Looking at the bullish case for Turk Telekom

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Looking at the bullish case for Turk Telekom

Turkey is on a roll.

By (STOCK PICK)

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Published: Mon 25 Jun 2012, 4:25 PM

Last updated: Tue 7 Apr 2015, 12:04 PM

Moody’s raised its sovereign credit rating to Bal (one notch below investment grade) and the $30 fall in Brent in nirvana for the lira and the current account deficit and the ruling AKP government in Ankara has cut the budget deficit to a mere 1.3 per cent of GDP, with a major reduction in public debt. The Central Bank has engineered a fall in inflation to 8.3 per cent. The Istanbul ISE-100 and the Turkish lira have stellar macro headwinds behind them.

Turkey faces potential black swan macro shocks. The military is engaged in a deadly war in eastern Anatolia with the secessionist PKK and the Syrian crisis could well escalate and impact Turkey’s Alawite minority, a spillover that has happened in Lebanon.

The Erdogan government is also engaged in a struggle for power with the military high command, with several generals in jail on attempted coup d’etat charges.

Turk Telekom shares may only benefit from a macro upgrade. — Bloomberg

Turkey exports mainly to an EU on the brink of recession and the lira is hyper-sensitive to risk aversion mood swings in the global markets. Turkish equities are notoriously high beta but I believe Turk Telekom, the largest integrated telecom firm in Turkey, offers at least 20 per cent capital gains potential and a eight per cent dividend yield. With eight per cent revenue growth rates, 13 million mobile subscribers, a 5-8 enterprise value/Ebitda and a price/earnings ratio below 10 mean Turk Telekom has value metrics whose shares will only benefit from a macro upgrade.

AKP governments Fatih project (named after Sultan Mehmet Fatih, the Ottoman Sultan who vanquished the Byzantine empire and besieged/conquered Istanbul in 1453 AD) will be hugely beneficial for Turk Telekom. Fatih intends to connect Turkey’s primary/secondary classrooms in a digital broadband platform. This could mean two to three million new ADSL subscribers for Turk Telekom and goose top line revenue growth. Turk Telekom offers an incredible 30 per cent ROE but is vulnerable to regulatory risk, a stagnant fixed line business and potential lira weakness (due to its forex exposure). I believe Turk Telekom would be an ideal buy on the TSE at 6.20 liras for a eight lira one-year target.

The weak lira has been a steroid shot for Turkish corporate EPS growth and ISE-30 is not expensive at 10.4 times earnings, down from 13 times earnings only last October. The Turkish lira is an forex wild card, as usual. The Central Bank is hawkish about inflation (rightly so, in a country that faced hyperinflation, bank runs and a currency collapse only a decade ago).

The lira at 1.80 has performed well against the dollar relative to the Brazilian real/Indian rupee or South African rand yet forex volatility was only lower once interest rate volatility spiked higher. I can well envisage the Turkish lira forex rate trade at 1.86-1.72 against the dollar in the next four months but forex risk means the lira can fall to 1.94-1.96 if Europe once again goes ballistic.

Turkey’s domestic macro fundamentals are fine, though 25 per cent bank credit growth and bank funding risk are both potential party poohpahs on the ISE. Yet a $30 fall in oil price, a three-point fall in inflation means a valuation rerating potential. This will benefit Turk Telkom, a classic widely owned defensive high-yield megacap in Istanbul.



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