Category Archives: Turk Tuborg

Turk Tuborg & GMA Holding Position Sizes 11/6/2017

Turk Tuborg & GMA Holding Position Size 11/6/2017


Turk Tuborg’s position decreased 5.1% on May 12, 2017 when there was the first sales with a goal of reaching 2.0%.  The share price has increased and the stock is illiquid. The current position is 3.2%. There will be no further selling.

There is a similar liquidity issue with GMA Holding.  There will be no more buying and the GMA Holding position.  It is a 6.4% position.

Both are high quality companies that can be held for five years regardless of stock market liquidity.

The latest recommendation size of 6.0% was completed over 7 days.

Future recommendations will be in more liquid stocks. The lower limit for 6 month average daily volume will be USD100,000 in the most attractive of situations but more likely it will be above USD250,000 average daily volume.




Turk Tuborg 2016 Full Year Results May 11, 2017

Turk Tuborg 2016 Full Year Results May 11, 2017

Turk Tuborg reported 2016 results. The company’s consolidated net sales increased by 29.6% from TRY742.68 million in 2015 to TRY962.7 million in 2016. ASP increases were the main driver of revenue growth as ASP per hectoliter (hl) increased by 30.9% from TRY245.12 in 2015 to TRY320.92 in 2016, while volume decreased by 1.0% from 3.03 million hectoliters (mhl) in 2015 to 3.00 million hectoliters in 2016. Despite the ASP increase and the volume decrease, Turk Tuborg still gained share from Anadolu Efes. Its volume share increased from 31.4% to 33.3% and its market share increased from 33.3% to 40.1%. Turk Tuborg and Anadolu control over 99% of the market so any share gain by one is at the expense of the other.


The table illustrates volume, volume share within Turkey, ASP, and market share within Turkey from 2008 to 2016. Since 2008, Turk Tuborg’s volume grew by 13.2% per annum, Anadolu’s volume decreased by 4.3% per annum, and the overall industry volume decline by -0.9% per annum. Since 2008, Turk Tuborg’s ASP increased by 9.9% per annum, Anadolu’s ASP increased by 7.0% per annum, and the overall industry ASP increased by 8.4% per annum.


In our initiation report, we believed Turk Tuborg’s product innovation and focused operations along with Anadolu Efes debt load is driving Turk Tuborg’s share gains.


In 2016, Turk Tuborg launched Tuborg Amber, the first and only beer in amber category of Turkey illustrating the company’s continued focus on product innovation. Anadolu continues to have operations all over Europe while Turk Tuborg remains focused on Turkey. Anadolu’s extended operations decrease the importance of Turkey on overall operations leading to less management attention. It also adds diseconomies of scale associated with administrating all the different entities. Anadolu improved its financial position to 3.6 times operating profit but capex is lower than depreciation meaning the company is unable to even maintain its current asset base, never mind spending on growth, while, Turk Tuborg grew and modernized its facilities.


Since 2011, Turk Tuborg’s average capex to depreciation ratio is 185% compared to Anadolu Efes’s average capex to depreciation ratio of 114%. The capex allowed it to modernize its facilities decreasing the average age of assets from 18.8 years in 2011 to 7.4 years almost on par with Anadolu Efes.


Despite Anadolu’s debt load, economies of scale persist. Distribution is crucial as over 50% of Turkish beer sales are through a two-way distribution system where bottles and kegs are returned. Advertising is another important fixed cost that benefits the largest players. These costs are included in the selling expense line on both companies’ income statements. Anadolu does not report Turkish beer expenses but assuming a similar split in operating expenses between administrative and selling expenses, the company’s selling expense can be determined.


Despite Anadolu spending almost three times as much on distribution and marketing, Turk Tuborg has made significant share gains. The company seems to be much more efficient with a much better feel for the desires of Turkish customers. Turk Tuborg’s superior management will be very difficult for Anadolu to overcome. Can Anadolu increase its marketing and distribution expense to win back share? The recent past would suggest increasing spending would not do much good. It is also particularly difficult when the company’s debt load is on the higher side. The restrictions on alcohol promotions and advertisements as well as the restrictions on alcohol producers sponsoring events greatly reduces the ability of increased marketing expenses.


Turk Tuborg’s saw its gross profit increase by 34.3% and its gross margin expand by 197 bps. Despite, the company increasing its ASP at an average annual rate of 9.9% since 2008, its gross margin has expanded by over 2675 basis points pointing to pricing power. Over the same period, industry volume declined by 0.9% strengthening the case of pricing power.


Administrative expenses increased in line with revenue 27.7% at remaining at roughly 5.0% of sales, while selling expenses increased by 26.0% decreasing slightly as a percentage of sales from 25.5% of sales to 24.7% of sales.


Operating profit increased by 44.3% from TRY180.78 million in 2015 to TRY260.85 million in 2016. The company’s working capital is negative at –TRY64 million and fixed capital turnover remained roughly the same at 2.82 times. The company’s capital efficiency declined slightly to 3.47 times. Overall, ROIC decreased slightly from 76.1% to 75.2%.


