September 05, 2018 - 4:38pm EST by
2018 2019
Price: 3.99 EPS 0.36 0.62
Shares Out. (in M): 877 P/E 11 6.5
Market Cap (in $M): 3,413 P/FCF 11 6.5
Net Debt (in $M): 1,550 EBIT 675 850
TEV ($): 4,963 TEV/EBIT 7.3 5.8

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  • Turkey


Long TKC ($4/shr)


Virtualodin wrote TUR a few months ago on the view that Turkey is a long-term buy based on the recent depreciation of the Lira and the low P/E multiples assigned to Turkish companies. At the time, we thought the write-up was very interesting but we were worried that 1) the currency hadn’t done a “blow-off the top” depreciation (something we find usually indicates a bottoming point for EM currencies) and 2) we did not want exposure to Turkish banks who are very reliant on foreign funding and are likely to see a meaningful deterioration in asset quality.


Since the recent write-up, the Turkish lira has violently depreciated to nearly 7:1 vs. the USD and Turkish equities, specifically banks, have de-rated further. We think that now is a good time to buy high quality Turkish companies and expose ourselves to the Turkish Lira. Of note, the Turkish stock market in USD is around ~$120bn, or $1.5k per person (Brazil, for reference, is ~$4k per person) and Turkey’s all-time REER low was in October 2001 and would equate to 5.2:1 vs. the USD. These 2 high-level data points suggest that Turkey is in a full panic and probably a good long-term buy.


In looking for what to buy, we purposely wanted to avoid the banks (for the reasons mentioned above) and primarily export oriented companies (we want exposure to the domestic economy and the Lira). Turkcell (TKC) is the leading mobile phone operator in Turkey with ~50mm subscribers, of which ~2.5mm are fixed line subs. As of Q2 2018, the subs are spread primarily across Turkey (~37.6mm), Ukraine (~10.1mm), and Belarus (~1.6mm). Within Turkey, ~34.8mm are mobile (~18.8mm postpaid and ~16mm prepaid), ~1.3mm are fiber, ~0.9mm are ADSL, and ~0.5mm are TV. Mobile penetration in Turkey is close to 100%, with smartphone penetration of ~55%. With a very young population (median age of ~30; quarter of the population under 14 years old) and an EM level GDP per capita, we expect smartphone penetration and data usage to continue increasing over time. As the leading mobile provider, we expect Turkcell to benefit from these long term secular trends (market share is ~44.5%, followed by Vodafone at ~31% and Avea at ~25%).


Turkcell has been able to increase its ARPU faster than inflation, which is key to protecting our purchasing power in dollars. Since 2015, Turkcell’s ARPU in Lira has grown 47% while CPI has increased 38%. Recently, inflation in Turkey has accelerated but we expect Turkcell to be able to continue to increase its ARPU at CPI+. In the event that the macro conditions in Turkey improve, we believe that Turkcell’s ARPU growth vs. CPI will widen, thereby expanding margins and improving cash flow.


We find Turkcell’s tower portfolio a long-term crown jewel asset. Turkcell owns 10.3k towers and 8.2k of those towers are in Turkey and we expect this asset to generate ~$50mm in sales in 2019 and continue to grow 15-20% long-term. Tower companies generally trade at over 10x sales, which means this business could be worth $500mm+ or 10% of Turkcell’s total EV. What is noteworthy is that Turkcell was planning on listing this business in 2016 but decided against it due to market conditions. Clearly, management is willing to highlight the value of this business by listing it when market conditions improve.


While we aren’t underwriting this, Turkcell is increasingly becoming a total media platform as opposed to a pure play mobile provider. Turkcell’s various mobile apps have hit a total of 100mm downloads, with several apps that have siginificant MAUs. A few apps of note: “bip” instant messaging has 6.5mm MAUs, “Dergilik” newspaper / magazine reader has 7.9mm MAUs, “Yaani” browser / search has 0.9mm MAUs. Over time, these apps should allow Turkcell to drive greater engagement and further monetize its customers.


Currently, Turkcell’s Mcap is $3.4b and EV is $5.0b. Note, since Turkcell’s debt is raised internationally, a further depreciation in the Lira will increase its gearing. However, despite the recent Lira depreciation, Turkcell is moderately levered at ~1.3x net debt/EBITDA. For reference,Turkcell generates $3.1b in sales, $1.2b in EBITDA (40% EBITDA margin), and $650mm in EBIT (21% EBIT margin). Turkcell is cash flow generative. Ignoring the expected EBITDA margin improvement from 35.3% in 2017 to 37-40% in the mid-term, Turkcell generated TRY 2.8b ($425mm) in LTM FCF. This represents a 12.4% LTM FCF yield, which is fairly cheap for a hard to replicate telecom business in a long-term growth market. Over the past 5 years, Turkcell has traded between 8-14x fwd P/E and currently trades ~8.2x fwd P/E.


Over the next 2 years, if the TRY rebounds to ~5:1 vs the USD and Turkcell re-rates to 11-12x fwd P/E, TKC is a double including its FCF generation. Management agrees that the stock is cheap as well, and has been buying back shares in the open market.



Note: Turkcell is 24% owned by Telia, a Scandinavian telecom operator that has been selling down its stake.

Note 2: On the Financial Info table, we converted everything to be in terms of the ADR. Each ADR share represents 2.5 shares of Turkcell.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Improving macro conditions

Cash flow generation & share buybacks

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