Sun Tekstıl (TFG Istanbul Menkul Değerler )

? High growth exporter at an appealing valuation
We initiate our Sun Tekstil coverage with a BUY rating due to the company’s
expanding international sales, design capabilities and manufacturer logistics edge
that cause entry barriers, likely addition of another large-scale apparel company to
its client portfolio, fast growth, net cash position and the appealing valuation. 94%
of revenues come from export markets in hard currency. The company has the
ability to set higher prices thanks to its unique designs. Its largest customer is Spainbased
Inditex Group/Zara. While Turkey’s avg textile export price to Spain is 18 $/kg,
it is 22 $/kg for Sun Tekstil indicating the value add.
? Expecting a headwind for 3Q22 followed by a recovery in 4Q22
We expect that higher yarn and energy costs have hurt the company's financials in
3Q22, thus expecting a q-q margin erosion. It will be temporary as input prices are
normalizing in 4Q22 and higher margin winter clothes are kicking in. We are also
optimistic for 4Q22 as higher margin technical textiles to climb up by 9pp to 50% of
sales by year-end. We envisage TRY1.05bn sales, TL138mn EBITDA and TL180mn net
profit for 3Q22. Any weakness in shares following 3Q numbers should be used as
buying opportunity in our view.
? EU trading-down to support the company’s biggest customer
Inditex accounts for 29% of Sun Tekstil’s top-line. Inditex might benefit from EU
slowdown from a market share point of view, because of its mid to lower-end
pricing. Analysts expect 16.3%, 7.4% and 8.1% EUR based Eps growth for
2022,2023,2024 respectively for Inditex (EquityRT).
? Well-Established Supply Chain Gives a Competitive Edge
Sun Tekstil is an oligopoly in Turkey with its well-established supply chain
structure. The company currently has a monthly capacity of 3mn units 10% of
which is produced through its own factory while the rest is supplied from 30
producers. Organizing so many suppliers in different locations and keeping up the
same quality provides an entry barrier for new comers. Also, fixed costs are less
due to this supply chain structure that is done on order flow.
? Valuation Appeal
We issue a BUY rating for Sun Tekstil with a TRY69.5/share target price representing an
upside potential of 70%. Sun Tekstil offers 33% upside to EM peers on EV/EBITDA and 46%
upside on P/E through 2023 expectations.
 TFG Istanbul Menkul Değerler A.Ş.
  www.tfgistanbul.com/arastirma-raporlar
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