03 January 2011 OUTPERFORM Ulker...

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Ülker Bisküvi03/01/2011

Please refer to important disclaimer at the end of this report.

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11-07 09-08 07-09 05-10 03-11

TL Relative

ULKERRelative to ISE 100

52 Week Range (Close TRY) 4.16 5.64

Price / Relative Price

Stock Data TRY US$

Price at 03 01 2011 5.64 3.62

12-Month Target Price 7.34 5.14

Mcap (mn) 1,515 974

Float Mcap (mn) 358 230

No. of Shares Outstanding 269 mn

Free Float (%) 23.62

Avg.Daily Volume (3M, mn) 14.0 9.7

Market Data TRY

ISE 100 67,608

US$ Spot Rate 1.5551

US$ 12-Month Forw ard 1.6345

Price Performance (%) 1 Mn 3 Mn 12 Mn

TRY 13 30 61US$ 7 19 54Relative to ISE-100 12 29 26

*Excludes dividend yield

Sweeten your portfolio Bloomberg: ULKER TI Reuters: ULKER IS

Ulker Biskuvi03 January 2011

Equity / Mid Cap. / Food

Upside Potential* 30%

OUTPERFORM

Initiating Coverage

Market leader in the Turkish biscuit market... Having a long lasting leadership in domestic market, Ulker Biskuvi has an overwhelming market share of around 52% - 55%. Together with its rival, Eti, two companies hold approximately 85% of total domestic biscuit market.

Vertical integration brings a major operational advantage... Vertical integration with Ulker Group companies creates significant advantage to Ulker Biskuvi in its production and distribution process. Wide network of subsidiaries and participations, most of which are linked to company’s core business, lead to efficient procurement and distribution.

Low per capita biscuit consumption in Turkey promises long-term future growth... Per capita biscuit consumption of 4.5kg remains well below compared to 7kg-15kg in European countries, as in the case for most of packaged food products, biscuits are still considered as luxury food items in most of the rural areas.

Favorable geographical location for export potential... Ulker Biskuvi currently exports its products to more than 100 countries including the Middle East, Russia & Central Asia, as well as Europe, Africa & United States. Global network of 4 factories & 2 subsidiary sales and marketing firms provide further improvements in business reach and scale.

Strong financial asset and participation portfolio... Ulker Biskuvi holds strategic financial assets such as BIM and Saglam GYO with 10% and 11% stakes, respectively. BIM is the most significant financial asset of the company with an estimated value contribution of TL869mn. Moreover, 25% stake in Godiva is another important asset valued on the books at TL193mn as of September, 2010.

Receivables from group companies may be used to fund new acquisitions... The company has net receivables of TL714mn from the parent company as of September 2010. These funds may be used to acquire stakes in companies in related businesses within or outside the group, leading to a better use of capital for Ulker Biskuvi. This, we believe is a major potential catalyst for the stock. Complex corporate structure... Complicated corporate structure of Ulker Biskuvi needs simplification and the company has been taking some steps towards a simplier structure.

We initiate our coverage for Ulker Biskuvi with an OUTPERFORM recommendation based on a 12 months target price of TL7.34 implying 30% upside potential.

Ilyas Safa Urganci

+90 212 350 25 [email protected]

Esra Suner

+90 212 350 25 [email protected]

Key Estimates (TRY mn) 2009 2010 2011 2012 2013ULKER 2009 2010E 2011E 2012E 2013ESales 1,552 1,623 1,758 1,916 2,095EBITDA 154 116 122 129 143Net Income 103 120 127 134 141P/E (x) 6.9 12.6 11.9 11.3 10.7EV/EBITDA (x)* 1.5 4.5 4.3 4.1 3.7EPS 0.38 0.45 0.47 0.50 0.53Dividend Yield (%) 0.5 1.2 1.1 1.3 1.3* adjusted for participations

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Production of biscuits, chocolate coveredbiscuits, w afers and crackers. Sells itsproducts throughout Turkey and exports tomore than 100 countries including Germany,France, Southern/Eastern Europe/CIS andthe Middle East.

42%

27%

26%

5%

Yildiz Holding A.S.Dynamic Growth FundFloatUlker Family

��Shareholder Structure

��Company Overview

Summary of Key Financials (TL mn) ######## ULKER######## ######## ######## ######## ########

Income Statement (TL mn) 2009A* 2010E 2011E 2012E 2013E

Revenues 1,552 1,623 1,758 1,916 2,095EBITDA 154 116 122 129 143Depreciation & Amortisation 31 28 31 34 36EBIT 123 89 91 95 107Other income (expense), net 24 26 28 30 32Financial expenses, net 2 46 50 53 48Minority Interests 17 10 10 11 12Income before tax 128 163 172 182 192Taxation on Income (26) (33) (34) (36) (38)Net income 103 120 127 134 141Cash Flow Statement (TL mn)

Net Income 103 120 127 134 141Depreciation & Amortisation 31 28 31 34 36Indemnity Provisions 4 0 0 0 0Change in Working Capital 52 6 1 2 (1)Cash Flow from Operations 190 154 159 170 176Capital Expenditure 43 38 30 18 32Free Cash Flow 147 116 129 152 144Rights Issue 0 0 0 0 0Dividends Paid 3 14 17 19 20Other Cash Inflow (Outf low ) 92 (88) (9) (9) (13)Change in net cash 236 14 104 124 111Net Cash 35 49 153 277 388Balance Sheet (TL mn)

