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MFIN301
Valuation Project
Zekiye Selvili

Zeki Yılmaz
Ömer Faruk Uçal
Berk Can Şahin
Fatih Can Yalçınkaya
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Table of Contents
Industry Background ...................................................................................................................................... 3
History and Evolution of the Industry ................................................................................................ 3
Merger Behavior .......................................................................................................................................... 3
Industry Concentration ............................................................................................................................. 4
Contribution to Turkish GDP and employment .............................................................................. 4
Financing and Valuation of Firms in the Industry .............................................................................. 5
Valuation .............................................................................................................................................................. 7
Method ............................................................................................................................................................. 7
Weighted Average Cost of Capital ......................................................................................................... 7
Discounted Free Cashflows...................................................................................................................... 8
Conclusion ........................................................................................................................................................ 10
Appendix ........................................................................................................................................................... 11
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Industry Background

History and Evolution of the Industry

The retailing sector in the world started with the supermarket phenomenon in
the USA in the 1950s, it is stated that the real development of the sector was in the
1990s. The events caused by the "opening up" winds that started to blow in the
Eastern Bloc countries in the 1980s resulted in the collapse of the communist system
in the 1990s, and a significant portion of the world population was included in the
capitalist system in a short time.

The retailer began retailing in Turkey between the years 1954-1957, showed a
significant improvement with the introduction of the industry in Migros and Gima
hypermarkets 1980s. With the entry of new stores into the market and increasing
competition, the concepts of customer-oriented sales, customer satisfaction, and
relational marketing have emerged. In the sector, a retailing understanding that acts
according to the wishes of the consumers and consequently the dominance in the
market passes from the producer to the consumer and the chain is more experienced
has started to prevail.

Today, e-commerce takes its place in the retail sector. Retail sales are growing
slowly as a whole. The growth of sales in physical stores in 2018 was merely 3.7%.
Meanwhile, ecommerce sales saw a 15% jump. In a decade, ecommerce sales have
grown from 5% of the retail market share to nearly 15%.

In 2020, customers preferred the online shopping method during the pandemic
process. This is why the retail industry is rapidly turning towards e-commerce.

Merger Behavior

Migros went public in 1991. Migros, which started its department store
application since the end of 1990, bought the retail chain Tansaş in 2005. On
February 14, 2008, Koç Holding sold its shares to a British company named
Moonlight Capital SA. In the first days of 2015, Anadolu Group acquired 40.25% of
the company's shares.
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Migros bought 95.5% of Tesco Kipa for 302 Million Lira on June 10, 2016. In
the statement made by the company on March 16, 2018, it was announced that the 56
branches of the UYUM market, owned by Makro Market, and the 17 Macro Market
branches operating in Antalya were taken over by Migros for 105 million TL.

Industry Concentration

Bim, Şok, Bizim and CarreforuSa appear as our biggest competitors in our
calculations for the retail industry. We have identified 4 firms that were publicly
traded in the BIST100 under the consumer trade of kap.gov.tr. There are 12 direct
competitors in Bist 100 and Migros ranks 2nd in terms of revenue and employees.
Bim, the largest company in the sector, has 47,980 employees and an annual revenue
of 32.3 billion TL.

Contribution to Turkish GDP and employment

There are a total of 3.1 million businesses in our country, 723 thousand of
these businesses operate in the retail sector. 2.1 million people work in the sector,
which corresponds to 13% of our 16 million employees. The revenue in the sector is
710 billion TL and this revenue corresponds to 11.5% of the turnover of 6.2 trillion
TL we have created in all sectors. Another data explaining the importance of the
sector is its share in the gross domestic product (GDP). The share of retail trade
services in our GDP, which is approximately 3.1 trillion TL, is around 12% with 368
billion TL.

Migros in Turkey's retail sector's contribution to GDP is 1.2 percent, compared

with 26.779 employees. It has 3.2 percent of the sector with 23.19 billion profit in
2019.
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Financing and Valuation of Firms in the Industry

Carrefour, BIM and BIZIM are strong competitors for Migros. In the table
below, we will examine leverage and interest coverage ratios of these companies. (All
of these datas based on 2019 annual reports.)

Table shows that, Migros’ Debt-Assets and Debt-Equity ratios are above the
average. Main reason is that Migros is mostly financed from debt. For Carrefour
situation is quite close to Migros since their debt value also above the average.
However, Carrefour’s debt-equity data is significant since it is minus number.

Reason is that Carrefour’s equity is minus number. We will examine firm sizes data
on the next table.

