenting my quarterly and LTM analysis, but pursued the common sense. Therefore, I will only share year-end figures and comparisons, and my calculations based on those, here.

EXECUTIVE SUMMARY

I report the outlook and financials for Şişecam every quarter and for those who read them regularly this work may contain some disappointments. We witnessed a global pandemic. We have experienced tough times when the VUCA World and businesses turned upside-down and evolved to BANI World. We have seen a war and supply chain bottlenecks.

Despite all these negative factors, Şişecam managed to exceed all expectations and produced solid results previously, but when inflation accounting hit locally and recession in Europe felt deeply, 2023 year-end results justified the depressed market price in a sense.

Consolidated net sales fell to 152 billion TRY (USD 5.2 billion) in 2023. International sales accounted for 60% of total sales, and investments amounted to 21 billion TRY. Şişecam has produced 5.2 million tons of glass, 4.7 million tons of soda ash, and 3.7 million tons of industrial raw materials in 2023.

Cold repairs in Georgia, Egypt and India modernised the furnaces, and building a new line with capacity increasing projects continued to support the future growth. First auto glass-specific float line in Lüleburgaz was commissioned and partnership agreement with ICRON, which is a Turkish technology company that provides decision optimisation services, was finalised. As one of the world’s top five largest capacity flat glass investments, construction is underway at float line in Tarsus.

Şişecam’s Chairman and Executive Member of the Board of Directors Prof. Dr. Ahmet Kırman has been named by the Phoenix Award Committee as ‘Glass Person of the Year 2023’ for his contributions to the global glass industry.

Last but not least, Şişecam continues its share buyback program and as of today (08.04.2024) buybacks reached to 59.9 million nominal value shares, corresponding to 1.96% of the capital. As conclusion; revenue and profit stumbled and margins faced headwind. International sales are relatively still strong and investments continue. Financial risk ratios are not volatile and in the safe zone. According to my calculations, Şişecam shares are priced below their intrinsic value and I will present my DCF tables under this report, in May.

Now let’s delve in to details.

1 – Segments and Regions

On the first quarter’s report I have highlighted the changes in the segment reporting. Previously Şişecam had 6 segments, namely: architectural glass, automotive glass, glassware, glass packaging, chemicals and others, and after this structural and name changes there are currently 7 segments. As we move forward in time, each category settles better.

In Figure 1, you can follow YoY changes from 2022 to 2023. I have presented figures by segments at the upper side and by regions at the lower side of the table. It is striking that revenue is 11% down and architectural glass has suffered the most with 30% decline. On the bright side, energy and industrial glass showed 19% and 14% growth. When it comes to regions, they are all down with various rates from 7% to 18%. Figures tell that 2022 was a good year and 2023 was depressing.

In Figure 2, net sales by these segments take place. At the end of the year, revenues of Şişecam stood at 151,994 million Turkish lira (TRY) and “Chemicals” is the top line item with its 26% share in revenue with its 39,431 million TRY value. “Architectural Glass” follows that with 20% and “Glass Packaging” is at third place with its 18% share. The new segment, “Energy” makes the 12% of total.

If we briefly gaze at to the contribution of these segments to the EBITDA; Chemicals is at top with 39% and second place belongs to Architectural Glass with its 23% share.

When it comes to net sales by region, Figure 3 shows the geographical segments with respect to the customers location. Turkey has the biggest share by 44% and 67,665 million TRY value. Europe stands at the second place with 24% and its contribution was 36,184 million TRY in 2023.

Also it must be noted that although produced in Turkey, some of those items exported from Turkey to other markets. Based on sales in and exports from Turkey, the share of international sales for Şişecam stood at 60% in 2023. Although in year it touched to 66% level this is the year-end result. In Figure 4, you can follow the changes and breakdown of data.

2 – Income Statement

Mr. Görkem Elverici, CEO of Şişecam, emphasised on the earnings release, how challenging was the business environment by his this comment: “Overall, 2023 was characterised by a complex interplay of economic and geopolitical dynamics, underscoring the need for resilience and adaptability in navigating an ever-uncertain world.” In this regard, sometimes we should also consider the actions rather than the results, which hopefully will reflect to those in the flow of time.

In Figure 5, I have attached highlights from the Income Statement. You can compare revenues, cost of sales and gross profit with the previous year. There is a 11% decrease in revenue at the year end and cost of sales is 5% lower. Gross profit in 2023 stands at 23% below of 2022. Margins are satisfyingly high, but they also suffered from the decline. Gross profit margin fell to 28% due to 439 basis points decline and EBIT margin is at 14%, well below 2022’s 19%.

Breakdown of Income Statement

At this point, it is apt to see where does this 151,994 million TRY revenue comes from. In Figure 6, Sankey Diagram shows the revenue by segments on the left hand side. Then we deduct Cost of Sales 110,056 million TRY and obtain 41,938 Gross Profit. Operating Expenses decreased 3.5% compared to previous year and reached to 31,482 million TRY. Operating Income at the year end was 10,456 million TRY and after adjusting for other items, Şişecam ended the year 2023 with 23,590 million TRY income before tax figure. From this sum, 4,612 million TRY tax paid and Net Income for the period is 18,978 million TRY, which is roughly 643 million USD. Profit attributable to equity holders of the parent is 17,121 million TRY.

In Figure 7, we can see the revenue growth, cost of sales and gross profits, quarter by quarter. We are seeing around 85-90% capacity utilisation rates due to weaker demand and recession in Europe. So sales are 11% down and both volume and pricing do not give a cheerful mood. But as the indicators in Chinese and European markets sign recovery, rates will keep pace with it. Energy segment contributes to profits and new investments will both increase the capacity and profitability of the company.

