ŞİŞECAM Valuation 2022/q2

A glimpse to the Şişecam (SISE) and a recap of previous works:

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 2 associates and 1 joint activities.

“Şişecam is among the world’s most prestigious manufacturers and with its more than 87 years of corporate history, Şişecam has a considerable experience and high degree of specialisation. As a global company it has production activities spanning 14 countries on four continents, and sales in 150 countries.” Following the merger, which was completed as of 01 October 2020, Şişecam aims 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, in my opinion this aim is within the boundaries.

Following this brief introduction let me shed light on the content of this article:

Firstly, I will provide you with links for my previous works, so in case you would like to read further, you will have some perspective. Secondly, I will give place to key financial results, and add my comments on the developments and trends. Then I will present you my Discounted Cash Flows (DCF) Valuation for the most recent period, which is based on the 2022/q2 results of the company. Finally, I will present the “Price – Intrinsic Value relationship” and show the returns of the stock compared to other variables.

1 – Previous Works

My very first evaluation on the company was before the merger, on 09/12/2019. Although it is in Turkish and does not include the full report, you can check it here: Soda Sanayi A.Ş. As I was impressed with the management quality, financial tables and future potential of the company, I have made the initial investment.

Then on January 30th, 2020, the Group has announced the beginning of merger talks. I have followed this process closely and reported every stage of it here in English: About Şişecam Merger. Needless to say, I have kept my SODA shares and let them converted to SISE, also with adding more to those.

Thirdly, I devoted a considerable time for the translation work of Professor Aswath Damodaran‘s Narrative and Numbers to Turkish. One of my thoughts at that time was bringing a new company and a great story to Professor’s exquisite book. Therefore, I applied the same principles and presented my study to him. His wisdom and humble personality guided me. He is a great teacher. He not only helped me to refine my analysis, but also gave an open class on how to make investments, and below is that video. With this opportunity, I’d like to thank him once again.

If you are interested in, you can also read my previous fundamental analysis and check my full-fledged DCF Valuation for the year 2021 based on the first quarter results: Şişecam Değerlemesi 2022/q1.

Thinking that “If this is the recap, I can’t read the rest of the article.” you have a point, and I will try to keep it compact. So let’s start with the 2022/q2 analysis.

2 – My comments on the 2022/q2 results

As you can see from the 2022 q2 Financial Statements Report, Şişecam has recorded an incredible growth and strong profits with improving margins. In spite of all the troubles, the company managed to navigate through risks with a great success. On the Graph 1 below, you see the “Key Financial Reslts”. Revenue has increased 215 percent in the second quarter of 2022, compared to the previous year’s same term. Recent figure is 40,2 billion TRY. Similar trends are also obvious in Gross Profit, EBITDA and Net Income.

When it comes to the distribution of recent 40,2 billion net sales figure based on geographical segments, I have depicted this data on Graph 2. Share of Turkey is 38 percent as a domestic market and rest of the sum is sales abroad, which is shown as export, that is 62 percent.

Following this current picture, I also present the long-term trend on Graph 3. Although it looks like, the share of export retreats, in fact the sales figures do increase sharply and continuously. Therefore there is a sound net sales growth both in domestic market and abroad, and I believe that we are still far from the market limits.

On Graph 4, I have studied the quarterly Net Income figures, and as you see there is no obvious trend or seasonality to a naked-eye. However since the end of 2021 there is a burst, and even though this might be due to inflationary problems, company manages to produce satisfactory results. Besides, inflation is not a new paradigm in Turkey, and Şişecem has a wide experience and an upper hand in this scenario.

On Graph 5, this time we are seeing the development of Earnings Before Interest and Taxes. In the last five years, there is a clear progress and it’s hard to claim a seasonality. Similar to the previous graph, which depicts the Net Income, EBIT also jumps after 2021/q3.

