The Company 

Anadolu Efes is the leading producer of beer in Turkey. Together with its 100%-owned subsidiary, Efes Breweries International (EBI), the company operates in Russia, Kazakhstan, Moldova, Georgia and Ukraine. The company also holds a 50.3% stake in Coca Cola İçecek (CCI), one of the leading bottlers in the Coca-Cola system. Along with Turkey, CCI operates in the Middle East, the Commonwealth of Independent States and Pakistan.

As of September 2012, the company commanded an 84% market share in Turkey. At the time, Turkey’s beer consumption had been stagnant for the preceding three years, mainly as a result of the holy month of Ramadan occurring during the high season. Moreover, some changes in the domestic regulatory environment played a part in this stagnation, including increases in excise duties in 2009, 2010 (twice), and 2011; the smoking ban imposed by the government in July 2009; and various restrictions in sales and advertising. However, since 2012, Turkey’s total beer sales have started to grow again, and we expect this trend to continue in the coming years. In Turkey, Anadolu Efes is benefitting from a high level of returnable packaging (i.e., returnable bottles and kegs) and a concentrated market in which the top two players combined account for a 99% share.

Developement Strategy

The international beer business at Anadolu Efes is run by the company’s 100%-owned subsidiary, EBI. In 2012, EBI merged with SABM iller’s Russian and Ukrainian operations, thereby expanding its presence in the region. Going forward, EBI will also be the sole vehicle for Anadolu Efes and SABM iller’s expansion in the region. Although we do not expect any merger and acquisition activity in the near future, we may see inorganic growth over next few years once the synergies in Russia are extracted. Russia is the largest market in which EBI operates and accounts for 67% of EBI’s sales volume.

Following the merger with SABM iller, EBI’s market share increased, rising from 10.9% in 2011 to 16.3% as of the end of September 2012. However, on a like-for-like basis, market share fell from 17.8% following the merger. Now that the integration process has been completed, we expect EBI to gain some share in Russia, but the market remains challenging due to its fragmented structure and various regulatory hurdles.

CCI runs soft drink operations at Anadolu Efes and operates in 10 countries: Turkey, Pakistan, Kazakhstan, Azerbaijan, Turkmenistan, Kyrgyzstan, Tajikistan, Jordan, Syria and Iraq. All of these markets offer strong growth potential on the back of young demographic bases and low per capita consumption, with the greatest opportunities outside of Turkey. On top of solid organic growth, CCI has considerable ability to grow through acquisitions as well.

Anadolu Efes issued a $500m bond with a 10-year maturity in November 2012. The yield of the bond was 3.523%, one of the lowest among Turkish companies.

This will not only help the Anadolu Efes reduce its cost of borrowing but also diversify its debt portfolio.

Our target share price for Anadolu Efes is TL32.30 (€13.95), offering 19% upside potential. The company has solid growth prospects with its soft drink business, and strong cash generating capability with its local beer operations. EBI appears set to become a turnaround story in 2013, after losing some market share in 2012 due to the SABM iller integration.

Anadolu Efes shares trade at 10.9x enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA), corresponding to a 7% discount to international breweries. Excluding the high-growth soft drink operations at Anadolu Efes, the company’s beer operations trade at an EV/EBITDA of 9.3x, implying a steeper discount of 20%. The stock underperformed the BIST 100 index by 17% between September 2012 and March 2013, mainly due to EBI’s weak operating performance. As we expect a turnaround in EBI’s operational performance in 2013 following the completion of the SABM iller integration process, the stock performance should catch up.