Politics

Turkcell: Cheap And Promising Bet In A Growing Turkish Economy (NYSE:TKC)


TURKCELL teken Turkcell is een Turkse mobiele telefoon operator die Moren heeft dan 34.000.000 abonnees

Caner CIFTCI/iStock Editorial via Getty Images

Investment thesis for Turkcell

This is my first article with a single focus on Turkcell (NYSE:TKC). In the past, I only wrote about Turkcell in relation to VEON (VEON) and the holding company LetterOne, which owns a majority share in VEON and a large stake in Turkcell as well. Normally, I’d prefer VEON as an investment over Turkcell, because VEON is diversified geographically over 10 countries, has very valuable cell tower and fintech assets in many countries, and has been significantly undervalued in recent years. Turkcell, by contrast, is over 80% concentrated in Turkey and has not traded at the low valuation multiples that VEON was trading at.

What triggered me to have a fresh look at Turkcell here was a comment from a Seeking Alpha reader with one of my articles. It was a remark about Turkcell in the comment thread of an article, that I recently wrote about América Móvil (AMX). The comment went as follows:

I see this (i.e., Turkcell, author addition) as a long term investment. Price reflects the problems with Turkish lira and Turkish economy. Not much risk that price will decline further while Turkey has a lot of potential on long term basis. A merger with VEON is also possible while both have same major shareholder.

There are a couple of reasons why the above quote stuck with me and why I decided to dive a bit more into Turkcell as a potential investment. First, the comment states that the price reflects the problems with the Turkish lira and the Turkish economy. As many will probably agree, there are definitely problems with the Turkish lira and the Turkish economy, so this line in the comment implies that the company shares must be trading at very low prices, potentially presenting a cheap entry for a new long position. Second, the comment states that there’s not much risk that the price will decline further. This implies that there’s a skewed risk-reward with investing in Turkcell: limited chance of a negative return and a much larger chance of an outsized return in the long run. Third, the comment identifies two long-term catalysts for a return, either by a merger of Turkcell with VEON or by the potential of Turkey as a country coming to fruition. In this case, in combination with a good entry at low share prices, a presence of clear catalysts seems a good reason to investigate the company further.

The above can also serve as an investment thesis for Turkcell. It offers some useful starting points for a more detailed look at the company and the shares.

Problems with Turkish lira and economy

We’ll have a more detailed look at the current Turkcell share price and if this trading price indeed reflects the problems with the Turkish lira and the Turkish economy or if there are other factors at play.

A graph of the Turkcell share price shows that the current trading price is near decade lows. This could indeed be a reflection of the problems with the Turkish lira and the Turkish economy, but it could also be a reflection of a dismal company performance or a mix of both.

Chart
Data by YCharts

A view on the company performance can be had from the most recent earnings report. The following image shows the highlights of the Turkcell Q3 2021 earnings report that was released on November 4th, 2021, in the week prior to the writing of this article.

Source: Q3 2021 presentation

These highlights are really good for a telco operator. There’s a ~20% revenue and EBITDA growth, massive subscribers net adds, double-digit average revenue per user (ARPU) growth for mobile and fiber services. On top of that, there’s a net debt leverage of only 0.9x. I don’t recall the last time when I’ve seen a telco operator with such low leverage. It’s very difficult to find telco operators with a net debt leverage of under 2.5x. In addition to the above highlights, it’s quite a challenge to find any problem with the Q3 earnings, even when going through the entire report. There is growth across the board, both across the four countries as well as across business lines, such as in communications services, media, digital, and fintech.

Judging the above highlights and the earnings in general, the current low share price doesn’t seem to be a reflection of dismal company performance. It will therefore indeed be a reflection of factors outside the company.

The first external factor that comes to mind is the Turkish lira. The next graph shows the number of US dollars one gets for a Turkish lira over the last decade.