Tangible Fixed Assets 293 308 307 291 287Other Long Term Assets 10 271 294 320 350Intangibles 6 0 0 0 0Goodw ill 2 0 0 0 0Long-term financial assets 684 781 869 967 1,076Inventories 161 173 190 209 228Trade receivables 295 307 332 362 396Cash & equivalents 279 24 26 29 31Other current assets 751 31 34 37 41Total assets 2,729 2,711 2,934 3,175 3,459Long-term debt 241 533 320 331 155Other long-term liabilities 41 49 53 58 64Short-term debt 540 171 341 279 427Trade payables 429 460 503 554 606Total Debt 782 704 661 611 582Other short-term liabilities 34 3 3 3 3Total liabilities 1,542 1,326 1,340 1,357 1,399Minority Interest 61 70 80 92 104Total equity 1,187 1,385 1,593 1,818 2,060Paid-in capital 269 269 269 269 269Total liabilities & equity 2,729 2,711 2,934 3,175 3,459Ratios

ROE (%) 10.6 9.4 8.5 7.9 7.3ROIC (%) 28.5 21.8 22.3 23.9 28.0Invested Capital 324 328 326 308 305Net debt/EBITDA (x) -0.23 -0.42 -1.25 -2.15 -2.7Net debt/Equity (%) -2.95 -3.54 -9.60 -15.24 -18.8Capex/Sales (%) 2.76 2.31 1.70 0.92 1.5Capex/Depreciation (x) 1.4 1.4 1.0 0.5 0.9EBITDA Margin 9.9 7.2 7.0 6.7 6.8EBIT Margin 7.9 5.5 5.2 4.9 5.1Net Margin 6.6 7.4 7.2 7.0 6.7Valuation Metrics

EV/Sales (x) 0.2x 0.3x 0.3x 0.3x 0.2xEV/EBITDA (x)** 1.5x 4.5x 4.3x 4.1x 3.7xEV/IC (x) 4.5 7.3 7.3 7.7 7.8xP/E (x) 6.9x 12.6x 11.9x 11.3x 10.7xFCF yield (%) 20.7 7.7 8.5 10.1 9.5Dividend yield (%) 0% 1.2% 1.1% 1.3% 1.3%*based on average Mcap during the year ** adjusted for participations

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INVESTMENT POSITIVES Low per capita biscuit consumption in Turkey signals long-term future growth... Per capita biscuit consumption of 4.5kg remains well below compared to 7kg-15kg in European countries, as in the case for most of packaged food products, biscuits are still considered as luxury food items in most of the rural areas. The increase in income level, favorable demographics and changing habits favoring packaged products thanks to urbanization in Turkey signal long-term growth for the domestic biscuit market. Market leader in the Turkish biscuit market... Having a long lasting leadership in domestic market, Ulker Biskuvi has an overwhelming market share of around 52% - 55% on branded biscuits. Together with its rival, Eti, two companies hold approximately 85% of total domestic biscuit market. Strong brand recognition thanks to concentrated marketing activities, extensive production and distribution network within the country and high product variety are the main reasons behind Ulker Biskuvi’s strong presence in Turkish biscuit market for years. Favorable geographical location for export potential... Ulker Biskuvi currently exports its products to more than 100 countries mainly to the Middle East, Russia & Central Asia, as well as to Europe, Africa & United States. Global network of 4 factories & 2 sales and marketing firms provide an extensive business reach and scale. Vertical integration brings a major operational advantage... Vertical integration with Ulker Group companies creates significant advantage to Ulker Biskuvi in its production and distribution process. Wide network of subsidiaries and participations, most of which are linked to company’s core business, lead to efficient and cheaper procurement and distribution. Strong financial asset portfolio... Ulker Biskuvi holds strategic financial assets such as BIM and Saglam GYO with 10% and 11% stakes, respectively. BIM is the most significant financial asset of the company with an estimated value distribuiton of TL869mn. The company management considers the stake in BIM as a strategic investment and doesn’t consider a stake sale in the near term. Receivables from group companies may be used to fund new acquisitions... The company has net receivables of TL714mn from the parent company as of September 2010. These funds may be used to acquire stakes in companies in related businesses within or outside the group, leading to a better use of capital for Ulker Biskuvi. This, we believe is a major potential catalyst for the stock. Simplification of corporate structure... Ulker Biskuvi initiated a simplifying process aiming to reach a more simplified corporate structure. The deconsolidation of Atlantik Gida in 2006 and the sale of packaging company Tire Kutsan to Mondi Packaging in October 2010 were part of this process. Any further simplification and grouping of all biscuit related businesses such as international subsidiaries of Yıldız Holding under Ulker Biskuvi will add value to the company. INVESTMENT NEGATIVES High raw material costs... Raw materials, mainly, wheat, sugar, and oil, hold the lion’s share in company’s total costs with 65% share. As a result, raw material cost inflation stands as the major impediment for profitability and margins. Despite of its market leadership, the company had greatest difficulty to pass raw material cost hikes to its prices due to increased competition. Complex corporate structure... Complicated corporate structure of Ulker Biskuvi creates transparency problem although the company has been taking some steps towards simplifying the structure of group companies. Competition challenges strong market presence... Fierce competition in the biscuits market is significantly challenging the strong market presence of Ulker Biskuvi. Aggressive pricing strategy of Eti and increasing investments of other players such as Bifa and Solen may result in further loss in market share and margin pressure. Limited exposure to export markets... Although the company exports to more than 100 countries, export revenues account only 18% of total revenues since international business are conducted through other Yıldız Holding group companies. Thus, Ulker Biskuvi’s exposure to the growth of export markets is not significant.

Investment Summary

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Sum of the Parts

We are initiating coverage for Ulker Biskuvi with an OUTPERFORM recommendation based on a 12 months target price of TL7.34 implying 30% upside potential.

We have used discounted cash flow ( DCF ) and peer comparison analysis and assigned equal weights to their outcomes to calculate the value of Ulker Biskuvi’s core business. Additionally, we have also included company’s stakes in BIM and Saglam GYO in our target valuation. We have incorporated IS Investment’s 12 month target value for BIM and current Mcap of Saglam GYO. Moreover, we have used the book value for the other stakes that Ulker Biskuvi holds in Godiva, G New Inc, Pendik Nisasta, Hero Gıda, Besler Gıda, Fresh Cake and Dünya Gümrükleme, amounting TL228mn as of September 30, 2010. Finally, we have deducted the value of the dividends on privileged shares as 5.54% of the total distributable income which is distributed indispensably to A / B type shares.