Turk Tuborg continues to perform extremely well growing at a fast pace, taking a significant amount of share, and remaining very profitable with an ROIC of 75.2%.  Given the poor liquidity in the company’s stock and political concerns, Turk Tuborg trades on a NOPAT yield of 7.4% with the potential for continued ASP increases of at least 5% per year leading to expected return of at least 12.5% and potentially more. Our weekly commentary dated 12/13/16-12/19/16, looked at acquisition multiples in the beer industry since 1999 and over the last twelve months. The average transaction multiple was 11.7 times EV/EBITDA and 11.5 times EV/EBITDA, respectively.  Assuming a multiple of 12 times EV/EBITDA, Turk Tuborg has 43% upside.


The barriers to entry within the Turkish beer industry are extremely strong, with Turk Tuborg and Anadolu maintaining over 99% of the market for over a decade, eliminating any concerns over competitive risks. Additionally, restrictions on alcohol promotions and advertising reduces the risk of increased competitive rivalry. The company has a net cash position at 1.2 times the company’s 2016 operating profit eliminating potential financial risk. The biggest risk is political as Erdogan consolidates his power in Turkey. The consolidation of power eliminates checks and balances typically seen in democracy and Erdogan’s conservative nature may lead to continued attempt to stifle the industry. The government continues to increase excise taxes in attempt to stamp out drinking. The current consumption tax rate on beer is 63%. In 2013, the Turkish government imposing a series of new alcohol restrictions including banning shops from selling alcohol from 10 p.m. to 6 a.m. and prohibited all forms of advertising and promotion of alcohol. Alcohol producers are also barred from sponsoring events, and television broadcasters were required to blur images of alcohol in movies, soap operas and music videos. In a 2010 survey commissioned by the Health Ministry, Ankara’s Hacettepe University found that only 23% of Turkish men and 4% of Turkish women drank alcohol so there may be a tolerance for prohibition. Turkish annual alcohol consumption is the lowest in Europe at 1.55 liters per capita compared to over 10 liters in most European countries.


Despite the company’s strong operating performance, strong competitive position, net cash position, and slightly cheap valuation, growth is bound to slow as ASP increase are the driver of growth with industry volumes declining at 1.0% per year. The increasing consolidation of power by Erdogan is worrisome for the industry leading us to decrease our position size to 2.0% as long as the price is above TRY9.00.








PC Jeweller declined by 14% over the last three days of the week as the Indian Government decided to ban all INR500 and INR1,000 notes to fight black money. Roughly, 80% of the industry sales are in cash. In the short term, there will be an impact. In the longer term, it may increase the attractiveness of gold and jewelry as a store of value as credibility of the government and its potential actions decrease. It may also help consolidate the market in the organized sector. PC Jeweller offers a 7.8% NOPAT yield. We are maintaining the current position size of 2.0% for now with any further price declines probably prompting a position size increase.


Turk Tuborg reported Q3 2016 results with revenue increasing 39% while net profit increased by 55%. It remains extremely profitable with a Q3 2016 annualized ROIC of 151%. Turk Tuborg continues to gain share on Anadolu Efes with Anadolu Efes Turkish beer revenue increasing by 2.5% in Q3 2016. Over the past 12 months, Turk Tuborg gained 7 percentage points of market share (34% to 41%). These two players have accounted for over 99% of the industry for many years. It also is much more profitable generating 1.14 times the EBITDA of Anadolu’s Turkish beer operations on 70% of the sales. Turk Tuborg net profit was six times Anadolu’s Turkish beer operations net profit due to the financial leverage employed by Anadolu. The combined market share, a two-way distribution system (bottles and kegs account for over half the market), and the economies of scale within the industry alleviate concerns of entry from new players. Competitive rivalry is also weak despite Turk Tuborg’s share gains due to Anadolu Efes financial leverage (6.1 times EBIT in 2015), currently a big concern of the company. Anadolu is also a much bigger entity with operations all over Eastern Europe diverting their attention while Turk Tuborg is focused solely on the Turkish market. The big risk to the investment case is the increased centralized control within Turkey may decrease secularism in the country leading to prohibition. The Turkish government taxes the Turkey’s beer market heavily making it a steady stream of revenue for the government, which it may not want to lose through prohibition. Turk Tuborg now trades at an EV/ttm EBIT of 7.8 times with a net cash position almost two times ttm EBIT. We will maintain our 4.4% position potentially increasing if there are any significant share price declines.





Veto Switchgears and Cables


Executive Summary

Veto operates in a commodity business with low barriers to entry yet only offers a NOPAT yield of 6.1%. The commodity nature of the business means growth does not add value and therefore does not generate any additional return, therefore the current expected return is 6.1% well below the required return for a commodity business.


Company Description


Veto Switchgears and Cable manufactures wires & cables, electrical accessories, industrial cables, fans, CFL lamps, pumps, modular switches, LED lights, immersion heater, MCB and distribution boards.

Veto has a distribution network of 2,500 dealers across the country with a majority of revenues coming from Rajasthan with growth opportunities in the rest of India and the Middle East. Given it growth potential, the company purchased 10,312.99 square meters in SEZ Jaipur to increase manufacturing capacity. The company’s targets reaching more than Rs.1,000 crores in sales by FY2021. The company’s current capacity and capacity utilization is illustrated below.


