Hepsiburada - fundamental catalysts in play

The single most attractive ecommerce platform on sales

Hepsiburada offers the most compelling valuation proposition amongst the internet/ecommerce players on sales and sales growth based comparisons. When plotted against 3YR sales CAGR, Hepsiburada’s EV to sales is a clear outlier. This is because the sales multiples the shares trade at are well below the industry averages. The stock sits within 0.1x to 0.2x on 2023 EV/Sales on consensus estimates. In comparison, the EM average is 2.1x and the DM average is 3.4x, both on 2023. The 2024 EV to sales gap is similar, again on consensus numbers. The magnitude of difference in the multiples we quote here is overwhelming, almost inconceivable.

Why is Hepsiburada’s enterprise value barely 10% of its sales? There are several reasons; but one word explains them all: predictability, in particular, that of EBITDA. As far as we can read and see, there is a lack of credible consensus concerning the timing of EBITDA break even. That should make the street's EBITDA estimates redundant, should it not? Looking at the sheer size of erosion in share price since last year and keeping in mind there are also powerful industry related reasons for the sell-off, we reckon the stock may be pricing an EBITDA break-even no sooner than 2024. That is way too late and punitively conservative, on our assumptions. This bearish view of outlook for EBITDA break-even is the source of upside risk to shares of historical proportions. The question is when the market will start offering “premium” for the sources of positive risk. What is the silver lining, if any, and what are the catalysts? Read on.

Looking for fundamental catalysts

Not after a technical bounce

It is hard to isolate the late sell-off in shares from the powerful bearish trend in global equities. In other words, reduced appetite for risk globally makes it harder to understand the stock’s response to quarterly financials and/or improvement in guidance, however modest it may be. We certainly see downbeat sentiment towards equities around the globe; and there are plenty of other reasons which (may) have depressed share values across tech space. We are not chasing some technical bounce in Hepsiburada here. We are instead searching for fundamental catalysts, which would alter the stock outlook for good reasons.

Follow cash cost of sales and OPEX margins in September financials

We have established there is no quality consensus as to the timing of EBITDA breakeven. It could be any one of the next three years, namely 2023, 2024 and 2025. We are looking for some early indicators towards profitability the street may be overlooking. We start off with the most recent set of accounts published by the company to look for clues. June quarter income statement Hepsiburada released reports sequential improvement at almost all lines. Importantly, both gross contribution margin and various OPEX margins have posted better readings on quarter-on-quarter comparisons. We would closely follow quarterly trends in both cash cost of sales and OPEX margins starting with September quarter financials. We would be interested in finding out if (a) the advertising and (b) shipping and handling margins post decline over their June readings.

And the free cash flow trajectory

The trajectory free cash flow will follow is equally important in our search for share price guidance. Free cash flow did show recovery during the June quarter, gaining back from the March quarter and turning positive: +TL185M in 2Q22 versus -TL1.8B booked in 1Q22, these are all IAS29 inflation adjusted figures. The reversal is primarily due to the positive reading in operating cash flow line, which posted +TL397M in June quarter versus -TL1,676M in March. Free cash flow should be one of the most important lines in September quarter financials to watch out for. A repeated positive reading following June would alone attract interest and give a boost to shares. If a good outlook statement for 2023 followed, then the stock would conceivably reverse its trend.

Calendar of events and other potential catalysts

What is the event calendar looking like between now and the year-end? The calendar is busy. Publication of the September quarter financial statements is certainly important, but there is more. The next important event for the stock we would watch out for is either (a) the release of the 2023 guidance statement, which should include targets for both revenues and EBITDA or (b) September quarter financials, whichever comes first. The timing of the former may coincide with the timing of the new CEO taking over. A public statement by the new CEO, if there is one, would certainly be among the events we should be looking out for. We see any one of these events as a catalyst for the stock and a source of positive risk. We will keep you posted.