FIGURE 1: Valuation Method

Source: IS Investment

Valuation

TL mn Valuation Method ULKER's Target Participated

stake Value Value

Core Business Equity Value DCF + Peer Comparison 1,014 1,014

BIM IS Investment Target Mcap10.00% 8,665 867

G New Inc. Book Value 25,23% 106 106

Godiva Belgium BVBA Book Value 25,23% 87 87

Pendik Nisasta Book Value 23,99% 19 19

Hero Gıda Book Value 39,60% 10 10

Sa�lam GYO Current Mcap 10.71% 50 5

Besler Gıda Book Value 7.00% 3 3

Fresh Cake Book Value 10.00% 2 2

Dünya Gümrükleme Book Value 79.58% 1 1

Total Participations w ith 5% discount 1,045

Value attributable to privileged shares 87

Total Target Value for ULKER BISKUVI - TL mn 1,972

Current Mcap - TL mn 1,515

Upside Potential 30%

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Valuation Assumptions for the core business

• Our projection period is ten years covering 2010 to 2020.

• We assumed the domestic biscuit market to grow at a CAGR of 3% between 2010 and 2020, driven by the population increase, rise in income level, and change in consumption habits towards packaged goods due to urbanization. We expect per capita biscuits consumption in Turkey to reach 5.9kg in 2020 from 4.5kg in 2009 with a growth rate of 2% per annum.

• We kept Ulker Biskuvi’s market share constant at 51% during our forecast period. Accordingly, we forecasted a CAGR of 2.7% for Ulker Biskuvi’s total sales volume.

• We projected revenues of Ulker Biskuvi to increase at a CAGR of 8% over the next ten years. We forecasted sales prices to increase lower than inflation rate due to strong competition in the market.

• Gross margin is allowed to decline during our projection period since Ulker Biskuvi prefers to maintain its strong market position rather than transfering high input prices onto customers

• We anticipated opex / sales ratio to decline during our forecast period from 17.9% in 2010 to 16.6% in 2020 thanks to economies of scale.

• Maintenance cap-ex as a percentage of sales is assumed to be 2% on average except in 2015 and 2019 due to additional 40K tons capacity increase expectation in order to support volume growth.

• We assumed slight decline in EBITDA margins in 2011 and 2012 compared to 2010 due to strong competition in the market, delays in the reflection of cost pressures on prices and higher marketing expenses to maintain strong market position.

FIGURE 3: Valuation Assumptions

Source: IS Investment Estimates

TL mn 2010e 2011e 2012e 2013e 2014e 2015e 2020e CAGR

Turkish Biscuits Market - ('000 ton ) 504 517 531 545 560 576 660 2.7%

y-o-y change 4% 3% 3% 3% 3% 3% 3%

Domestic Market - ('000 ton ) 362 372 384 395 407 420 487 3.0%

Export Markets - ('000 ton ) 142 145 147 150 153 156 173 2.0%

Per Capita Biscuits Consumption - kg 4.92 5.01 5.10 5.19 5.29 5.38 5.89

ULKER Market Share 51% 51% 51% 51% 51% 51% 51%

ULKER Sales Volume - tons 268 274 282 289 297 305 349

Domestic ('000 ton) 185 190 196 202 208 214 249

Export ('000 ton) 83 84 86 87 89 91 94

Revenues 1,600 1,736 1,892 2,069 2,253 2,437 3,476 8%

y-o-y change 3% 9% 9% 9% 9% 8% 7%

Gross Margin 23% 23% 22% 22% 22% 22% 22%

Opex -286 -302 -319 -345 -376 -406 -576

Opex / Sales -17.9% -17.4% -16.9% -16.7% -16.7% -16.7% -16.6%

EBITDA 118 124 130 144 160 173 246 8%

y-o-y change -23% 5% 5% 11% 11% 8% 7%

EBITDA Margin 7.4% 7.1% 6.9% 7.0% 7.1% 7.1% 7.1%

Cap-ex 24 31 38 41 45 148 70

Capex/Sales 2% 2% 2% 2% 2% 6% 2%

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We have calculated a TL based WACC of 14% for ULKER BISKUVI, based on a risk free rate of 9%, terminal growth of 4% and equity risk premium of 5%.

Please note that we have taken into account company’s net debt ( cash ) position in the calculation of WACC. Under a scenario where the company collects its receivables from the parent company and uses them to make an acquisition, D /(D+E) ratio will increase affecting the DCF value positively.



INTERNATIONAL PEER COMPARISON Most of the large global peers such as Nestle, Kraft Foods and Kellogs, are also involved in chocolate, confectionary, cakes and cookie production and have global presence in various countries. Threrefore these type of international companies with large Mcaps are not included in our analysis due to their incomparable large Mcap size. Ulker trades at 2011E P/E and EV/EBITDA of 11.9x and 4.3x, respectively compared to its global peers median of 13.0x and 7.5x. This implies a 8% and 43% discount, respectively. We calculated TL1,072mn target value for Ulker Biskuvi based on median 2011E EV/EBITDA ratio of international peers.