The company’s main raw materials are copper, PVC resin, and aluminum.



The company listed on the public stock exchange in 2012. The promoters own 58.19% of the company down from 71.76% at the end of December 2015.



The company describes the industry as fragmented with low barriers to entry therefore the only way to generate excess returns is through operating efficiency. Given the difficulties maintaining a competitive advantage, it will be difficult sustaining excess profits and therefore the company should trade at reproduction value.


A volatile ROIC averaging 15.8% over the past five years seems to confirm the lack of competitive advantage but the company’s capacity utilization is low providing an opportunity for the company to double its ROIC. An inconsistent gross margin is evidence of a lack of pricing power.



Management has not overly levered the company with current net debt to 5-year average operating income of 1.95 times.


Management remuneration is reasonable at 2.0% of operating income in FY16 and FY15.


Related party transactions are relatively insignificant at 2% of sales.


Given the lack of barriers to entry, the company’s number one strategic focus should be operational efficiency.



Assuming an 12.5% discount rate, cyclically adjusted operating margin, and cyclically adjusted capital efficiency, for the company to generate over a 10% annualized return, the company needs to grow by 20% over the next five years fading to 5% terminal growth rate in year 10. Given the lack of barriers to entry in the industry, any growth should not generate any value therefore is irrelevant making the market’s current assumptions very aggressive.


Veto currently offers a NOPAT yield of 6.1%. As mentioned the commodity nature of the business means growth does not add value and therefore does not generate any additional return, therefore the current expected return is 6.1% well below the required return for a commodity business.



Continued growth in the market alleviates competitive pressures allowing the company to main elevated returns.


The company fills capacity and is able to double its ROIC through much better capital efficiency.


Key Areas of Research Focus

  1. Operating costs relative to peers





Whether an industry has a barrier to entry or not is a key question in our investment process. In an industry with barriers to entry, competition cannot freely enter limiting the potential supply in the market allowing excess profits to be sustained. The sustainability and predictability of earnings or cash flows means an earnings or cash flow based valuation is a more appropriate valuation methodology. If barriers to entry do not exist in the industry, competition will freely enter the market leading to a reversion of profitability to the cost of capital. In times of elevated profitability, supply will increase until profitability reverts to the cost of capital. In an industry with no barriers to entry, the appropriate valuation methodology is reproduction value or the value of a new competitor to reproduce the assets of the company.


In a scenario of no barriers to entry, we also take into account barriers to exit. An industry with no entry barriers and no exit barriers, profitability will revert to the cost of capital as new supply enters and exits the industry. The speed of the reversion of profitability will depend on the time to add new supply, the time to eliminate supply from the market, and the growth in demand in the market. If exit barriers exist, it will be harder for supply to exit the market slowing or even halting the reversion to the mean of profitability during periods of underperformance when supply should be exiting the market. A state where industry returns persist below the cost of capital occurs and is rectified when demand growth catches up to the supply in the industry or supply exits the market.


In an industry with barriers to entry, growth is an important assumption in determining the value of a company. Assuming 25% ROIC and a 12.5% discount rate, every $1 invested creates $2 in value illustrating the importance of growth. In an industry with no barriers to entry, ROIC will eventually revert to the cost of capital meaning $1 invested will create no additional value making growth an irrelevant assumption.


The crucial strategic questions in industries with barriers to entry are what is the barrier to entry, and then is the barrier to entry strengthening or weakening. The crucial strategic questions in an industry without barriers to entry are do exit barriers exist, is supply increasing or decreasing, how long does it take to bring on supply or shut down supply,  and is the company at the low end of the cost curve as operational efficiency provides an opportunity for potential excess profits.


Not understanding the importance of barriers to entry leads investors to make mistakes. The thought that all growth generates value and is therefore relevant being the biggest mistake. Another mistake investors often make is assuming an industry in its early stages with strong profitability means barriers to entry exist. Often in the early stages of an industry’s life cycle, companies are able to generate excess profits as demand is growing at such a rapid pace that supply cannot keep up. The supply demand imbalance allows producers to be price takers. In most industries, the excess profits from the early stages of the industry eventually dissipate as demand growth slows and supply catches up eliminating the tightness in the market causing profitability reverts towards the cost of capital as pricing power of suppliers is eliminated. Only a small number of industries will be able to limit the supply allowing for sustained excess profits. The short-term thinking in the industry is the main culprit for the errors listed above. If an investor has focus on whether next quarter’s earnings will beat expectations, barriers to entry and industry life cycle is irrelevant, as these events may not occur for quarters or years.


Whether barriers to entry exist or not is an important question in our investment process determining the type of industry analysis and the valuation method used.