3 – DCF Valuation

First of all, I have made a narrative change or let’s call it an alteration within the context. The first valuations were based on “Merger Story” and the effects of one company was dominant. My emphasis were mainly on the efficiency and economies of scale, and the competitiveness. I am still bound with that story and we are seeing the positive results of it. However, this time my narrative includes “Sustainable Growth” strategy.

Based on this narrative and the assumptions that I presented above, you can follow the steps for my Şişecam DCF Valuation for 2022/q2 through Table 1. On August 05, 2022 closing price for the SISE stocks was 23,40 TL per share. Taking the 10 year government bond yield for the same date, which was 16,55 percent, I have reached a 44,06 TL per share intrinsic value. Keeping all else constant, I have reiterated the process with a 20,00 percent 10 year government bond yield. The result this time was 36,08 TL per share. These are 12 month forward looking targets.

On Graph 6, I have also prepared a chart by compiling Bloomberg data. Considering the various major institutions target prices, I can say that most of them updated their targets to around 30,00 TL per share. In this situation both my first benchmark of 36,08 TL p/s and ultimate target 44,06 TL p/s price take place on the most right, but time will show that whether those are right or not.

Finally on Graph 7, I have added a chart to follow “My previous DCF Valuations” and the market price at the relevant time periods. I run DCF Valuations for Şişecam every quarter and was planning to present them in detail only at the end of first quarters. However, with this continuing report I will reconsider that idea. As you can see there is always a close race between the intrinsic value (yellow) and market price (blue). Interestingly, the latter comes from the behind and this time the stock looks 46,89 percent undervalued.

The gap is dazzling, but I must remind that global macroeconomic risks are not dismissed, geopolitical tension is high and in addition to those there are country and exchange rate risks. Therefore, please do your own assumptions, calculations and take responsibility of your own actions. Because, market is not a one way street, and it is impossible to know what the future price will be.

4 – Past Performance

Although the past performance might not be a healthy indicator, let’s have a look to past five years returns for the Şişecam.

On Graph 8, (red) shaded area depicts the month-over-month inflation via official statistics data. That is the very first hurdle that investors should pass with their investments. Then I have added the stock exchange index for Turkey, which is BIST 100 (XU100 – yellow). As it is seen from the chart, stock market index managed to produce real returns by exceeding the inflation.

Can you do a better job? Of course. If you are bringing money from abroad, you have to calculate currency exchange risk, too. Therefore, achieving a positive return in US dollar terms in an emerging market is where the difference lies. Green line on the graph represents the exchange rate for Turkish lira against the US dollars (USDTRY). Finally, we have the Şişecam (SISE) stocks return in blue colour. As you can see it takes place on the top of all variables for the examination period. There are three short periods (purple rectangles) that SISE underperforms due to depreciations on Turkish lira, but overall performance is strong.

In case there are number crunchers among us, I will briefly touch upon the left-top side of the Graph 8. Here you can see year-on-year returns for the five and half year period. Şişecam was in red at the end of 2019 with a 3,91 loss, but this needs another perspective. If we are doing a long-term investment, we need to compare the returns with Compound Annual Growth Rate (CAGR). Therefore, I have calculated it for each variable and presented those on the last column.

Conclusion

While BIST 100 produced dazzling (?) 19,03% return from 02/01/2017 to 05/08/2022, actually inflation eroded 18,04% of it. So the result is a kind of poor, compared to alternatives. Secondly, in the examination period, CAGR for USDTRY was 30,33%, which is not normal, but unfortunately it is the case. Last and most importantly, Şişecam (SISE) stock managed to produce 36,59% CAGR and made its investors happy.

Şişecam is one of the companies that I have in my global portfolio, and I watch it closely. I have provided you with the developments, figures and performance of the company and you can send me e-mails, write comments or give your feedbacks here. For your investment decisions, the principle is “caveat emptor“. So, please consult to your advisors or banks, check official channels, and ask your questions to Şişecam Investor Relations, which would lead you to the results that you are looking for, in a kindly and timely manner.

I thank you for your time and wish you all the best.

Ergun UNUTMAZ, 12.08.2022