FIGURE 5: INTERNATIONAL PEERS

Source: Bloomberg & IS Investment Estimates

FIGURE 4: DCF Analysis - Core Business

WACC 14.0%

Risk Free rate 9.0%

Equity Risk premium 5%

Beta 1.00

Cost of Equity 14.0%

After tax cost of Debt 7.6%

D/(D+E) 0%

MCAP

Ticker Company USD mn 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E Country

HSY US HERSHEY CO/THE 10,080 2.1 2.0 1.9 9.9 9.3 8.9 17.7 16.5 15.4 UNITED STATES

LOTB BB LOTUS BAKERIES 413 1.3 1.3 1.2 7.4 7.1 6.9 13.2 11.8 11.2 BELGIUM

MYOR IJ MAYORA INDAH 1,059 1.4 1.1 0.9 10.3 8.5 6.9 18.0 14.9 11.6 INDONESIA

JTZ PW JUTRZENKA 174 0.9 0.9 0.8 9.5 8.0 7.5 19.9 14.1 12.8 POLAND

THT LN THORNTONS PLC 108 0.4 0.4 0.4 4.7 4.5 4.3 13.5 11.8 10.4 BRITAIN

ZTR LN ZETAR PLC 42 0.4 0.4 0.3 5.3 4.9 4.6 5.7 5.3 4.8 BRITAIN

Median 1.1 1.0 0.9 8.4 7.5 6.9 15.6 13.0 11.4

ULKER TI ULKER BISKUVI 882 0.3 0.3 0.3 4.5 4.3 4.1 12.6 11.9 11.3 TURKEY

Discount/Premium -71% -70% -68% -47% -43% -41% -20% -8% -1%

EV/Sales EV/EBITDA P/E

DCF TL mn 2011E 2012E 2013E 2014E 2015E 2016E 2018E 2019E 2020E TV

Net Sales 1,758 1,916 2,095 2,282 2,469 2,661 3,083 3,295 3,521

Gross Profit 397 418 456 501 531 585 679 714 777

EBIT 91 95 107 121 120 141 168 168 194

Tax on EBIT -18 -19 -21 -24 -24 -28 -34 -34 -39

Depreciation 31 34 36 38 52 42 47 61 51

Change in Working Capital 1 2 -1 -2 -2 -1 -2 -2 -2

Capex -32 -38 -42 -46 -149 -53 -62 -173 -70

Free Cash 74 73 79 86 -3 101 118 20 134 1,390

Disc Factor 1.00 1.14 1.30 1.48 1.69 1.93 2.50 2.85 3.25

DCF 74 64 60 58 -2 52 47 7 41 427

Terminal Grow th Rate 4%

Terminal Value 427

Enterprise Value 806

Net Cash 2011E 149

Equity Value 955

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Global Biscuit Market

According to Datamonitor's Global Guide Report, the global biscuit market grew by 3.3% in 2008 reaching to US$ 35.2 billion in total. The global size of the market is estimated to grow at a CAGR of 3.1% between 2008 and 2013 reaching to 9.3 billion kg with a value of US$ 41 billion. EU countries such as UK, Germany, Belgium, Italy, France and Hol-land and Canada are the major producers and exporters of biscuit. The Americas ( North & South ) accounts for 43% of the global biscuit’s market value.

Increased awareness on health consciousness of food products and the changing patterns of eating behaviour among consumers boosted the sales of biscuits in the snack food market. The development of consumer awareness is considered as opportunity for the biscuit producers. Demand for renowned brands and packaged products has grown with rising importance of food safety and quality.

One of the most important risks of the sector is escalating raw material prices which cre-ate margin pressures on the producers. Wheat, sugar, oils/fats are the common ingredi-ents used in the production of biscuits and the volatile prices of these commodities can directly affect the small producers as they tend to buy flour from the spot market. Larger companies are less influenced by this volatility as they hedge against cost inflation.

FIGURE 6: Worldwide Biscuits Sales - US$ billions

Source: Euromonitor, International Confectionery Association

Source: Euromonitor, International Confectionery Association, 2008 Figures

FIGURE 7: Worldwide Performance of Leading Food and Beverage Categories - US$ billions

CAGR: 3.1%

35.236.3

37.3

38.5

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2008 2009 2010E 2011E 2012E 2013E

Sectoral Overview

Global biscuits market is estimated to be 9.3 billion kg in three years

0 100,000 200,000 300,000

BeerSoft Drinks

Bottled WaterConfectionary

WineMilk

Snack BarsIce Cream

BiscuitsPasta

Snack Bars

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Turkish Biscuits Market The industrial biscuit production started in Turkey in 1924 with the establishment of two factories in Istanbul according to the report of Istanbul Chamber of Commerce. The in-dustry has made substantial progress starting from 1960s with rising population and ur-banization. The production facilities are mostly located in Southeast Anatolia, Marmara and Central Anatolia region of the country due to dense flour production. Karaman is the centre of biscuit production with a capacity of 1.1mn tons/year.

The sector is highly correlated with GDP growth, income level, agricultural output and macroeconomic conditions. Margins are under pressure due to the highly volatile input prices in Turkey. The production is planned according to current demand conditions due to difficulty of storage and high inventory management costs. The sector grew at a CAGR of 1.2% between 2005 - 2009 and the total biscuit production capacity of Turkey is estimated as 503,000 tons in 2010.

In Turkey, per capita consumption of biscuits remains relatively low levels at 4.5kg in 2009 compared to EU countries at 7kg-15kg. The market depicts a developing outlook with demand mainly driven by population growth and increasing urbanization. The biscuit consumption increases owing to changing consumption habits of people as their income levels improve. In order to meet the needs of targeted consumers, the companies pro-duce consumer oriented products such as diet biscuits, biscuits for babies and special wheaten biscuits. However in most of the rural areas, biscuits, wafers and crackers are still viewed as luxury food items.

Source: International Confectionary Association, 2008

FIGURE 9: Per Capita Biscuit Consumption- kg

FIGURE 8: Biscuit Production in Turkey

Source: TUIK and IS Investment Estimates

02468

1012141618

Turkish biscuits market grew at a CAGR of 3.7% for the last five years

Per capita biscuits consumption of 4.5 kg remains at relatively low levels...

