Anandolou Efes (OTCPK:AEBZY) is Turkey's largest brewery and seller of sparkling beverages. It operates in Turkey as well as in other international markets, mainly Russia, eastern Europe, central Asian countries and Pakistan.
The company reported an annual revenue of $4.1 billion (9.19 billion TRY) in 2013 and a net income of $1.17 billion ( 2.9 billion TRY). Right now the market capitalization of the business amounts to $6.4 billion. Interestingly, most of its money is earned through the sale of sparkling beverages and not beer.
As the chart shows, the share price is currently approaching its all time lows around $2.
The question should therefore be if such a relatively low price is backed by fundamental developments in the business.
If we look at the capital structure of the company, we see, that the company is mainly controlled by the Anadolou group and the large brewer SAB Miller (OTCPK:SBMRF). The soft-drink branch partly belongs to Coca Cola Turkey (OTCPK:COLAY).
Source: Company Presentation
The company's income statement:
Steadily growing revenue and stable operating income for the last five years. The earnings per share are also constant around $0.10. The last annual report showed a sudden rise in EPS and net income as the company decided to include Coca Cola Turkey's results proportionately in a consolidated financial report (see annual report 2013, p.42). Hence, Efes reported an EPS of $0.39 for the last year.
If this number then represents the true earnings of the company, we should notice that it would only trade at 5.5 times earnings now.
The cash flow statement:
Positive and growing cash flow on an annual basis. At the current market capitalization the company trades at 7.5 times operational cash flow (based on TTM data).
The balance sheet:
The company holds growing cash and other assets (receivables and inventories) are rising accordingly. Due to the mentioned consolidation, non current assets have also increased. We think this is a logical consequence and no reason to get suspicious. The liabilities show identical features. The liabilities grow with the expansion of the business and as CCI data is consolidated, we see a massive increase in minority interest.
The general problem with the judgment of the data lies in the consolidation process in 2013, which was also somehow adapted to the 2012 report. However, the years before remain unchanged (Anadolou bought the first interest in CCI in 1996). This makes a detailed discussion of the performance rather complicated. What stays unchanged is the observation that Efes' business is stable and well diversified. Only 15% of the company revenue is generated from the sale of beer in Turkey. By far the largest part of revenue is generated with soft drinks. This shields the company against political uncertainties and 'religious risks' in its home country. Another important point is the Russian market, where Efes sells a large part of its international beer. The market there is not only very competitive, but also is influenced by political measures that banned drinking in public and restricted the hours of sale for alcohol.
Despite all that, we would argue that Efes as an original brewer is well aware of these risks and also experienced in managing them. We think investors should not overestimate these risks, as the whole industry has to cope with them and Efes seems well prepared both strategically and in its operational tactics.
If we then assume that Efes is financially stable and its business is about to generate profits in the future, we have to ask if the company's shares are cheap enough at the moment to justify the risk of investment.
The price: In retrospective we might say that Efes is approaching its cheapest price ever, which was around $1.85. We think a price very close to $2 can therefore be understood as historically cheap. From the data above we could also conclude that there is no fundamental reason why the shares should be so cheap.
Other indicators such as price-to-book value suggest that the shares might trade below book value soon and might therefore provide a further margin of safety. The corrected price-to-earnings ratio for the last year also shows a low 6.3. This year's earnings have not been brilliant so far, due to the mentioned problems and higher prices for basic materials (e.g. barley).
Altogether, the situation for Efes is not 100% conclusive in our opinion. We have little doubt about the future presence and growth of the company. The recent stagnation in foreign sales should not last forever, but hinders short-term prospects. Still, we do not know how long it will take before demand in Russia picks up again. The diversification of the company is greatly beneficial. On the other hand, there are no positive catalysts in the near future that would jusitfy a sudden rise in the share price. Rather, we think that the company is a safe and conservative investment for long term investors if it's bought close to or below $2.
If similar investments cannot be found in the US or elsewhere is up for debate. As we think that geographical diversification of investments can play an important role in modern portfolio development, Efes can be an interesting prospect. We therefore recommend to watch the further development of the company.
We introduced Efes as a large and globally active producer of beers and soft drinks. We sketched the company as fundamentally stable and growing. We pointed out that technical matters make it hard to judge the company's recent financial development.
We pointed out that the share price is approaching historically lows at the moment. Due to problems in its foreign markets, the company should not be expected to perform miracles in the short term. The financial stability and its diversified business-model will help the company manage these turbulent times.
We think that Efes might be an interesting company for long term investors below $2. Investors with a focus on global diversification of their portfolio should watch the company.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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