Chart
Data by YCharts

It shows that the Turkish lira has lost value against the dollar consistently over the entire period. Turkcell receives the subscription fees in Turkish lira from the subscribers. Measured in US dollar, the value of that lira lost ~80% over the last decade, so if the subscriptions have had a stable price in Turkish lira, the revenue in US dollar would have experienced an 80% adverse effect over the last 10 years. Luckily, Turkcell uses inflationary pricing to manage this, which means that subscription fees in Turkish lira are increased by the company in-sync with inflation. To illustrate this, the blue line in the below graph shows that over the period from Q1 2015 to Q2 2019, the Turkcell average revenue per user (ARPU) increased by 72%. The blue line starts at 100 and ends at 172. This increase was slightly above the Turkish inflation over the same period, which was 63% (red line in below graph). And, more importantly perhaps for US investors, if the blue line would be extended to cover the last decade, it would have compensated for the devaluation of the lira against the US dollar. The total incoming Turkish lira were increasing fast enough to compensate for the increasingly lower value of the currency in US dollar terms.

Source: 2019 investor presentation Turkcell

In addition to inflationary pricing, Turkcell manages the problem of the continuously devaluating Turkish lira by hedging and keeping US dollar cash reserves and minimizing leverage, especially in foreign currencies. According to the Q3 earnings, Turkcell keeps 86% of its cash reserves in US dollar and net debt leverage is only a very low 0.9x with ~50% of debt in US dollar, where it’s normal for telcos to have over a 2.5x leverage.

The Turkish inflation and the Turkish lira devaluation against the dollar seem to be managed well by the company, so this doesn’t seem to explain the low share price either.

It could be that the low share price reflects a bad outlook of the Turkish economy as a whole, but this doesn’t seem likely either. Just a few weeks ago, the World Bank raised Turkey’s GDP growth forecast for 2021 to 8.5%. For 2022 and 2023, the GDP growth is forecasted at 3% and 4%, respectively. As this is substantial growth in the coming years, these numbers are not likely to be a reason for depressed prices either.

With company performance, Turkish lira problems, and general GDP growth problems ruled out as a cause for low Turkcell share prices, it can be that the cause for low Turkcell share prices is that investors don’t trust the Turkish political environment and that they don’t like investing in Turkey at all. This, finally, is confirmed by a look at the iShares MSCI Turkey ETF (TUR), which shows a generic decline for Turkish stocks that looks very similar to the decline of the Turkcell shares.

Chart
Data by YCharts

My conclusion from the above is that performance of Turkcell is just very good and that the low share prices are disconnected from that, due to a generic dislike in the market for investing in Turkish stocks at the moment.

Attractive Turkcell valuation

With an ADR share count of 877 million and a share price of $4.35, the Turkcell market cap is ~$3.81 bn. Adding ~$2.55 billion in debt and subtracting ~$1.27 billion in cash, the Enterprise Value equates to ~$5,09 billion. Based on the EBITDA of $1.11 bn for the first nine months of 2021, I’d estimate EBITDA to be ~$1.5 billion for the full year. This means the EV/EBITDA ends up just under 3.5x. This number is much lower than the same multiple of over 6x for América Móvil, but VEONs multiple is still lower, not exceeding 3x. One reason for this may be that Turkcell has kept paying a dividend during the pandemic, while VEON has temporarily suspended the dividend.

Dividend

The following table shows the Turkcell dividend over the last years. In 2021, the three dividend payments total 22.6 cents. At the current share price, this equates to a dividend yield of 5.2%.

Source: NASDAQ

As becomes clear from the table, there’s no clear trend in number of payments or the dividend size over the years. It does become clear that Turkcell pays a dividend in every year, which gives a degree of certainty that a return will be made on the shares.

Conclusion and investor takeaway

Turkcell is trading near a decade-low valuation. The company’s performance is definitely not the reason for this. It’s most likely explained by a general dislike of investing in Turkish stocks at the moment. Given that Turkish GDP is forecasted to grow, it can certainly be that that mood will change.

Turkcell has proven to be consistent in paying a dividend in the last years. Investors who take a chance on buying Turkcell shares get paid to wait for the moment that the market drives up the shares. As a result of this review, I couldn’t resist going long Turkcell myself. I think it’s indeed a good moment for an entry at the current low valuation.



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