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2000 2002 2006 2007 2008 2009 2010E 2011E

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Turkey’s biscuit exports reached US$ 255mn in 2009, in which Iraq had the greatest share with 20%. Exports have been mainly targeted to the Middle Eastern , African and European countries. Sweet biscuits account for a large part of the exported biscuits ( 58.2% in 2009 ) from Turkey. Export volume increased with a CAGR of 15% between 1980 and 2009 reaching to a level of 140,000 tons. Biscuits have been the third largest exported goods among the flour-based products category as of 2009. Transportation costs are the major obstacle for the biscuit exports particularly due to short shelf life.

The leading player of the Turkish biscuit market is Ulker with a market share of around 52%-55%, followed by the only major competitor Eti with a market share of around 30%-33%. The small confectionery producers, controlling the remainder of the market, are located in Central Anatolia some of which are major exporters. Despite market size, no major foreign or domestic player have been able to enter the market as Ulker maintains its overwhelming market position. Ulker’s market standing is sustainable and its position as the market leader is likely to remain unchanged.

FIGURE 10: Turkish Biscuit Exports

Source: Export Promotion Center of Turkey

FIGURE 11: Turkish Biscuit Market Players

Source: Company Annual Reports and Is Investment

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1980 1985 1990 2000 2007 2008 2009

tons

59% 59%56% 56%

53% 51%

22%24%

30% 30%33% 33%

19% 17%14% 14% 14% 16%

-10%

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010E

Ulker Eti Others

Biscuits have been the 3rd largest exported goods among the flour-based

Leading player with a market share of 51%...

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Yıldız Holding Having an expertise in biscuit and chocolate manufacturing, Yıldız Holding is one of the oldest food production companies in Turkey. Besides biscuits, chocolate production, the company is actively involved in the packaging, IT, real estate, dairy, non alcoholic bever-ages, frozen food, marketing and financial services. The company had an annual con-solidated revenue of TL8.9 billion from its food operations as of 2009.

Under Yıldız Holding, Ulker Division is engaged in the production, marketing, sales and distribution of biscuits, chocolates, cakes, and baby food. Additionally, Yıldız Holding is also the largest milk and flour producer in Turkey. Ulker products reach 220k sales points across Turkey with market leaderships in chocolate, biscuits and cocoa.

Food Division incorporates the production of oil, margarine, milk and dairy products, soft drinks, starch-based sugars, ready to cook soups, spices and other culinary supple-ments. Under Packaging Division, the group carries the production of basic packaging materials.

Company Profile

FIGURE 12: Yıldız Holding Organization Structure One of the oldest food production companies...

Source: Company

Yıldız Holding

Food, Frozen Products and Personel Care

Food, Beverage , Gums and Candy

Ulker Group ( Biscuits, Chocolate

and Cake )Ulker Biskuvi

Others Financial Services

International Operations

Marketing, Strategy and Retail

Packaging, IT and Real Estate

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Ulker Biskuvi Established as a small bakery with a capacity of 75 tons of cookies per year with just three workers in 1944, Ulker Biskuvi now produces biscuits, wafers, crackers and cov-ered biscuits at its factories with a capacity of approximately 380,000 tons per year. The company is the indisputable market leader with a well known brand name supplying bis-cuits and cracker products to both domestic and international markets.

According to AC Nielsen’s survey 2009, Ulker is the first recognized brand name in the biscuits category, and second in the category of the brands that consumers feel closest to. Ulker currently exports to more than 100 countries including Germany, France, South-ern/Eastern Europe/CIS and the Middle East.

Shareholder Structure

Yıldız Holding A.S and Dynamic Growth Fund are the main shareholders of Ulker Bisküvi holding 42,1% and 27,4% respectively, while free float stands at 25,9%. Dynamic Growth Fund is an independent investment fund , principally investing in actively managed portfolio of companies operating in Europe.

FIGURE 13: Ulker Milestones

Source: Company

Source: Company Presentation

FIGURE 14: Shareholder Structure

42.1%

27.4%

4.61%

25.9%

Yıldız Holding A.S. ��

��

1944Founded in Istanbul by Sabri Ülker with a capacity of 75tons of

biscuits p.a.

1948Tripled its capacity

at its Topkapı Factory

1955Distribution with its

own network throughout Turkey

with same unit price

1970Production capacity

was doubled with Anadolu Gıda in

Ankara

1974The first biscuit export to Middle

East

2007Company name

changed from Ulker Gıda to Ulker Bisküvi

2008Acquisition of

25,23% Godiva share

2009Reached to

production capacity of 380,000 tons p.a.

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Subsidiaries Ulker Bisküvi has a wide network of subsidiaries and participations, most of which are linked to core business of the company. While Ideal Gıda and Biskot Gıda are involved in biscuit manufacturing, Birlik Pazarlama produces flour for the company. While domestic market distribution is carried by Atlas Gıda and Rekor Pazarlama, exports are distributed by Istanbul Gıda and Birlesik Dıs Ticaret. Another important financial asset of Ulker is BIM, the listed hard discount retailer < BIMAS.TI>, at which company has 10% stake.

Source: Company

FIGURE 15: Subsidiaries & Financial Assets

Wide network of subsidiaries brings strong competitive advantage...

ULKER BISKUVI

Ideal Gıda 97,5%Production

Atlas Gıda Paz. 78,2% Domestic Marketing

Istanbul Gıda Dı� Tic. 83,8%

International Marketing

Biskot Bisküvi San. 50,8% Production

Birle�ik Dı� Tic. 69% Foreign Trade

Rekor Paz. 46,6%Domestic Marketing

Birlik Pazarlama 99% Flour Production

Godiva Belgium 25,2% Chocolate production

and marketing

Godiva US 25,2% International Investment

PNS Pendik 23,99% Starch and stach-based

sugar production

Hero Gıda39,59% baby food production

BIM 10% - Financial Asset

( BIM AS TI ) Retail

Sa� lam GYO 10,7% REIT

Fresh Cake 10% Cake Production

Besler Gıda 7% Oil and Margarine production

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BIM Birle�ik Ma�azalar A.�. - ( 10% )

Ulker Biskuvi has 10% stake at BIM which is the largest food retailer with 2,925 stores and 30 regional warehouses in more than 60 provinces across Turkey. The company operates also in Morocco with 41 stores with its subsidiary Bim Stores SARL. Providing approximately 600 products at the lowest possible prices, the company recorded annual turnover of TL5,323mn in 2009. BIM had a market cap of TL8.0 billion as of Dec 21, 2010 and we have target mcap of TL8,668mn for 2011 year end, offering 9% upside potential with our 12 month price target of TL57.10. The company management considers the stake in BIM as strategic investment and doesn’t consider a stake sale.

