DESA (TFG Istanbul Menkul Değerler )

A Dash of La Dolce Vita to the Business
With the completion of the 2k sqm factory investment on a 5k sqm land in Toscana in May 2023, the company became able to produce leather goods for the most Italian luxury brands with an important insignia of "Made in Italy'' that is much sought-after. The prime materials utilized for the leather primarily hail from Turkey to undergo finishing in Italy, acquiring the esteemed Italian passport. Although the initial impact on turnover for this year is anticipated to be no more than a couple of million euros, we project EUR15mn contribution to the topline for 2024. This 20% expected addition to the topline is set to grow exponentially, owing to the factory's strategic proximity to the realm of luxury brands.

Suitcase segment is a cash cow
On top of its 53 own branded stores to sell its own products, Desa sells Samsonite branded products through a network of 36 Desa-Samsonite and 16 Samsonite JV stores. Under a strategic agreement with Samsonite, the suitcases are costed in TRY but sold based on the prevailing FX rate. This pricing arrangement allows the company to garner additional markup when favorable exchange rates come into play. Desa also stands to benefit from a potentially robust tourism season, which is poised to bolster the company's topline.

Normalization is ahead after a weak first quarter
As a result of the unwavering FX rate driven mounting TRY costs on raw materials, along with the weak demand resulted in quarterly contraction in operational earnings in 1Q23. The weak demand was offset by climbing exports with lower mark-up compared to domestic sales. Therefore, the EBITDA margin marked historical low level of 8.5%. We envisage a normalization in operational profitability up to 20% levels from 2Q23 onwards, which will be celebrated by the market in our view.

Appealing Valuation
We issue a BUY recommendation for DESA with a target price of TRY 21.4/share derived solely through our DCF model, representing an 63% upside potential. The company also trades at a compelling 4.7x 2024F EV/EBITDA.

 TFG Istanbul Menkul Değerler A.Ş.
  www.tfgistanbul.com/arastirma-raporlar
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