Analyst: Barış İnce +90 (212) 384 1141 [email protected]Sales Contact: +90 (212) 384 1155 [email protected]Duran Dogan Packaging (DURDO, Not Rated) Blossoming operational outlook given new businesses, capacity increase and less debt Duran Dogan Packaging (DURDO) is mainly engaged in the packaging of food, spirits and personal care products. Competition: There is a fragmented structure in Turkish paper packaging sector . Two locals including DURDO and one global player with a similar market share dominate roughly 30% of the market in Turkey. New businesses: DURDO’s main shareholder, French LGR packaging, is new to luxury spirit packaging, but is eager to grow on that front in Europe (mainly in France) and sees DURDO as a hub. Furthermore, Ulker Group (Pladis) shifted some of its GODIVA brand production to Turkey and DURDO has started to cater for Godiva. The company is also pursuing new opportunities in Europe via its recently acquired marketing firm “DUDO” in the UK. The company also started to cater for United Biscuits in the UK. DURDO is also the second largest carton packaging supplier for Diageo, according to DURDO’s management. Profitability: Strong pricing and the newly added business to drive margins — EBITDA margin up by c7pps in 1H17. Capacity increase: The company has recently secured EUR5mn in financing for new machinery to raise capacity by c25%. The new machinery will also enable DURDO to produce more value-added products. Deleveraging: Net debt to trailing 12 month EBITDA was 2.7x as of 1H17 vs. 7.6x in 1H16. 2017E targets: No guidance has been provided by the company, but we expect 2H17 to be similar to 1H17. We estimate TL130mn in revenues and a 15% EBITDA margin in 2017. Risks: The main risks are the company’s heavy dependence on specific clients and illiquidity (USD0.5mn average volume in the past three months). Company in brief: Duran Dogan Packaging was established in 2005 via the merger of the two most experienced and well-known companies in the packaging sector: Duran Ofset and Dogan Packaging. The company became public by joining the Istanbul Stock Exchange in 1991. In 2013, LGR Emballages, a major European cardboard packaging Group, became Duran Dogan’s leading shareholder. LGR bought 26% of the company from Yildiz Holding for EUR8mn. Eventually, LGR increased its stake to 34% in the company via purchasing shares f rom the market. This cooperation between two family companies with strong commercial and technical synergies launched a new area for the company. The company acquired marketing firm “DUDO” in the UK back in 2016 to seek and manage opportunities as well as strengthen its already continuing operations in Europe. September 13, 2017 Shareholder Structure LGR 33.7% Dikran Mihran Acemyan 9.8% Oktay Duran 8.3% Ibrahim Okan Duran 8.0% Dikran Acemyan 5.0% Other 35.3% Source: Footnotes Share Price TL3.35 Bloomberg/Reuters: Mcap (TLmn) 56 Mcap (US$mn) 16 EV (TLmn) 102 Rel. Performance: 1 mth 3 mth 12 mth -10% 6% 8% 12M Range (TL): Aver. Daily Vol. (US$mn) 3 mth: 0.3 YTD TL Return: 60% Shares Outstanding (mn): 17 Free Float (%): 35 - - Potential Return 1.95 / 3.79 DURDO.TI / DURDO.IS Stock Market Data 12M Target Price
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September 13, 2017 Duran Dogan Packaging€¦ · Duran Dogan Packaging (DURDO) is mainly engaged in the packaging of food, spirits and personal care products. Competition: There is
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Blossoming operational outlook given new businesses, capacity increase and less debt
Duran Dogan Packaging (DURDO) is mainly engaged in the packaging of food, spirits and personal care products.
Competition: There is a f ragmented structure in Turkish paper packaging sector . Two locals including DURDO and one global player with a similar market share dominate roughly 30% of the market in Turkey.
New businesses: DURDO’s main shareholder, French LGR packaging, is new to luxury spirit packaging, but is eager to grow on that f ront in Europe (mainly in France) and sees DURDO as a hub. Furthermore, Ulker Group (Pladis) shifted some of its GODIVA brand production to Turkey and DURDO has started to cater for Godiva. The company is also pursuing new opportunities in Europe via its recently acquired marketing firm “DUDO” in the UK. The company also started to cater for United Biscuits in the UK. DURDO is also the second largest carton packaging supplier for Diageo, according to DURDO’s management.
Profitability: Strong pricing and the newly added business to drive margins — EBITDA margin up by c7pps in 1H17.
Capacity increase: The company has recently secured EUR5mn in financing for new machinery to raise capacity by c25%. The new machinery will also enable DURDO to produce more value-added products.
Deleveraging: Net debt to trailing 12 month EBITDA was 2.7x as of 1H17 vs. 7.6x in 1H16.
2017E targets: No guidance has been provided by the company, but we expect 2H17 to be similar to 1H17. We estimate TL130mn in revenues and a 15% EBITDA margin in 2017.