Godiva - ( 25.2% )

Godiva Chocolatier is a manufacturer of premium chocolates, including bonbons, truffles, flavored coffee and ice cream. Ulker Biskuvi acquired 25,2% of Godiva for US$ 240mn in 2008. The company used US$ 240mn bank loan to finance Godiva acquisition, but paid back in June, 2010 in order to take advantage of the early payback option.

Godiva posted 17% growth on volume basis since Ulker Group bought it from US based Campbell Soup Co. The company currently has four retail shops in China and plans to open 17 more in 2011. While Godiva is expected to generate US$ 580mn revenues in 2010, the management targets its revenue to reach US$1.0 billion in five years.

Despite its positive EBITDA figure, Godiva’s participation in terms of net income is still negative for Ulker Biskuvi.

Ideal Gıda-Biskot Gıda ( 97.9%- 50.8% )

Ideal Gıda and Biskot Gıda actively engaged in the production of biscuits and crackers. Ideal Gıda produces more than 40K tons of biscuits with a CUR of 87% in the Gebze Organized Industry Zone. Operating in four different factories in the Karaman Industrial Zone, Biskot Gıda produces 2nd tier brands Halk and Karsa as well as Ulker with a ca-pacity of over 100,000 tons with an average CUR of 65%.

Birlik Pazarlama ( 99% )

Birlik Pazarlama provides flour for biscuit production from every kind of grain based on the needs of the Group. The company has wheat processing capacity of 930 tons/day, rice processing capacity of 19 tons/day, soya processing capaciy of 7.5tons/day and oat processing capacity of 2 tons/day.

Atlas Gıda - Rekor Pazarlama ( 78.2% - 46.6% )

Atlas Gıda and Rekor Pazarlama provides domestic marketing of the Group. While Atlas Gıda distributes the products of Ulker Biskuvi and Ideal Gıda, Rekor Pazarlama conducts distribution of Biskot Gıda’s products.

Istanbul Gıda - Birle�ik Dı� Ticaret ( 83.8% - 69% )

Istanbul Gıda and Birle�ik Dı� Ticaret are involved in the international marketing and distribution of the products. The biscuits from Ulker Biskuvi and Ideal Gıda are exported via Istanbul Gıda while Biskot’s products are exported via Birle�ik Dı� Ticaret.

PNS Pendik ( 23.99% )

Pendik provides starch and starch-based sugar products.

Hero Gıda ( 39.59% )

Hero Gıda is engaged in production of baby food.

Fresh Cake - Besler Gıda ( 10% - 7% )

While Fresh Cake is involved in cake production, Besler Gıda produces oil and margarine.

To be a global premium chocolatier with Godiva...

14


Capacity and Production

The largest biscuit production capacity in Turkey belongs to Ulker Biskuvi, with annual capacity of approximately 380,000 tons as of 2009. The main production facilities of Ulker Biskuvi are in Istanbul Topkapı and Ankara where biscuits, chocolate covered biscuits and wafers productions are carried out with CURs of 76% and 69% respectively as of 2009.

Apart from these two main facilities, its subsidiaries Ideal Gıda and Biskot Gıda also contribute to Ulker Biskuvi’s production, with their plants in Gebze since 2000 and Karaman since 1999. While the former has a CUR of 87.4%, the latter’s CUR is at 65% as of 2009.

Ulker achieved to increase its production from 186,000 tons to 267,000 tons with a CAGR of 6.2% between 2003 and 2009.

CAGR: 2.5%

FIGURE 16: Production Facilities

Source: Company

0

20,000

40,000

60,000

80,000

100,000

120,000

2005 2006 2007 2008 2009 2010E

Topkapı Ankara Gebze Karaman

tons

2009 / tons Capacity Production CUR

Istanbul 64,020 48,655 76%

Ankara 104,299 71,966 69%

Ideal Gıda/ Gebze 49,085 42,901 88%

Biskot Gıda / Karaman 159,229 103,499 65%

FIGURE 18: Total Biscuit Production

Source: Company

225 240262 272 267 281 288

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010E 2011E

000 tonsCAGR: 4.2%

Largest biscuit production capacity in Turkey with 360K tons

Total production grew at a CAGR of 6.2 for the last five years

FIGURE 17: Capacity and Production

Source: Company Annual Reports & Is Investment Estimates

15


Sales Volume and Revenues Ulker is the indisputable market leader in Turkish biscuits market with a market share of around 52%-55%. Eti follows right after Ulker with a market share of around 30%-33%. With its wide range of distribution network, Ulker has the ability to reach every corner in the domestic market. The products manufactured in the Biskot Gıda are distributed to domestic markets via Rekor Pazarlama and export markets via Birle�ik Dı� Ticaret. The products produced in Ideal Gıda and Ulker Biskuvi are distributed to domestic markets via Atlas Gıda and export markets via Istanbul Gıda. Considering wide range of subsidiary network, foreign companies are willing to form partnerships with Ulker Group companies in order to be able to enter to Turkish food market.

Ulker Biskuvi lost some market share in last two years due to fierce competition from its rival Eti and other small players.