Covid-19 has significant negative effects nearly all industries; however,

supermarket industry is not of these industries. Since there are lockdowns, people
spend most of their times at home. This would lead to increase on demand to
supermarket products. Table from the above stated that BIM has most revenues
between these companies, and their total assets are higher than average. In equity part,
market leader is Migros. Migros has significantly more equity than its rivals.
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In the table above, we can see stock information of these for companies. While
BIM is the leader of stock price, Migros has strong increase from January 2020 with
75%.
Market Ratios Formulas Migros Carrefour BIM BIZIM Average
Market Capitalization/Total Book
Market to Book Value 1,86 1,42 1,77 3,64 2,17
Price to Earnings Share Price/Earnings Per Share -16,01 -25 22,17 30,48 2,91

In this part we have market to book, and P/E ratios. For market to book ratio,
Migros is below the average. In the P/E ratio part, Migros and Carrefour have
negative P/E ratios because of their minus number earning per shares (-2,76 for
Migros and -2,75 for Carrefour.)

M/B Equity Multiplier 1,86

Migros BV of Equity 3,21
Migros Equity Value 5,99

In the final part, we calculated equity value with comparable methods. We

found that Migros Equity Value=5,99 billion. Nevertheless, comparable data is not
reliable enough since Carrefour has negative equity, and we use 2018 data of them.
For correct calculation of Migros value, next pages would be useful (FCF and NPV
analysis).
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Valuation

Method
To make a valuation for Migros, we are going to use discounted cashflow
method using our WACC value. To come up with WACC value, we examined the
whole firms in supermarket industry, and we chose five of biggest rivals of Migros to
compare; ADESE, BIM, CARREFOURSA, BIZIM, SOK. After some assumptions
and calculations, we ended up with WACC value. To calculate discounted free
cashflow, we used this WACC value to project revenue and expenses. After that,
discounted free cashflow was found by using these projected values. We have
calculated a terminal value for Migros at the end of 2025, then we discounted to
present value. To come up with firm’s value, we sum all these discounted cashflows
and terminal value. Finally, we extracted the debt of Migros from net present value of
Migros we found, then we divided it by number of shares to find price per share.

Weighted Average Cost of Capital

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The WACC is the least required rate of return for accepting the project. First, we
looked at financial statements of Migros’s rivals for their debt, equity, debt to capital
ratio, and equity to capital ratio. Moreover, after founding beta equity value, we
calculated the beta asset value for each company. To calculate WACC for Migros we
came up with some values and assumptions. We took risk free rate as 12.51% which
10-year Turkish government bonds yield. Tax rate is implied by the annual reports of
Migros as 22%. Cost of debt have to higher than risk free rate, it will be at least
approximately 13%. So, we assumed that cost of debt will be 15% by giving it 2%
premium. We examined some statistics for average market premium, we took market
risk premium as 9.6%, according to statista.com 2019 average market risk premium in
Turkey data. We relevered the beta asset to calculate the cost of equity. After all these
assumptions and calculations, we came up with 13.66% WACC.
Discounted Free Cashflows

To calculate free cashflows, we estimated future revenues, operating profit,

depreciation, CAPEX and change in net working capital. After examining the
historical data for Migros, we assumed that revenue is increasing 4 billion year to
year. Operating profit is projected as 3% of the yearly revenue. Depreciation in 2019
was an outlier, so we neglected it. We calculated average depreciation percentage to
yearly revenue between 2016 – 2018, so depreciation is taken as 1.71% of the yearly
revenue. We followed same steps for change in net working capital, so we assumed
that it is 2.78% of the yearly revenue. According to Migros, the estimated CAPEX is
₺400,000,000 for 2020. For our assumption, it will remain same for upcoming years.
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To calculate terminal value, we sum the projected PP&E value in 2025 and the
projected change in net working capital in 2025. We discounted terminal value with
WACC to get PV of terminal value.

These two tables are complementary.

We sum the present value of total cashflows and the present value of terminal
value to calculate total net present value of the company. Based on Migros’s annual
report in 2019, the number of shares outstanding is 181,050,000. So, dividing net
present value minus the debt of Migros by number of shares give us the price per
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share as ₺24.12. The current stock price per share is ₺44.42 for Migros. We can easily
observe that, the current stock price is overvalued. Actually, the enterprise value was
really high but Migros is mostly financed by debt. So it leads to lower firm value for
Migros. Moreover, we took the revenue assumption as 4 billion increase for every
year but the other assumptions are based on percentage of the revenue. Because of
that, we came up with lower firm value. We could make better assumptions to
calculate more precise value for Migros.

Conclusion
Based on our calculations, and assumptions price per share of Migros is
₺24.12. However, the currently the stock price is ₺44.42. We can suggest that short
sell could be good option for investors. As we mentioned, this analysis is not an exact
science, mostly based on assumptions and considerations. Therefore, we might have
ended up with incorrect conclusion. In order to make more comprehensive analysis,
we could have come up with better assumptions like more percentagewise
assumptions rather than constant increases. For some assumptions, we used
percentagewise increases to make this analysis more efficient. However, no
percentagewise pattern was found among some of the increases in the data.
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Appendix

https://www.kap.org.tr/
https://www.statista.com/
https://www.investing.com/
https://finance.yahoo.com/
https://www.wsj.com/
Some data were taken from company-related pages on these sites.