Here's a Turkish Stock BofA Finds Irresistible in Selloff

  • Ulker trades at a 10% discount to global peers after rally
  • BofA to JPMorgan see upside for the confectioner's shares

Turkish equities may have taken a beating in August, but there’s one stock outperforming its local and global peers that Bank of America Corp. and Duet Asset Management Ltd. can’t resist.

Cake and biscuit maker Ulker Biskuvi Sanayi AS soared 16 percent last month, making it the best performer on the benchmark stock index, which sank into a bear market on Aug. 24. The stock even held up on Tuesday, rising 2 percent while the Borsa Istanbul 100 Index slid after police cracked down on businesses associated with President Recep Tayyip Erdogan’s biggest foe.

The rally may be poised to continue as analysts and investors including Duet say they find the company’s revamped business model attractive. Shares of the Istanbul-based confectioner, which were upgraded to overweight by JPMorgan in August, still trade at a 10 percent discount to global peers after their gains. Meanwhile, Turkish stocks slid 5.9 percent last month as a political deadlock, militant violence and an emerging-market selloff weighed on sentiment.

“Ulker remains one of the best combinations of growth and value in the Turkish consumer sector,” Andrew Smith, Dubai-based analyst at Bank of America Merrill Lynch, said by e-mail from Dubai on Wednesday. “We’re very positive on the stock. We expect a strong second half of the year driven by better volumes and margins."

Defensive Chocolate

Ulker, which also makes chocolate bars, baby food and cheese crackers, is expanding its reach regionally after restructuring its product portfolio and posting stronger sales. The company’s operating profit increased by 33 percent to 187 million liras ($63.9 million) in the first half of the year, while second-quarter revenue rose almost 10 percent. 

“We find Ulker’s expansion plans realistic and believe it is likely to continue to beat the bearish trends in Turkish markets,” Michel Danechi, a London-based money manager at Duet Asset Management, said by e-mail last week. The stock, along with Vienna-based gourmet-entertainment company Do&Co., is “resilient in the current environment,” he said.

JPMorgan upgraded Ulker from neutral last month with a price estimate of 20 liras, implying a 9.6 increase from yesterday’s closing price of 18.25 liras. The investment bank’s view on the company hasn’t changed, Dubai-based analyst Muneeza Hasan said by e-mail on Wednesday. Ulker shares ended a three-day gain today, losing 3 percent by the close.

Bank of America Merrill Lynch on Aug. 4 said the company was among “potentially best-placed” consumer stocks in Turkey as the industry’s fundamentals “seem set to improve.” The bank, which has a buy rating on Ulker, said the shares may rise to 23 liras. 

Ulker operates in a “defensive confectionery business and is immune to risks related to the weakness on global demand,” according to Ilyas Safa Urganci, an analyst at Istanbul-based Is Invest. “Lower commodity prices will also be a positive factor as cacao and palm oil are the major raw materials,” he said.

The Bloomberg Commodity Index has retreated 15 percent so far this year amid weakening demand from China, the world’s biggest consumer of raw materials.

Ak Investment, which has an outperform rating on the stock, disagrees. “While Ulker will serve as a high-quality defensive name in the current uncertain market backdrop, we opt for taking it out of our most preferred stocks portfolio at this time, given its recent outperformance,” Bertug Tuzun, an analyst at Ak Investment in Istanbul, wrote in a research note on Wednesday.

The cake maker in August said it agreed with its parent, Yildiz Holding AS, to buy operations in Egypt and Saudi Arabia and that it plans to start talks on Kazakhstan.

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