Ulker achieved to increase its sales volume from 225K tons to 267K tons with a CAGR of 4.4% between 2005 and 2009. Total revenues of the company increased from TL1,359mn to TL1,553mn with a CAGR of 3.4% between 2005 and 2009. Export shares accounted for 17% shares in total turnover in 2009 and the company expects it to be around 20% by 2012.

FIGURE 18: Market Share

Source: Company Presentation & Is Investment Estimates

FIGURE 19: Sales Volume & Revenue

Source: Company

Source: Company

FIGURE 20: Total Revenues

CAGR : 6.3%

Financial Analysis

1,359

1,927

1,409 1,4111,553 1,600

1,736

0

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 2009 2010E 2011E

TL mn

56%56%

53%

51% 51%

57%56%

54%

51% 51%

48%

50%

52%

54%

56%

58%

2007 2008 2009 2010E 2011E

Volume Share Value Share

230,000

240,000

250,000

260,000

270,000

280,000

0

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 2009 2010E2011E

Revenues Volume

TL mn tons

16


Seasonality

Generally, 1Q and 4Q are the strongest season of the year for Ulker, opening of schools, religious holidays and longer time spent in offices. However, shift of religious holidays from 4Q to 3Q will effect Ulker Biskuvi’s sales as well.

Raw material costs constitute approximately 65% of Ulker Biskuvi’s total costs. Although the mix of ingredients change from product to product, average breakdown of raw mate-rial cost can be given as: 20% wheat, 15% sugar/sweetener, 15% oils/fats and 15% oth-ers.

The company suffers from the volatility of raw material costs such as wheat, oil/fats and milk powder prices in Turkey. However, procurement of basic production and scale ad-vantage of the Group companies provide Ulker Biskuvi cost advantage over its rivals. While Birlik Pazarlama from the food division of the group provides the flour, oils/fats are supplied by Besler Gıda.

FIGURE 21: Quarterly Revenue Breakdown

Source: Company Financials

FIGURE 22: COGS Breakdown

Source: Company

Raw materials

65%

Packaging15%

Labor10%

Overhead10%

FIGURE 23: Raw Material Structure

27% 24% 28% 29% 28% 26%

23%23%

20% 24% 25% 22%20%

29%32% 25% 23% 22%

29%

25%

20% 23%24% 26%

2005 2006 2007 2008 2009 2010E

1Q 2Q 3Q 4Q

Wheat; 20%

Sugar, 15%

Oils, 15%

Others, 15%

17


Wheat prices in Turkey are already well above global prices and determined independ-ently. According to Turkish Grain Board, average wheat prices are $370/tons while global prices are $274/tons according to World Bank commodity price data in 2010.

According to TUIK; while average wheat prices increased by 17% from TL0.48/kg to TL0.56/kg , oils/fats prices soared by 9% from TL3.24/kg to TL3.53/kg in 2010. As a result, raw material cost inflation stands as the major concern on profitability and margins. Despite of its market leadership, the company did not prefer to reflect high raw material costs on its sales prices to defend its strong market position against competition.

Source: TUIK

FIGURE 24:Wheat, Sugar and Margarine

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0.10

0.20

0.30

0.40

0.50

0.60

Jan

-06

Ap

r-06

Jul-

06

Oct

-06

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08

Oct

-08

Jan

-09

Ap

r-09

Jul-

09

Oct

-09

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Wheat TL/kg Sugar TL/kg Oils/Fats TL/kg

�

�

�

�

��

��

��

��

��

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��

��

��

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��

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# �� $� ��%�

FIGURE 25: Global Wheat Prices

Source: USA Department of Agriculture

Domestic wheat prices are determined independently and well above global levels...

18


Depending highly on people’s income level and GDP growth of the country, biscuit prices usually track the changes in inflation rates. Strong competition and aggressive pricing strategies prevent Ulker Biskuvi to increase sales prices according to changes in input cost. Therefore, margin pressure can be experinced during the fierce competition periods.

Large portion of operational expenses, accounting for 14% of revenues consist of marketing expenses since Ulker Biskuvi wants to keep its strong market position. While these marketing activities support companies’ market position, it dents the profitability as well. However, for the time being we believe that some margin decline is acceptable for the company to prevent market share loss.

Since the sector is highly related to consumer preferences and the income level, profitabiltiy is affected by imbalances in supply&demand conditions and volatility in input prices. Weak demand conditions and high raw material prices resulted a decline in Ulker’s EBITDA margin as of 9M10. We expect EBITDA margin to be at 7.4% at the end of 2010, implying a decline of 2.4pp y-o-y.

Source: TUIK

FIGURE 26: Biscuits, Crackers and Wafers Prices

Source: Company

8

9

10

11

12

13

14

4

4.5

5

5.5

6

6.5

7

7.5

Jan

-06

Ap

r-06

Jul-

06

Oct

-06

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08

Oct

-08

Jan

-09

Ap

r-09

Jul-

09

Oct

-09

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Biscuits TL/kg Crackers TL/kg Wafers TL/kg

FIGURE 27: EBITDA and EBITDA Margin

127 141

98 93

154116 122

9.4%

7.3% 7.0%6.6%

9.9%

7.2% 7.0%

0

20

40

60

80

100

120

140

160

180

0%

2%

4%

6%

8%

10%

12%

��& �� ! �� " ��' ��'

EBITDA TL mn EBITDA margin

19


With approximately 380K tons of production capacity, Ulker Biskuvi’s facilities appear to be adequate to meet capacity requirements for the next couple of years. Capital expenditures were highest in 2008 due to the efficiency improvement investments at Topkapı and Ankara factories at an amount of TL12.1mn in total. Capital expenditures mainly consist of maintenance, renovation, improvement in production lines. There is no need for an immediate large scale investment for expansion.

During the past five years, Ulker’s gross margin ranged in the interval from 20% to 25.2%. Rising raw material costs, high energy prices and strong competition with its rival Eti resulted in margin decline for the company. However, the management plans to change this strategy by transfering some input cost hikes onto consumers in 2011. Large portion of operational expenses stem from sales&marketing expenses since the company has an aggressive marketing policy. The ratio of operational expenses to sales increased considerably from 15.1% to 17.1% between 2005 and 2009.