Risks: The main risks are the company’s heavy dependence on specific clients and illiquidity (USD0.5mn average volume in the past three months).
Company in brief: Duran Dogan Packaging was established in 2005 via the merger of the two most experienced and well-known companies in the packaging sector: Duran Ofset and Dogan Packaging. The company became public by joining the Istanbul Stock Exchange in 1991. In 2013, LGR Emballages, a major European cardboard packaging Group, became Duran Dogan’s leading shareholder. LGR bought 26% of the company f rom Yildiz Holding for EUR8mn. Eventually, LGR increased its stake to 34% in the company via purchasing shares f rom the market. This cooperation between two family companies with strong commercial and technical synergies launched a new area for the company. The company acquired marketing firm “DUDO” in the UK back in 2016 to seek and manage opportunities as well as strengthen its already continuing operations in Europe.
September 13, 2017
Shareholder Structure
LGR 33.7%
Dikran Mihran Acemyan 9.8%
Oktay Duran 8.3%
Ibrahim Okan Duran 8.0%
Dikran Acemyan 5.0%
Other 35.3%
Source: Footnotes
Share Price
TL3.35
Bloomberg/Reuters:
Mcap (TLmn) 56
Mcap (US$mn) 16
EV (TLmn) 102
Rel. Performance: 1 mth 3 mth 12 mth
-10% 6% 8%
12M Range (TL):
Aver. Daily Vol. (US$mn) 3 mth: 0.3
YTD TL Return: 60%
Shares Outstanding (mn): 17
Free Float (%): 35
--
Potential Return
1.95 / 3.79
DURDO.TI / DURDO.IS
Stock Market Data
12M Target Price
Please see the last page of this report for important disclosures.
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DURDO September 13, 2017
RESEARCH
Segments: The company’s products fall into five segments: i) Chocolate & Confectionery, ii) Food, iii) Spirits, iv) Personal Care & Cosmetics, v) OTC, vi) Non-food and vii) Rigid-setup boxes. The main revenue generators are Chocolate & Confectionery and the Food segments with a total share of 50% in overall sales volumes followed by spirits with 30%.
Clients: FMCG players are the biggest clients as expected. The company says that Pladis is its largest client with a 30% share in total sales followed by Unilever with a 10% share. DURDO is the second largest packaging procurer for Diageo brands (Yeni Raki, Johnnie Walker, J&B, Baileys, Binboa, Kayra etc). Diageo covers 35% of DURDO’s exports. The company also provides packaging for Pernod Ricard (Chivas, Absolut, Malibu, Ballentines etc.). LGR is not in the luxury spirit market in France. With the synergy from DURDO, LGR has recently entered this market, which will be another plus for DURDO to enhance exports in the coming period. Furthermore, Pladis’ GODIVA has recently shif ted some part of its production to Turkey. Other than the aforementioned clients, thanks to DUDO, DURDO is now more active in Europe (mainly in the UK) and has recently started to package Pladis’ United Biscuits products as well.
Performance in 1H17: Following the approval of the Paris Climate agreement by China in 2H16, China closed paper plants that were operating with old technology which did not comply with the environmental standards espoused in the agreement. It is likely to take at least two years to replace the plants which have been decommissioned. As a result, a supply shortage has arisen and paper prices have substantially increased. This is the main driver behind the improvement in the paper-related sectors’ profitability given the better pricing along with the higher utilization ratios. Given the increased utilization ratios, the company prefers to cater higher margin clients. Similarly, DURDO has shown a strong performance. Revenues and EBITDA were up by 27% and 116%, respectively in 1H17, while net profit rose to TL5mn f rom almost nil. There is no seasonality in terms of its operations. Therefore, it is likely for the ytd trend to continue in 2H17.
Selected Products
Source: The Company website
Please see the last page of this report for important disclosures.
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DURDO September 13, 2017
RESEARCH
Exports: The company has a balanced domestic/export ratio. The ratio was 55/45 and 53/47 as of 2016 and 1H17,
respectively. Thanks to DUDO, we believe export growth will gain momentum.
Competition: DURDO, Sentez (local) and MM (Mayr-Melnhof-Austrian) Packaging are the main players in the sector.
Each is estimated to have a 7-10% market share.
Global players: Graphic packaging, Westrock and MM are global peers, but they are much larger in comparison to DURDO and they have their own paper production while DURDO does not.
Source: Garanti Securities, Bloomberg as of September 12, 2017
EV/EBITDA
Please see the last page of this report for important disclosures.
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DURDO September 13, 2017
RESEARCH
Capacity increase: The company is currently almost running at full capacity with two shifts. If needed, there is room for over-time. The company has recently announced that it will be purchasing new machinery for EUR5mn. This addition is expected to increase capacity by 25% by the end of 2018. The machinery will become operational in 2Q18. The
financing has been provided by Sudwestbank. This new machinery will also enable the company to produce more value-added products.