CVS Warns of Prescriptions Shift, Shares Tumble on Profit Warning (Wall Street Journal)

An interesting article discussing the differences in business models of CVS and Walgreens. It is a reminder that strategy involves choosing not only what to do, but what not to do. (link)


Why Warren Buffed Does Not Believe in EBITDA (S&C Messina Capital Management)

While market participants regularly use EBITDA as a proxy for cash flow, we find it to be a very flawed metric therefore we use it only we there is no other option. The linked article by S&C Messina Capital Management discusses the main reasons for our suspicion of the EBITDA metric. (link)


Joel Greenblatt on Wealthtrack (Hurricane Capital)

Hurricane Capital took notes on Joel Greenblatt’s recent visit to Wealthtrack. Mr. Greenblatt is always insightful and a very articulate value investor. He discusses many of the key tenets of value investing. (link) You can watch the full interview here on YouTube.


Reader’s Questions (CSInvesting)

CSInvesting answered some readers’ questions on reproduction value and EPV with some very interesting insights. (link) CSInvesting has a lot of useful resources so it is worth the time to have a look around the website. Reproduction value and EPV are valuation techniques made famous by Bruce Greenwald. His book Value Investing: From Graham to Buffett and Beyond is one of the best value investing books ever written. Professor Greenwald also wrote Competition Demystified another invaluable resource on thinking about the competitive environment. Professor Greenwald teaches a value-investing course at Columbia Business School. A playlist of his course can be found here on YouTube. It is well worth the time to watch multiple times.

Don’t Confuse Cheap With Value (Broyhill Asset Management)

Broyhill Asset Management put together an interesting presentation on valuation multiples and what a multiple actually represents. (link)


Interesting Tweet Comparing Nike and Under Armour (Connor Leonard)

Apparel much more prone to trends and higher margins but a weaker competitive position as performance footwear is much more complex requiring more R&D. Additionally, performance footwear is crucial to the activity it is bought for therefore much more loyalty. Apparel is much more fashion oriented so significantly less loyalty. These views conform to our views mentioned in our Peak Sport Products and Anta Sports reports. (link)


Common Mistakes Made When Investing in Quality Companies (Lawrence A. Cunningham)

Mr. Cunningham was the co-author of Quality Investing: Owning the Best Companies for the Long Term. A wonderful book that is a must read for all investors thinking about investing in quality businesses. As stated in the title, the article discusses the common mistakes made when investing in quality companies. (link)

Honworld H1 2016 Report Review and Position Sizing October 9, 2016

Honworld H1 2016 Report Review and Position Sizing October 9, 2016


Honworld recently released its H1 2016 report.  In the first half of 2016, the company’s revenues increased by only 0.9% and its gross profit and operating profit contracted by 2.5% and 10.2% respectively.


Honworld stated the cause of the slowing in sales growth was a slowing of the Chinese condiment industry as well as a shift in its distribution channel strategy from supermarkets to more traditional channels and the catering market. Additionally, the company altered its product mix to better serve the new distribution channels leading higher sales of medium range products, which we estimate as having roughly 50% gross margin compared to gross margin of 65-75% for high end and premium products. The company did not provided a breakdown of sales by product category or gross margins of product categories both of which would be very useful for any analyst trying to understand the business and should be disclosed by the company.


The table below illustrates the growth in the H1 2016 of various condiment makers with Honworld performing at the bottom of the pile for growth illustrating company specific issue more than an industry slowdown was the reason for weaker growth.



Operating margin declined due to an increase in advertising, distribution and research and development expenses. These are all fixed cost that the company should spend significantly on to take advantage of its size advantage over peers making much more difficult for peers to compete.


The big concern has been capital allocation of the company. Honworld stated in its annual report that it had reached an optimal inventory level with inventory levels remaining stable in H1 2016 compared to H1 2015. Despite the stable inventory levels, Honworld did not generate strong operating cash flows as both short term and long term prepayments increased significantly. The increase in prepayments could be attributed to growth plans of the company or it could something else.  It is a bit concerning that in the company’s first period to prove its ability to generate cash flow due to minimal inventory investment it was unable due to an increase in a soft account.


Overall, it was a disappointing set of results with growth slowing and free cash flow not increasing despite minimal investment in inventory.


We are moving to a new approach for position sizing.  There are significant limits to any investor’s knowledge given you cannot now everything inside a company particularly in smaller companies where there is less outside evidence to collaborate one’s ideas. Most investors base much of their analysis on the financial statements provided by the company being researched. For example, the primary driver of the quality of a business is the ability of a company to generate high returns on invested capital. If the financial statements are not an accurate reflection then any investment analysis will be completely off base.  Inaccurate financial statements happen quite frequently with Chinese companies. The lack of trust creates a need for a less aggressive position size therefore all Chinese companies will start at a 2.0% position and increase with evidence that provides credibility of accurate financial statements. Outside investment in Honworld by Lunar Capital improve the credibility of Honworld’s financial statements; unfortunately, an inability to generate free cash flow is a sign of a bad business or bad management decisions. In the case of Honworld, the business seems great with a very strong marginal economics. Unfortunately, management is misallocating capital in a quest to build mammoth inventory levels decreasing returns on invested capital and increasing the need for outside funding if the company keeps growing. The need for outside funding decreases potential returns for investors due to dilutive nature of growth.