FIGURE 28: Cap-ex


FIGURE 29: Gross & EBTDA Margin - Opex / Sales FIGURE 30: Net Margin

Source: Company Financials Source: Company Financials

4.9% 4.6%

8.2%

1.1%

6.6%7.6% 7.3%

0%

2%

4%

6%

8%

10%

2005 2006 2007 2008 2009 2010E 2011E

Net Margin

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009 2010E 2011E

Gross Margin EBITDA Margin Opex / Sales

4.1%

1.2%

2.3%3.7%

1.8%1.8%%1.8%

-5%

-3%

-1%

1%

3%

5%

-10

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010E 2011E

(� ��) (� ��)�*��+T

L m

n

20


Ulker Biskuvi’s net working capital requirement fell continuously since 2005 thanks to the decline in receivables and increase in payables. Consequently, working capital as a percent of sales improved to 1.7% in 2009 from its peak level at 21.3% in 2005.

The total debt on the balance sheet does not fully belong to Ulker Biskuvi due to treasury structure of the group. We took into account net receivables and payables from and to the group companies in calculating company’s net debt.

Ulker Biskuvi distributed dividends to its shareholders regulary for the last five years, even before the company became listed. While payout ratio has historically been around 20% and 30%, dividend yield of Ulker Biskuvi ranged between 0.5% - 2.2% for the last five years. The company paid TL14mn dividends in 2010, pointing out a 1.2% dividend yield.

FIGURE 31: Working Capital / Sales


FIGURE 32: Net Debt / Equity


FIGURE 33: Dividend & Dividend Yield


Steady dividend payer...

21.3%

8.9%7.1% 5.5%

1.7% 1% 1%0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

100

200

300

400

2005 2006 2007 2008 2009 2010E 2011E

Working Capital Working Capital / Sales

0.190.16

0.27

-0.03 -0.04

-0.10-0.2-0.1-0.10.00.10.10.20.20.30.3

-200-150-100-50

050

100150200250

2005 2006 2007 2008 2009 2010E 2011E

Net Debt Net Debt / Equity

20 21

24 24

3

14 17

2.2%

2.1% 1.8%

3.5%

0.5%

1.2%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011E

Dividends TL mn Dividend Yield

1.2%

21


9M10 Interim Results

ULKER Biskuvi posted TL21mn net income in 3Q10 lower than TL26mn recorded in 3Q09, leading 9M10 bottom-line figure to TL81mn, up from TL68mn in 9M09. Failure of reflecting rising raw material costs onto sales prices resulted in weak operating performance.

Net sales remained flat at TL360mn in 3Q10 compared to same period last year carrying 9M10 top-line to TL1,210mn, up by a slight 2% y-o-y. Low growth in the overall biscuit market and some market share loss are the main reasons of the lackluster top line growth. The company expects improvement at the top-line in 4Q10 with the help of new product launches. Gross margin deteriorated by 5.2pp to 20.9% in 3Q10 mainly due to higher raw material costs. Operational expenses, as percentage of sales declined to 17.3% in 3Q10 from 17.7% in 3Q09 and 22.4% in 2Q10. Please recall that the company recorded marketing expenses at once in 2Q10, instead of spreading it throughout the year, causing a jump in op-ex. Although operational profit declined by 48% y-o-y to TL13mn compared to TL30mn in 3Q09, it is up by 37% q-o-q compared to TL9mn in 2Q10.

Recorded 3Q10 EBITDA carried 9M10 EBITDA figure to TL84mn compared to TL117mn in 9M09, down by 28% y-o-y. EBITDA margin dropped to 5.3% in 3Q10 from 10.1% in 3Q09. Ulker Biskuvi’s 3Q10 financials indicated lower operating profitability compared to our expectations. However, higher financial income due to the gains on f-x debt limited the decline in the bottom line figure.

2011 Outlook

We estimate Ulker Biskuvi to post TL1,736mn revenues in 2011, implying 9% y-o-y growth, on the back of 3% sales volume increase and 6% increase in average sales prices. We don’t foresee further market share loss for the company thanks to increasing marketing activities. 0.3 pp EBITDA margin deterioration is primarily due to raw material costs not being fully reflected onto prices and higher competition in the market.

FIGURE 34: FINANCIAL HIGHLIGHTS

Interim Results & 2011 Outlook

Source: Audit Reports and Is Investment Estimates

ULKER TL mn 2011 Y-o-Y 2010 Y-o-Y 2009 9M10 Y-o-Y 9M09

Revenues 1,758 8% 1,623 -19% 2,009 1,210 2% 1,186

Gross Margin 22.6% -0.8pp 23.3% -1.7pp 25.1% 23.2% -1.4pp 24.6%

Operating Profit 91 3% 89 -28% 123 65 -33% 96

Operating Margin 5.2% -0.3pp 5.5% -2.4pp 7.9% 5.3% -2.8pp 8.1%

EBITDA 122 5% 116 -23% 152 84 -28% 117

EBITDA Margin 7.0% -0.2pp 7.2% -2.6pp 9.8% 7.0% -2.9pp 9.8%

Financial Income 2.6 n.m 1.3 n.m 2 30 n.m 1

Net Income 127 5% 120 17% 103 81 19% 68

Net Margin 7.2% -0.2pp 7.4% 2.3pp 5.1% 6.7% 1.0pp 5.7%

22


This report has been prepared by “�� Yatırım Menkul De�erler A.�.” (�� Investment) solely for the information of clients of �� Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary.

The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.

All information in these pages remains the property of �� Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written

This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. For more information, please visit Capital IQ's web site at www.capitaliq.com.

03 January 2011 OUTPERFORM Ulker...

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