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Turkcell: Emerging Market Growth at Crisis European Prices
Posted by: Charles Sizemore (IP Logged)
Date: July 31, 2012 10:00AM

Europe may be mired in crisis and global growth may be slowing, but it is business as usual at Turkish mobile giant Turkcell Iletisim Hizmetleri (TKC).

Turkcell released second quarter results late last week that beat expectations. Group revenues rose by 13 percent and Turkish revenues were up 9 percent—not bad at all given that the country shares borders with a Europe mired in crisis and a Syria in the midst of a civil war that threatens to destabilize the region. Net income was also up 13 percent.

These results came in ahead of expectations and sent shares sharply higher. After bottoming out in late May, Turkcell shares are up by fully a third. Not a bad two-month run, all things considered.

Turkcell (NYSE: TKC)

Looking under the hood, the there is a lot to like. Subscribers of Turkcell Turkey rose 192 thousand to 34.7 million during the quarter, despite intense competition from international telecom juggernaut Vodafone (VOD), and the mix of prepaid and postpaid subscribers continues to shift in favor of more profitable and consistent post-paid contracts. Average revenues per user continue to climb due to increased data usage; they were up 5.6 percent for the quarter.

Smartphone usage—with the lucrative data plans it entails—also continues to rise though the smartphone penetration rate remains low at 15 percent.

This is about as good of a story as you can find in an emerging market stock of Turkcell’s quality. As a country, Turkey’s cell phone penetration rate is only 88 percent; in most advanced countries, the number is far in excess of 100 percent. (Yes, there are more mobile devices than people. Are you surprised? I didn’t think so.) This means that Turkcell can growth through three distinct avenues:

  1. Reaching new customers who previously did not own a cell phone
  2. Converting pre-paid customers to more profitable post-paid contract customers
  3. Upgrading regular feature-phone customers to smart-phone customers
Bottom line, Turkcell is fine way to invest in the long-term growth of Turkish living standards and the rise of the Turkish middle class.

Turkcell is also an interesting contrarian play. As I wrote last month (see “Bring in the Tanks”), the struggle for control of Turkcell’s board has made the stock something of a pariah. Turkcell hasn’t paid a dividend in two years because the two rival shareholder factions can’t sit in a room together for long enough to agree to pay it.

The boardroom circus keeps a lid on share prices, but I’m ok with that. It will get fixed, and soon. The Turkish government is losing patience, and the fiasco has become something of a national embarrassment. In the meantime, we’re able to accumulate shares of one of the finest emerging market stocks on the market at very reasonable prices. Turkcell sells for just 11 times expected 2013 earnings.

I reiterate my “buy” recommendation today.

Disclosures: Sizemore Capital is long TKC.



Stocks Discussed: TKC,
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Re Turkcell Emerging Market Growth at Crisis European Prices
Posted by: Cornelius Chan (IP Logged)
Date: July 31, 2012 03:28PM

Back in 2002, TCK at the low price of $2.34 had a price-to-book ratio of 1.92 and price-to-earnings ratio of 15.6 - and then ran up over the next 5 years to a high of $28.71 with p/b of 4.36 and p/e of 18.76.

Currently, Turkcell trades at $13.80 with p/b of 2.14 and p/e of 14.64.

While dollar-cost-averaging into this stock at the $10 mark would not be too bad of an idea (with either the long-term view toward capturing emerging wealth telecom spending over the next decade-plus or flipping the stock at $20), the 5-year declining revenue and profit margin, 5-year increasing debt-to-assets and the 5-year declining operating income brings a solid case for avoiding such a strategy until the stock falls back down closer to 1X book value (7.43mrq).

A more conservative investor would wait until it falls below book value. Unfortunately such a thing is unlikely to happen without major adverse events, usually resulting from such wonders as corporate mismanagement, political or military crisis or a worldwide economic depression.

I would also like the company to begin a moderately aggressive expansion into north and central Africa. They are geographically suited for it and it would be an easy way to profit off the back of China's development of the dark continent. (i haven't checked, they may already be doing this)



Stocks Discussed: TKC,
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