Hepsiburada - The Stock to Own in 2023
/The stock is below $1 mark offering compelling value. Having staged a strong rally following the release of the December quarter financials, the stock has again fallen below the $1 mark. The poor share performance in April has coincided with the broader weakness across the internet and e-commerce stocks in the lead up to the March quarter earnings season. We see the recent weakness in shares as an opportunity to accumulate and argue Hepsiburada stands out in the crowd as a stock to own in 2023. Here is our thought process.
Expect margin gains to continue. The December quarter marked the third quarter of margin gains. There was a marked decline reported in advertising and shipping/packaging margins last year. Margins gained despite the fact that Hepsiburada chose not to reduce any capacity or headcount in 2022 unlike other ecommerce and fintech businesses. Major marketplace operators including the industry heavyweights Amazon, Alibaba, eBay, Baidu, and JD.Com have reduced their headcount since early 2022. Hepsiburada, which did not follow suit last year, is now implementing a major redundancy plan with potentially material impact on expenses and margins for the rest of the year.
The management is indeed guiding EBITDA break even as early as March. The December quarter EBITDA did almost break even. The operating loss narrowed both sequentially and on year-on-year comparisons. The management is now guiding an EBITDA breakeven by the end of March quarter. As we have communicated before, If the EBITDA broke even sooner than the analysts factor in, target equity values would have to be raised potentially significantly. Now, a positive EBITDA reading in 2023 is no longer too stretched a prediction. It is now conceivable that earnings will break even soon after.
The marketplace operators in China are looking to float shares in subs — how important is this? The news that the marketplace companies in China have plans to restructure their businesses may have further reduced the appetite for e-commerce stocks. It is not the sound of restructuring itself that is causing concern among the minority shareholders. Giving more space to subsidiaries to run and monitor their businesses is not necessarily a bad idea. What is less convincing are the plans to offer their shares to the public. Alibaba and JD.Com are indeed looking to float selected businesses as part of their restructuring plans. Back-door listings rarely create value if at all. It is well documented that the Holding companies tend to trade at discounts, often wide, to their net asset values. The parent companies may be potentially unlocking value in the selected divisions they float but do so only at the expense of those divisions that are not-so-profitable, which remain under parent company's control.
…and what does it mean for Hepsiburada? Any restructuring plan executed by Alibaba or JD.Com is not directly relevant for Hepsiburada unless the former decides to float Trendyol, its Turkish subsidiary. A restructuring involving Alibaba's international commerce division and/or a Trendyol IPO anytime soon is highly unlikely for a variety of reasons. We will share the reasons in a separate commentary.
About Hepsiburada's equity value. We are not going to quote any forward looking sales or EBITDA predictions here. Neither will we promote a target value for equity. Instead, we shall make two simple assumptions to give you an idea as to how undervalued Hepsiburada’s equity may be. We assume that Hepsiburada grows its sales by 5% and generates an EBITDA margin of 1% in 2023. We are using inflation adjusted numbers here (cTL16.1B in 2022 sales). As for the EV, we take the 24 April 2023 NASDAQ quote for equity and use the 31 December 2022 book values for any non-equity claims on the firm's assets.
Here are the implied multiples. If you subscribed to our assumptions, you would be looking at 6.2x on 2023 EV/EBITDA to become a shareholder or half of that if the company pulled a 2% margin. Alternatively, a relatively modest 5% EBITDA margin outlook would entail an EV to EBITDA multiple of 1.2x, hardly demanding.