Additionally during a period of weak growth, when there is minimal investment in inventory the company is unable to generate free cash flow due to a increase in prepayments is concerning. We are decreasing our position size in Honworld to 2.0% and selling at HKD4.50 or above.


Deep value investments outside of Hong Kong and Chinese will be 2.0% positions as these are inherent weaker businesses. As you move up the quality spectrum, our maximum position size will increase with the maximum position at 10.0%. Good businesses that are undervalued will start at 2.0% increasing to potentially 6.0% as undervaluation increases. Good businesses generate strong cash flow and profitability and operate in a growing market but may not have competitive advantage. Current examples are PC Jeweller and Zensar Technologies.


High quality businesses with competitive advantages that are close to fairly valued will start at 2.0% and increase to potentially 10.0% based on the level of undervaluation.  Current examples are Credit Analysis and Research, ANTA, Turk Tuborg, Grendene.


The new position sizing comes with understanding of the limits to our knowledge and the reliance on financial statements published by companies in formulating investment strategies.   Our previous position sizing seems a bit too aggressive. Our goal is to get between 20-30 investment ideas offering sufficient diversity to buffer against any potential  bad investments while still offer enough concentration to take advantage of upside from good investments.

Turk Tuborg: A Turkish Brewer in a Duopoly offering an 8.0% NOPAT Yield 5/21/2016

Turk Tuborg: A Turkish Brewer in a Duopoly offering an 8.0% NOPAT Yield


Turk Tuborg May 21 2016 RCR


Investment Thesis


Türk Tuborg is the second largest company in a Turkish Beer market that is a duopoly.  Along with Anadolu (Anadolu), the two companies have controlled over 99% of the market for many years. There are significant barriers to entry in the form of economies of scale and brand as the Turkish Beer market requires a two way distribution system and there are restrictions on advertising. Türk Tuborg has outperformed Anadolu increasing its market share from 11.5% in 2010 to 31.4% in 2015. The company also increased its pre-tax ROIC significantly from -3.3% in 2010 to 95.2% in 2015. These improvements came just after new ownership introduced a number of new products to the market. The company offers an 8.0% EBIT yield with pricing power leading to an expected return of 13.0% per year, which is attractive given the barriers to entry in the market and the company’s outperformance under current management.


  • Expected annual return between 13.0%-15.5%
  • We will initiate a 4.0% position in Turk Tuborg.


Turk Tuborg Key Stats 5 21 2016 


 Turk Tuborg Key Stats II 5 21 2016


Company Description


Türk Tuborg was founded in İzmir-Pınarbaşı in 1967 with production starting in 1969 through a partnership between Tuborg and Yasar Holding Production. Carlsberg took a majority shareholding of Türk Tuborg in 2001 increasing its stake from 2.24% to 50.01% after purchasing 47.77% from Yasar Holding. This transaction valued Türk Tuborg at roughly USD110 million (DKK960 million). Over the course of the next few years, Carlsberg continued to increase its stake until reaching 95.69% in 2003. In 2008, Israel Beer Breweries Ltd, a Carlsberg partner in Israel and Romania, purchased 95.69% stake from Carlsberg for USD44.5 million valuing Türk Tuborg at USD80 million.  After the purchase, Türk Tuborg retained its license to continue to produce Carlsberg and Tuborg brands. The 4.31% not owned by Israel Beer Breweries is free float with the company listed on the Borsa Istanbul.


Türk Tuborg owns one of the largest breweries in Turkey with 36,000 tons of malt and 333 million liters of beer capacity. The company produces Tuborg (Gold/Amber/Special/Fici), Carlsberg, Skol, Venus Pilsner, and Troy Light for both Turkey and export markets. The company also produces Vole, Thelch, and F5 for export markets.  Türk Tuborg also imports Leffe, Hoegaarden, Guiness, Corona, Weihenstephan, Kilkenny, and Somersby.


Türk Tuborg’s products are sold through direct sales and dealers all over Turkey.  Corona, Leffe Brune, Leffe Blonde, Leffe Radieuse, Hoegaarden, Weihenstephan, Kilkeny, and Guinness brands are positioned at the super premium beer segment. Carlsberg brand is positioned at the premium beer segment. Tuborg Gold, Tuborg Fici, and Tuborg Special brands are positioned at the standard segment, while, Skol and Venus brands are positioned at the economical beer segment in 2015.


In 2015, Türk Tuborg was the second largest player in the market with a 31.4% volume share of the Turkish beer market behind Andalou’s 68.4% volume share.


In 2011, Türk Tuborg launched the Türk Tuborg Brewmaster project with the goal of delivering product variety to Turkish consumer. The company introduced super premium brands Corona, Guinness, Leffe, Weihenstephan, Kilkeny, and Hoegaarden.  The project has help increase the company’s volume share in the Turkish beer market from an estimated 11.0% in 2010 to 31.4% in 2015.



Barriers to Entry


Within the Turkish beer market the evidence points to significant barriers to entry.


