Analyst: Barış İnce +90 (212) 384 1141

bince@garanti.com.tr

Sales Contact:

+90 (212) 384 1155

icm@garanti.com.tr

Duran Dogan Packaging

(DURDO, Not Rated)

Blossoming operational outlook given new businesses, capacity increase and less debt

Duran Dogan Packaging (DURDO) is mainly engaged in the packaging of food, spirits and personal care products.

Competition: There is a f ragmented structure in Turkish paper packaging sector . Two locals including DURDO and one global player with a similar market share dominate roughly 30% of the market in Turkey.

New businesses: DURDO’s main shareholder, French LGR packaging, is new to luxury spirit packaging, but is eager to grow on that f ront in Europe (mainly in France) and sees DURDO as a hub. Furthermore, Ulker Group (Pladis) shifted some of its GODIVA brand production to Turkey and DURDO has started to cater for Godiva. The company is also pursuing new opportunities in Europe via its recently acquired marketing firm “DUDO” in the UK. The company also started to cater for United Biscuits in the UK. DURDO is also the second largest carton packaging supplier for Diageo, according to DURDO’s management.

Profitability: Strong pricing and the newly added business to drive margins — EBITDA margin up by c7pps in 1H17.

Capacity increase: The company has recently secured EUR5mn in financing for new machinery to raise capacity by c25%. The new machinery will also enable DURDO to produce more value-added products.

Deleveraging: Net debt to trailing 12 month EBITDA was 2.7x as of 1H17 vs. 7.6x in 1H16.

2017E targets: No guidance has been provided by the company, but we expect 2H17 to be similar to 1H17. We estimate TL130mn in revenues and a 15% EBITDA margin in 2017.

Risks: The main risks are the company’s heavy dependence on specific clients and illiquidity (USD0.5mn average volume in the past three months).

Company in brief: Duran Dogan Packaging was established in 2005 via the merger of the two most experienced and well-known companies in the packaging sector: Duran Ofset and Dogan Packaging. The company became public by joining the Istanbul Stock Exchange in 1991. In 2013, LGR Emballages, a major European cardboard packaging Group, became Duran Dogan’s leading shareholder. LGR bought 26% of the company f rom Yildiz Holding for EUR8mn. Eventually, LGR increased its stake to 34% in the company via purchasing shares f rom the market. This cooperation between two family companies with strong commercial and technical synergies launched a new area for the company. The company acquired marketing firm “DUDO” in the UK back in 2016 to seek and manage opportunities as well as strengthen its already continuing operations in Europe.

September 13, 2017

Shareholder Structure

LGR 33.7%

Dikran Mihran Acemyan 9.8%

Oktay Duran 8.3%

Ibrahim Okan Duran 8.0%

Dikran Acemyan 5.0%

Other 35.3%

Source: Footnotes

Share Price

TL3.35

Bloomberg/Reuters:

Mcap (TLmn) 56

Mcap (US$mn) 16

EV (TLmn) 102

Rel. Performance: 1 mth 3 mth 12 mth

-10% 6% 8%

12M Range (TL):

Aver. Daily Vol. (US$mn) 3 mth: 0.3

YTD TL Return: 60%

Shares Outstanding (mn): 17

Free Float (%): 35

--

Potential Return

1.95 / 3.79

DURDO.TI / DURDO.IS

Stock Market Data

12M Target Price

Please see the last page of this report for important disclosures.

2

DURDO September 13, 2017

RESEARCH

Segments: The company’s products fall into five segments: i) Chocolate & Confectionery, ii) Food, iii) Spirits, iv) Personal Care & Cosmetics, v) OTC, vi) Non-food and vii) Rigid-setup boxes. The main revenue generators are Chocolate & Confectionery and the Food segments with a total share of 50% in overall sales volumes followed by spirits with 30%.