Working Capital: According to our calculations, receivables and payables days stood at 69 and 73 as of 2016 vs. 64 and 79 as of 1H17, respectively. Inventory days, however, are around 81 days vs. 83 days, respectively. The increase in
inventory is due to DUDO as the company needs to keep more inventory for DUDO when demand arises considering the shipment process.
Cost base: c50% of the costs are related to raw materials. The company is procuring almost half of its paper needs f rom Kartonsan (KARTN) in Turkey, while the remainder is acquired f rom some European countries such as Finland.
FX impact: 45-50% of revenues are f rom exports. Europe dominates export sales with a 59% share followed by Africa with a 27% share. Since Diageo accounts for the c35% of exports, the company is exposed to the GBP. On the cost side, around 25% of the total cost is in FX (mainly EUR) terms. According to the footnotes, the company’s short FX position stands at TL28mn, mainly in EUR and USD. A 10% appreciation of the USD against the TL could result in a 1.9mn loss vs. a 0.6mn FX gain if the EUR gains 10% in value vs. the TL. Capex: Annual maintenance capex is around TL1-2mn according to the management. Indebtedness: The company had TL47mn in net debt as of 1H17. The company’s indebtedness is lessening. Net debt to EBITDA was 7.6x in 1H16 vs. the current 2.7x due to high EBITDA growth. If this net debt level is sustained, the ratio should hover at 2x over the next two years. However, considering the EUR5mn in f inancing for the new machinery, the
ratio could be around 3x if the company is unable to generate cash.
Risks: Heavily dependent on specific clients (Pladis, Diageo, Unilever), a rise in raw material prices, stiffer competition
and illiquidity are the main risks for the company.
Our take: The company has not provided a guidance for 2017 or 2018. However, we think that in the remainder of the year, its performance is likely to be similar to 1H17 given low seasonality impact in its operations. Accordingly, for 2017 we assume TL130mn in revenues and a 15% EBITDA margin (15.9% in 1H17), corresponding to 6.3x EV/EBITDA af ter
adjusting for EUR5mn in financing for the new machinery. As for 2018, we think that the top line growth should continue given the above mentioned capacity increase and growing momentum in exports. Assuming another 15% growth in 2018 with a stable EBITDA margin, EV/EBITDA could be around 5.5x. In our 2017/2018E forecasts, the BIST-Industrials
trade at 8.3/7.3x EV/EBITDA.
We like the company’s deleveraging, capacity increase and growth prospects as it is capturing a larger share f rom
Pladis’ products and is likely to further increase its presence in Europe with the strong backing f rom LGR. LGR sees DURDO as its luxury packaging arm which is new to LGR as it has no experience on that f ront, but would like to grow in that market.
Indebtedness 2013 2014 2015 2016 1Q17 1H17
Net Debt/Equity 4.6 4.2 2.7 3.9 1.4 1.2
Net Debt/EBITDA 10.7 5.5 8.0 5.1 3.3 2.7
Source: Garanti Securities
Working Capital Days 2014 2015 2016 1H16 1H17
Receivables 72 76 69 66 64
Inventories 92 61 81 77 83
Payables 35 54 73 75 79
Cash Cycle 130 83 77 68 69
Source: Garanti Securities
Please see the last page of this report for important disclosures.
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DURDO September 13, 2017
RESEARCH
Alternative approach to the valuation—transaction multiple: LGR bought 26% of the company for EUR8mn in February 8, 2013, implying EUR2.04/share. In 2012, revenues, EBITDA, net prof it and net debt were TL88mn, TL12mn, TL6.8mn and TL37mn. If we assume the transaction materialized over the 2012 f inancials, the transaction multiples
would be 11.7x PE, 9.6 EV/EBITDA and 1.3x EV/Sales. Given these multiples, the company’s 12M trailing revenues (TL116mn) and EBITDA (TL17mn) figures, point to TL7.2/share in EV/EBITDA and TL6.4/share in EV/Sales af ter adjusting the debt level with the EUR5mn loan for the new machinery. Since the trailing figures are now c40% higher
than in 2012 with a TL10mn higher net debt level, we think that the transaction at the very least could be a benchmark for the shares after adjusting for the EUR5mn financing for the new machinery. This calculation give us an average
TL5.6/share for the company assuming that the EUR/TL is at 4.10.
Recent M&As: There is continuing interest in the Turkish packaging sector. We have seen many deals completed to date and interest in them is still strong. However, the transaction details of most M&As have not been disclosed. According to Mergermarket, Dentas (DENTA) and Olmuksa (OLMIP) were acquired at a 6.8x EV/EBITDA and 10.9x EV/EBITDA in 2013, respectively, while those for Farmamak and Korozo were at 8.2x and 11.3x in 2016 and 2017, respectively.
Recent Deals in Turkish Packaging Sector
Deal Value
Date Target Buyer (USDmn) EV/EBITDA
24.01.2017 Korozo Ambalaj EBRD, Esas Holding, ActeraGroup 340 11.3