  1. Türk Tuborg and Anadolu have accounted for over 99% of the Turkish beer market for many years. At the end of 2015, these two companies represented 99.8% of the market.  The high and consistent market share points to no significant new entrants or exits from the market.  The duopolistic market structure with a no significant entry or exit from the industry points to significant barriers to entry. Heineken attempted to enter the Turkish beer market, but withdrew in 2006 as it was unable to reach the minimum efficient scale needed to compete.
  2. Distribution is a significant barrier to entry. In 2012, 64% of Turkish beer volume was returnable bottles and kegs making a two way distribution system a requirement to compete in the Turkish beer market increasing the investment requirements and complexity of the required distribution network.
  3. The distribution network required to compete also points to economies of scale as distribution is a fixed cost independent of units sold. Over the past five years, Türk Tuborg has averaged roughly TRY155 million per year in selling, distribution, and marketing expenses. In 2015, both Türk Tuborg (TRY134.3) and Anadolu (TRY137.6) had a gross profit of roughly TRY135 per hectoliter. Just to cover the fixed costs associated with Türk Tuborg’s distribution, a competitor would need to achieve 12% market share.
  4. There are significant advertising restrictions on beer and other alcohol decreasing a new entrant’s ability to building a brand. There is no alcohol advertising on television or radio. Also, alcohol companies cannot sponsor any sports team and, similar to smoking, all alcohol on television or in movies is blurred.
  5. Türk Tuborg seems to have significant pricing power. Since 2008, Türk Tuborg has been able to increase its average selling price by 7% per year. The company’s cash gross margin has increased from 49.0% in 2008 to 60.1% in 2015.
  6. Total Turkish beer market volume has not grown since 2008, decreasing the attractiveness of the market, and increasing the difficulty of entering the market as lower growth often leads to increased competitive rivalry.
  7. Türk Tuborg has little or no working capital requirements. In 2014 and 2015, working capital per unit has been negative and averaged TRY63 million. Negative working capital is a strong sign of a company’s bargaining power over both its suppliers and customers.



While the evidence pointing to barriers to entry are strong, there is evidence against barriers to entry.


  • Türk Tuborg’s recent profitability has been strong with a ROIC averaging over 100% over the past two years, but from 2008 to 2011 ROIC averaged 0%. The lack of inconsistent ROIC is evidence against a competitive advantage.


Overall, the evidence overwhelmingly points to significant barriers to entry that would take years for a new competitor to reach the necessary scale to compete.


Given the evidence points to the presence of barriers to entry, what form do they take? Barriers to entry take the form of economies of scale and brand. Economies of scale are in the form of a two way distribution network that requires a minimum efficient scale of roughly 12.0% just to replicate the smaller of the two large competitors’ annual spend on selling and distribution expenses.  Additionally, large breweries require expensive equipment that is much cheaper on a per unit basis if the depreciation is spread over many units. Additionally, larger brewers can acquire raw materials and package goods cheaper due to the size of their purchases.


Brand advantage also exists. The restrictions on advertising help existing brands as new entrants cannot build a brand to displace incumbents making brands with an existing relationships and positions more resilient and less resistant to change.



Intensity of Rivalry


Given the duopoly within the Turkish beer market, the intensity of the rivalry between will be a significant factor in determining industry profitability.  The industry rivalry seems low.  Since 2011, Türk Tuborg has raised prices on average by 8.4% per year while Anadolu has raised prices on average by 8.0% per year. Since 2008, Türk Tuborg has raised prices on average by 7.2% per year while Anadolu has raised prices on average by 7.1% per year. Price inflation has been during a period of increasing excise tax.  If the intensity of the rivalry was high, both firms would not have increased prices in an attempt to gain market share given the importance of economies of scale in the industry.


The presence of economies of scale in the industry points to increased intensity of rivalry as one of the drivers of profitability is your size or market share leading competitors to attempt to maintain or increase their share to maintain profitability.


(Capex)/depreciation ratio is used to determine the amount of supply in the industry. If capex exceeds depreciation, industry participants are increasing supply.  If supply increases outpace demand profitability will suffer. Currently, the Turkish beer industry volumes are not growing with total volume estimated at 9.67 million hectoliters since 2008.  The lack of growth in and of itself typically increases rivalry but with the duopoly it is easier to keep track your one competitor making coordination easier. Despite the lack of growth, the industry capex/depreciation ratio has averaged 134%.  A more appropriate capex/depreciation ratio for a no growth, mature industry is somewhere below 75% as less investment goes to the industry leading to depreciation exceeding capex. The capex/depreciation ratio may point to increased rivalry as competitors attempt to fill their new capacity.


The participants sell products that are similar but are differentiated in the form of taste and brand decreasing competitive rivalry as price is an important but not the sole factor in purchasing the good.


Anadolu net debt has ballooned from 0.8 times EBIT in 2011 to 6.1 times EBIT in 2015.  The change in fortunes occurred when SAB Miller and Anadolu created an alliance with Anadolu acquiring some of SAB Miller’s assets in the region and SAB Miller taking a 26.5% stake in Anadolu.  The increase geographical presence and increased debt decreases the Anadolu’s flexibility, but it may lead to an increase intensity of rivalry as Anadolu’s Turkish beer operations are not generating sufficient operating profit to cover interest expenses.