Clients: FMCG players are the biggest clients as expected. The company says that Pladis is its largest client with a 30% share in total sales followed by Unilever with a 10% share. DURDO is the second largest packaging procurer for Diageo brands (Yeni Raki, Johnnie Walker, J&B, Baileys, Binboa, Kayra etc). Diageo covers 35% of DURDO’s exports. The company also provides packaging for Pernod Ricard (Chivas, Absolut, Malibu, Ballentines etc.). LGR is not in the luxury spirit market in France. With the synergy from DURDO, LGR has recently entered this market, which will be another plus for DURDO to enhance exports in the coming period. Furthermore, Pladis’ GODIVA has recently shif ted some part of its production to Turkey. Other than the aforementioned clients, thanks to DUDO, DURDO is now more active in Europe (mainly in the UK) and has recently started to package Pladis’ United Biscuits products as well.

Performance in 1H17: Following the approval of the Paris Climate agreement by China in 2H16, China closed paper plants that were operating with old technology which did not comply with the environmental standards espoused in the agreement. It is likely to take at least two years to replace the plants which have been decommissioned. As a result, a supply shortage has arisen and paper prices have substantially increased. This is the main driver behind the improvement in the paper-related sectors’ profitability given the better pricing along with the higher utilization ratios. Given the increased utilization ratios, the company prefers to cater higher margin clients. Similarly, DURDO has shown a strong performance. Revenues and EBITDA were up by 27% and 116%, respectively in 1H17, while net profit rose to TL5mn f rom almost nil. There is no seasonality in terms of its operations. Therefore, it is likely for the ytd trend to continue in 2H17.

Selected Products

Source: The Company website

Please see the last page of this report for important disclosures.

3

DURDO September 13, 2017

RESEARCH

Exports: The company has a balanced domestic/export ratio. The ratio was 55/45 and 53/47 as of 2016 and 1H17,

respectively. Thanks to DUDO, we believe export growth will gain momentum.

Competition: DURDO, Sentez (local) and MM (Mayr-Melnhof-Austrian) Packaging are the main players in the sector.

Each is estimated to have a 7-10% market share.

Global players: Graphic packaging, Westrock and MM are global peers, but they are much larger in comparison to DURDO and they have their own paper production while DURDO does not.

Duran Dogan Basim Ve Ambalaj Summary Financials

(mn TL) 2Q16 3Q16 4Q16 1Q17 2Q17 6M16 6M17 2Q17/2Q16 2Q17/1Q17 6M17/6M16

Net Sales 27 25 26 30 36 52 66 33% 18% 27%

Gross Profit 6 4 8 9 8 10 17 52% -3% 78%

Operating Profit 2 0 3 4 3 2 7 111% -18% 259%

EBITDA 3 1 5 5 6 5 11 82% 3% 116%

Net Other Income/Expense 0 1 2 1 0 0 1 -51% n.m. n.m.

Financial Inc./ Exp. (net) -1 -3 -9 -3 -1 -2 -5 n.m. n.m. n.m.