3 – Financial Ratios and Stock Buyback

If you are familiar with this blog, you would normally see here a full-fledge DCF Valuation for Şişecam. I do run intrinsic valuation for Şişecam at every quarter and 2023/q4 is not an exception, but I do share my calculations with a time lag, in May 2024.

Below you can find the financial risk ratios for Şişecam for the last six years (Figure 8). The most stable ratio in the graph is financial leverage that the company uses. It is anchored around 45% and the most recent value is 43%. Debt-to-Equity ratio is 0.74 and it is also not that volatile. When it comes to liquidity ratios Current Ratio is falling from unnecessary high plato to safe levels. It is at 1.69 and Quick Ratio is at 1.20.

Şişecam has previously announced a buyback program on 26.02.2021 and made its first purchase on 15.03.2021. After reaching the first criteria Şişecam announced a second, supportive program and it is still ongoing. For further details you can read my article on Şişecam Stock Buyback. Figure 9 covers recent transactions that took place in this quarter. Above you see prices in white and buybacks in yellow in Turkish lira. Below you will find the USD denominated chart with same principles.

As we all know share buybacks are important for share holder value, but it is not the only instrument to that end. In addition to search for the best returns to the invested capital, Şişecam also pays dividends regularly with an increasing ratio every year (Figure 10). This year 2,200 million TRY will be distributed and payment is due on 31 May 2024. Dividend per share is 0.7182 TRY gross and 0.6464 TRY net.

These all reflect to company value and share price. However, the market sentiment does not progress in linear way and sometimes might be persistent in the other direction. In Figure 11, I have attached my DCF valuation outputs (in yellow) for every quarter and you can compare those with the given market price at that date (white). As you can see, value is like a magnet and eventually draws the price to itself.

At the end of the 2023/q3, I have calculated 60.36 TRY per share value, and that was the reason behind I made additions to my portfolio in third quarter. In October, price hit the 57.45 TRY but then it was a journey down the rabbit hole. We will see how will it develop in 2024.

As a conclusion; it was a tough year and Şişecam disappointed the investors with the results. Investors bore inflation related real losses and losses in dollar terms with the given depreciation of the currency. Due to global recession, weak demand and tightening liquidity conditions, many sectors and companies missed their earning targets, too. Earthquake in Turkey, elections and inflation burden are also the first culprits. Competitors with lower-cost production advantage from China do not make the scene better for the profitability of the company. We might witness another scenario this year. Interest rates that are high to curb inflation creates alternatives to stocks and higher costs increase the cost of capital. In the short run, the picture might not change quickly in better way, but when it comes to the long run, I believe that Şişecam will take the opportunity to reach its goals decisively.

Şişecam is one of the companies that I follow closely and have in my global portfolio for years. I hope this figures, analysis and calculations are also useful for you, too. For further documents and news please check Şişecam Investor Relations use their official figures to avoid unintended errors or miscalculations.

With this opportunity, I’d like to thank to Şişecam management and all employees for their efforts and performances, who are ready under all circumstances for the best of the company and to create sustainable value.

Ergun UNUTMAZ, 09.04.2024

You can read my previous works by clicking the links.

ŞİŞECAM 2023/q1
ŞİŞECAM 2023/q2
ŞİŞECAM 2023/q3

DCF Valuation 2023/q4

Discounted Cash Flows Analysis & Intrinsic Value

Before arriving to this point, I was following the merger narrative. Although 4 years is too short to make drastic decisions we have witnessed cost efficiency and growth after the merger. As a global player there were both organic growth and acquisitions during the analysis period. Unfortunately, due to macroeconomic factors and recession fears the stock was well underperformed in year 2023. The company has a privileged status of having all the segments of glass production under a single roof and with its investments we may witness far better results. Therefore, I sustain my narrative based on investing and balanced growth, and run a full-fledge DCF Valuation for Şişecam at every quarter.

Below you can find the output of my recent valuation that reflects the 2023/q4 results.

In this study, I started with the 20% revenue growth rate for the following year and decreased it gradually to 10% in stable growth. When it comes to pre-tax operating margin, I accepted this years figure as an outlier to previous performance and started with 14%. I assumed it will be around 18% at the tenth year. The other variables and shifts are given above. Although 10 year government bonds in Turkey indicated a 26.33% yield at the time of analysis, I have utilised 19.50% yield based on my inflation expectations. As a reminder, please note that this financials are corrected for the high inflation in Turkey for the first time and we do not possess the quarterly figures. In this vein standart error of the forecasts will probably be higher.

I conducted this valuation on March 09, 2024 and closing price for the SISE stocks was 49.04 TRY per share on March 08, a day before the disclosure of the financial report. The intrinsic value that I have calculated is 72.86 TRY per share. According to my assumptions and expectations Şişecam stocks was 32.69% undervalued, which indicates a 48.58% upside potential.

Therefore, I have made additional purchases to my long-term investment portfolio. But I’d like to remind that all calculations are prone to error and even if they are perfect, markets have their own dynamics and value-price gap may widen before it converges. I have checked the Bloomberg terminal on 27 March, 2024 (well after I have concluded my DCF Analysis), and my forecasts stands at the upper side of the analyst targets. In Figure 13, you can also find analyst estimates for Şişecam. This estimates are dated in terminal from 03/2023 to 03/2024, so if there is an updated version I will add that later on, too.

I wish you all the best.

Ergun UNUTMAZ, 29.04.2024

Disclaimer

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