Türk Tuborg’s market share gains also can just after the launch of Türk Tuborg’s Brewmaster project. The increased product offerings may be striking a cord with customers that Anadolu is unable to replicate.


Overall, the intensity of rivalry in the industry is low and expected to remain low but this may change given Anadolu’s market share losses, profitability declines, and increasing debt load.



Bargaining Power of Suppliers


Suppliers have very little bargaining power.  The main inputs into beer are commodity products sold by many sellers where the customers are pure price takers.  This bargaining power is reduced further by the duopolistic nature of the market.  Barley largest use is not beer but animal feed, which accounts for 67% of consumption.  Industrial uses such as beer are the next largest consumer of barley accounting for 21% of total consumption. The variety of uses for barley increases the bargaining power of suppliers.  Hops on the other hand are primarily used for beer.  The United States is seeing high demand for hops due to the trend towards craft beer, as craft beer uses much more hops that traditional beer.  Turkey is not seeing the trend toward craft beer therefore there is a lot less pressure.  Hops have less uses and there is much fewer uses for the product decreasing its bargaining power. Overall, due to the commodity nature of inputs, the numerous suppliers of these products, the limited uses of the products, and the duopoly in the Turkish beer market suppliers have very little bargaining power.



Bargaining Power of Customers


The customers of Anadolu and Türk Tuborg are dealers, distributors and large retail chains.  In 2012, off-premise accounted for 61.5% of sales in the Turkish Beer market, on-premise accounted for 23.2% of sales, and key accounts accounted for 15.2% of sales. Off-premise and on-premise are serviced by dealers and distributors.  In 2014, Anadolu had a network of 170 dealers and 27 distributors in 15 sales regions.  The number of dealers and distributors illustrated the fragmented nature of the customer base decreasing the bargaining power of customers.


Similar to bargaining power of suppliers, the duopoly and differentiated products decreases the bargaining power of customers combined with the fragmentation of the customer base leads to low bargaining power of customers.



Threat of Substitute


The main alcohol substitutes for beer are wine and spirits.  In 2012, Beer accounted for 58% of alcohol consumption within Turkey, spirits accounted for 33% of alcohol consumption, and wine accounted for 9% of alcohol consumption. Beer is the cheapest of all alcohol at a cost of TRY11.26 per liter, wine is the next cheapest at TRY54.67 per liter, and spirits are the most expensive with raki costing TRY73.48 per liter.  While wine and spirits are substitutes for beer, personal preferences are probably the biggest impediment to substitution.  Additionally, the significantly higher cost of wine and spirits makes substitution unlikely.





As mentioned, volumes in the Turkish Beer market have stagnated at 9.66 million hectoliters since 2008.  During this period, Türk Tuborg’s revenue increased by 23.69% per year driven by increased volumes (15.41% CAGR) and increased price (7.17% CAGR). Despite the lack of volume growth, Türk Tuborg’s volumes increase from 1.1 million hectoliters in 2008 to 3.0 million hectoliters in 2015 with growth coming at the expense of Anadolu’s volumes (8.5 mhl in 2008 to 6.6 mhl in 2015). Given the lack of volume growth in the market, growth from volume increases will eventually slow as Anadolu should retaliate in an attempt to win back volume share given the importance of economies of scale on profitability.


Türk Tuborg’s ASP (7.2% since 2008) increases are more sustainable given the duopoly in the Turkish Beer market and the relative cheapness of beer to substitutes.


Many often quote Turkey’s low per capital consumption of beer and alcohol as a potential source of growth. Turkey consumes beer at 17% of the EU average. This statistic is misleading as Turkey is predominantly Muslim and there are estimates between 40% and 80% of the population do not drink alcohol, which is unlikely to change.  Assuming 75% of the population does not drink alcohol, the per capita consumption is 67% of the EU average for beer consumption.  With a religion that forbids alcohol consumption playing a large role in the society, there is not going to be a significant growth from increased per capita consumption.  Additionally, the current ruling party has a religious slant and has increasing excise tax and advertising restrictions in an attempt to “protect” the public from themselves.


There is a potential for increased penetration of beer companies’ distribution channel as there are only 1.1 off-premise outlets per 1,000 people well below regional peers.


Turk Tuborg Off Premise Channel 5 21 2016





In 2008, Israel Beer Breweries Ltd, a Carlsberg partner in Israel and Romania, purchased 95.69% stake from Carlsberg from USD44.5 million giving Türk Tuborg a total enterprise value of  USD80 million.  The company is owned by Central Bottling Company, which has held the Israel franchise for Coca Cola products since 1968.


Israel Beer Breweries has done a good job of increasing the intrinsic value of the company since acquiring its ownership position. Since 2008, revenues have increased by 23.69% per year as volumes increased by 15.41% per year and prices increased by 7.17% per year. The volume increases are particularly impressive given volumes have not grown in the Turkish Beer since 2008.