PROFIT BEFORE TAX FROM CONTINUING OPERATIONS 1 -3 -3 2 2 0 4 362% 33% 7224%

Tax 0 0 0 0 0 0 0 60% 1014% 339%

Net Income 1 -3 -3 2 3 0 5 259% 54% 2739%

Net Cash -54 -51 -58 -49 -47 -54 -47

Working Capital -21 -16 -21 -18 -23 -21 -23

Shareholders Equity 23 20 15 35 38 23 38

Ratios

Gross Margin 20.6% 15.4% 32.4% 28.8% 23.5% 18.5% 25.9% 2.9 pp -5.2 pp 7.4 pp

Operating Margin 5.9% n.m. 13.3% 13.6% 9.4% 4.0% 11.3% 3.5 pp -4.2 pp 7.3 pp

EBITDA Margin 11.6% 4.9% 18.6% 18.2% 15.9% 10.0% 16.9% 4.3 pp -2.3 pp 7 pp

Net Profit Margin 2.9% n.m. n.m. 6.0% 7.8% 0.3% 6.9% 4.9 pp 1.8 pp 6.6 pp

Change

Gross Revenues

(TLmn) 2014 2015 2016 1H16 1H17

Europe 36.3 27.1 31.4 9.2 18.1

ME&Africa 2.3 3.5 8.5 4.0 8.2

USA & Asia Pacif ic 1.4 2.7 2.6 1.7 1.0

Azerbaijcan & Turkic Republics 4.3 6.8 4.2 3.0 3.4

Total Export 44.3 40.1 46.7 17.8 30.8

Domestic 46.7 51.3 58.1 33.8 34.8

Total gross revenues 91.1 91.4 104.8 51.7 65.6

Breakdown

Europe 40% 30% 30% 18% 28%

ME&Africa 3% 4% 8% 8% 13%

USA & Asia Pacif ic 2% 3% 2% 3% 1%

Azerbajcan & Turki Republics 5% 7% 4% 6% 5%

Total Export 49% 44% 45% 35% 47%

Domestic 51% 56% 55% 65% 53%

Source: The company footnotes

Global Peers

Mcap 2017E 2018E

MM Packaging EUR2.3bn 7.4 7.1

Westrock Packaging USD14.7bn 9.0 7.4

Graphic Packaging USD4.1bn 8.7 7.9

DURDO TL56mn 6.3 5.5

Source: Garanti Securities, Bloomberg as of September 12, 2017

EV/EBITDA

Please see the last page of this report for important disclosures.

4

DURDO September 13, 2017

RESEARCH

Capacity increase: The company is currently almost running at full capacity with two shifts. If needed, there is room for over-time. The company has recently announced that it will be purchasing new machinery for EUR5mn. This addition is expected to increase capacity by 25% by the end of 2018. The machinery will become operational in 2Q18. The

financing has been provided by Sudwestbank. This new machinery will also enable the company to produce more value-added products.

Working Capital: According to our calculations, receivables and payables days stood at 69 and 73 as of 2016 vs. 64 and 79 as of 1H17, respectively. Inventory days, however, are around 81 days vs. 83 days, respectively. The increase in

inventory is due to DUDO as the company needs to keep more inventory for DUDO when demand arises considering the shipment process.

Cost base: c50% of the costs are related to raw materials. The company is procuring almost half of its paper needs f rom Kartonsan (KARTN) in Turkey, while the remainder is acquired f rom some European countries such as Finland.

FX impact: 45-50% of revenues are f rom exports. Europe dominates export sales with a 59% share followed by Africa with a 27% share. Since Diageo accounts for the c35% of exports, the company is exposed to the GBP. On the cost side, around 25% of the total cost is in FX (mainly EUR) terms. According to the footnotes, the company’s short FX position stands at TL28mn, mainly in EUR and USD. A 10% appreciation of the USD against the TL could result in a 1.9mn loss vs. a 0.6mn FX gain if the EUR gains 10% in value vs. the TL. Capex: Annual maintenance capex is around TL1-2mn according to the management. Indebtedness: The company had TL47mn in net debt as of 1H17. The company’s indebtedness is lessening. Net debt to EBITDA was 7.6x in 1H16 vs. the current 2.7x due to high EBITDA growth. If this net debt level is sustained, the ratio should hover at 2x over the next two years. However, considering the EUR5mn in f inancing for the new machinery, the

ratio could be around 3x if the company is unable to generate cash.

Risks: Heavily dependent on specific clients (Pladis, Diageo, Unilever), a rise in raw material prices, stiffer competition

and illiquidity are the main risks for the company.

Our take: The company has not provided a guidance for 2017 or 2018. However, we think that in the remainder of the year, its performance is likely to be similar to 1H17 given low seasonality impact in its operations. Accordingly, for 2017 we assume TL130mn in revenues and a 15% EBITDA margin (15.9% in 1H17), corresponding to 6.3x EV/EBITDA af ter

adjusting for EUR5mn in financing for the new machinery. As for 2018, we think that the top line growth should continue given the above mentioned capacity increase and growing momentum in exports. Assuming another 15% growth in 2018 with a stable EBITDA margin, EV/EBITDA could be around 5.5x. In our 2017/2018E forecasts, the BIST-Industrials

trade at 8.3/7.3x EV/EBITDA.

We like the company’s deleveraging, capacity increase and growth prospects as it is capturing a larger share f rom

Pladis’ products and is likely to further increase its presence in Europe with the strong backing f rom LGR. LGR sees DURDO as its luxury packaging arm which is new to LGR as it has no experience on that f ront, but would like to grow in that market.