The company has significantly outperformed its main rival Anadolu. Since 2011, Türk Tuborg has taken almost 19% volume share, increasing its share from 12.5% to 31.4%. Over that period, the company’s ROIC increased from 1.1% to 95.2% while Anadolu’ Turkish Beer operation’s ROIC decreased from 76.5% to 29.3%, illustrating the importance of economies of scale on profitability.

Turk Tuborg vs Anadolu Efes 5 21 2016


Since 2008, Türk Tuborg’s ASP premium averaged 5.9%.

Turk Tuborg ASP Premium 5 21 2016


Türk Tuborg’s market share gains came during a period where the ASP premium declined.

Turk Tuborg ASP Premium + Volume Share 5 21 2016


It seems Türk Tuborg’s products are viewed as premium products by the public given the consistent ASP premium relative to Anadolu.  With Türk Tuborg prices decreasing relative to Anadolu, consumers may see themselves getting a higher quality product at a more attractive price.  The price premium returned in 2015, yet Türk Tuborg continued to gain market share, which seems to invalidate the theory of consumers purchasing due to the decrease in Türk Tuborg’s premium.


Over the review period, Türk Tuborg’s cost of goods per unit increased by 3.7% while Anadolu’ cost of goods sold increased by 14.3%. Anadolu’ Turkish Beer operations still produce goods cheaper than Türk Tuborg but there has been a significant convergence of costs. Anadolou producing goods cheaper makes sense given the presence of economies of scale in the industry allowing the company to obtain a discount for raw materials purchased in bulk and spread depreciation over a greater number of units.


Since 2011, Türk Tuborg has been able to decrease operating expenses per unit by 1.9% per year while Anadolu’ operating expenses have increased by 10.1% per year. Türk Tuborg is much more operational efficient with operating expenses per unit at TRY74.6 compared to Anadolu TRY93.4.  In 2011 and 2008, Anadolu’ operating efficiency was well ahead of Türk Tuborg’s but declining volumes and cost inflation lead to the increase in operating expenses per unit increased.


Türk Tuborg’s operating efficiency is the key differentiator allowing the company to generate an operating profit per hectoliter that is 35% greater than Anadolu, not an insignificant gap.


Türk Tuborg also has a big advantage on capital efficiency in 2015 as working capital per unit is TRY-23.4 compared to TRY76.5 at Anadolu.  Fixed assets are similar with Anadolu having a slight advantage as expected given the presence of economies of scale as larger breweries can spread fixed capital investments over a larger number of units. As the volume differential has shrunk, so has the difference in fixed capital efficiency.
Overall, Türk Tuborg’s ROIC is much higher than Anadolu in 2015 at 95.2% compared to 29.3%, a change from 2011 and 2008 where Anadolu’ ROIC averaged 82.4% compared to an average ROIC of -6.2% at Türk Tuborg in 2011 and 2008.


Overall, management has done well operationally increasing volumes, ASP, operating margins, capital efficiency, and ROIC.


The company has not allocated capital to anything but the business.  There have been no dividends meaning net debt has decreased from TRY42 million to a net cash position of TRY313 million.  Cash is starting to build up on the balance sheet at almost 2 times operating income so the company could start returning that cash to shareholders in the form of a dividend.


There are no corporate governance issues other than related party transactions at 5.8% of sales and 4.8% of assets but it is nothing too significant.





Given the existence of the barriers to entry, the best method of valuing Türk Tuborg is based on earnings. Our preferred valuation method is IRR, using the company’s current free cash flow yield plus expected growth. At the close of business on May 20, 2016, the company was trading on a current free cash flow yield of 5.4%.  Given the pricing power in the industry the company can expect at least 5.0% increases in prices and if it can continue to grow volumes at 5.0% per year than it offers a 15.3% expected return.


Valuing the company using current EBIT yield plus and organic growth rate, the company is trading on an EBIT yield of 8.0% with pricing growth of 5.0% bring the current expected return to 13.0%. Given the strength of the barriers to entry within the industry, a 13.0-15.0% return using conservative estimates is very attractive.



Why is it Cheap


The stock is cheap due to economic and political issues within Turkey.  It also has a very small free float and illiquid with an average trading volume of USD137,000 over the past six months.





Türk Tuborg has been gaining market share and outperforming Anadolu significantly.  Anadolu Turkish beer operations have seen deteriorating profitability.  The combination of market share gains and deterioration of profitability may lead to Anadolu increasing the intensity of rivalry to win back market share and profitability.


Turkey has one of the highest excise taxes on alcohol in Europe, which is 3.91 times the European average. This is making alcohol more expensive and suppressing demand in the country leading to the stagnation in volume since 2008. From 2002 to 2013, Turkish excise tax increased by 6.63% per year. Given the ruling party’s religious slant, it would not be a surprise to see a continuation of excise tax increases.


There are increasing restrictions on alcohol in Turkey. Retail alcohol sales licenses are limited between the hours of 10 am and 6 pm, as well as completely ban alcohol advertising and promotions of alcohol-related products. New licenses for the sale of alcohol are restricted. There is an ever increasing shift towards prohibition.


There is political risk in Turkey with it becoming more dictatorial. The increasing restrictions on freedom may bring a reaction.


A slowdown in macroeconomic growth or tourism is a short term risk.