Indebtedness 2013 2014 2015 2016 1Q17 1H17

Net Debt/Equity 4.6 4.2 2.7 3.9 1.4 1.2

Net Debt/EBITDA 10.7 5.5 8.0 5.1 3.3 2.7

Source: Garanti Securities

Working Capital Days 2014 2015 2016 1H16 1H17

Receivables 72 76 69 66 64

Inventories 92 61 81 77 83

Payables 35 54 73 75 79

Cash Cycle 130 83 77 68 69

Source: Garanti Securities

Please see the last page of this report for important disclosures.

5

DURDO September 13, 2017

RESEARCH

Alternative approach to the valuation—transaction multiple: LGR bought 26% of the company for EUR8mn in February 8, 2013, implying EUR2.04/share. In 2012, revenues, EBITDA, net prof it and net debt were TL88mn, TL12mn, TL6.8mn and TL37mn. If we assume the transaction materialized over the 2012 f inancials, the transaction multiples

would be 11.7x PE, 9.6 EV/EBITDA and 1.3x EV/Sales. Given these multiples, the company’s 12M trailing revenues (TL116mn) and EBITDA (TL17mn) figures, point to TL7.2/share in EV/EBITDA and TL6.4/share in EV/Sales af ter adjusting the debt level with the EUR5mn loan for the new machinery. Since the trailing figures are now c40% higher

than in 2012 with a TL10mn higher net debt level, we think that the transaction at the very least could be a benchmark for the shares after adjusting for the EUR5mn financing for the new machinery. This calculation give us an average

TL5.6/share for the company assuming that the EUR/TL is at 4.10.

Recent M&As: There is continuing interest in the Turkish packaging sector. We have seen many deals completed to date and interest in them is still strong. However, the transaction details of most M&As have not been disclosed. According to Mergermarket, Dentas (DENTA) and Olmuksa (OLMIP) were acquired at a 6.8x EV/EBITDA and 10.9x EV/EBITDA in 2013, respectively, while those for Farmamak and Korozo were at 8.2x and 11.3x in 2016 and 2017, respectively.

Recent Deals in Turkish Packaging Sector

Deal Value

Date Target Buyer (USDmn) EV/EBITDA

24.01.2017 Korozo Ambalaj EBRD, Esas Holding, ActeraGroup 340 11.3

06.09.2016 Farmamak Ambalaj KlocknerPentaplastGmbH 44 8.2

13.12.2012 Dentaş Ambalaj MosburgerGmbH 207 6.8

19.09.2012 Olmuksan International PaperCompany 101 10.9

Source: Mergermarket Average 9.3

Median 9.6

DURDO 2012 last 12M trailing 2017E* 2018E*

Revenues 88 116 130 150

EBITDA 12 17 20 22

Net Debt 37 47 68 68

EUR/TL on Feb 8, 2013 2.37

Transaction share price in EUR 2.04

Transaction share price in TL 4.83

# of shares (mn) 16.6

Transaction values w hole company at (TLmn) 80.1

Enterprise value for w hole company 117 120 120

Transaction multiples

EV/EBITDA 9.6 6.2 5.4

EV/Sales 1.3 0.9 0.8

Source: Garanti Securities estimates

*EUR5mn added to net debt at 1H17-end

Method:

Transaction

multiple

Implied Market

Value (TLmn)

Price per

share

(TL)

Average

Price per

share (TL)

Current

Price (TL)

Upside

potential

(%)

EV/EBITDA 97.8 5.90

EV/Sales 87.5 5.28

Source: Garanti Securities estimates

*after adjusting for EUR5mn financing for new machine assuming EUR/TL@4.10

5.6 67%3.4

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RESEARCH

Definition of Stock Ratings

OUTPERFORM (OP) The stock's return is expected to exceed the return of the BIST-100 over the next 12 months.

MARKET PERFORM (MP) The stock's return is expected to be in line with the BIST-100 over the next 12 months.

UNDERPERFORM (UP) The stock's return is expected to fall below the return of the BIST-100 over the next 12 months.