TurkCell: A Worthwhile Long Term Investment

Under the radar. Turkcell Iletisim Hizmetieri (TKC) is a cell phone provider in Turkey. The company also has investments in several of the central Asian republics and other areas formally part of the old Soviet empire. The company's profile states:

"Turkcell Iletisim Hizmetleri A.S. (Turkcell), incorporated on
October 5, 1993, is a provider of mobile services in Turkey. The Company provides mobile voice and data services over its global system for mobile communications network. As of December 31, 2008, Turkcell provided service to its subscribers in 202 countries through commercial
roaming agreements with 607 operators. The Company provides wireless and value-added mobile communications services to subscribers
throughout Turkey. Subscribers can choose between its postpaid and pre-paid services. As of December 31, 2008, Turkcell had approximately 29.5 million pre-paid subscribers and 7.5 million postpaid subscribers.
The Company has investments in Azerbaijan, Georgia, Kazakhstan, Moldova, and also in the Turkish Republic of Northern Cyprus, Ukraine and Belarus. In August 2008, Turkcell announced that it had completed the acquisition of an 80% stake in Belarusian Telecommunications
Network (BEST).

The Company’s subscribers can choose between its postpaid and prepaid services. As of December 31, 2008,
postpaid subscribers signed a subscription contract and receive monthly bills for services. Prepaid subscribers must purchase a starter pack which consists of a Simcard and includes airtime ranging from 20 to 250 counters. Scratch cards can be purchased in increments of 25 to 1000 counters."

Turkcell posted its 1Q09 results recently. While revenues were in-line with expectations, EBITDA, operating income and adjusted net income were above expectations. In 1Q09, revenues declined on a year-over-year basis due to a decline in blended Average Revenue per User [ARPU]. This decline was further accentuated by a decline in the value of the Lira against the U.S. dollar.

Earnings plunged in 1Q09 by 18.5% with declines from several revenue streams across the board. The exceptions were revenues from call centers. Net income declines to $0.16 pershare for the quarter as compared to $0.22 per share in the prior year's quarter. These results were dramatically less than consensus estimates.

On a positive note, the subscriber vase increased to 36.40 million. ARPU dropped 21.2% to $10.40 from $13.20.

Short-term, the outlook for TKC is not so good. Macroeconomic forces will negatively impact both domestic and non-Turkish operations. The recent strengthening of the Turkish Lira vs. the dollar is a positive and will help the long term. The investment horizon for TKC is twelve to twenty-four months. Within that time, we expect to see a return a reversal of the latest set-backs and a return to growth. Our target value for TKC is $18.00. It may take a while but we expect to see the shares trading at that level.

Disclosure: The author holds no position in TKC.

Comments

[Albert Meyer:]

I agree with you. One has to own the stock through the peaks and troughs of exchange fluctuations. For example, measured in lira Q4 2008 revenue growth was 25.7% (Y/Y), but measured in dollars, Y/Y growth was a negative 12.3%. The dollar/lira distortion in Q4 2008 was an anomaly that should correct itself over time. TKC has a rock solid balance sheet with more than a dollar per share in cash, net of debt. EBITDA and net margins of 37% and 26%, respectively, etc. One of the best (if not the best) companies in Turkey to work for, which means it draws the country's top graduates.

As an aside, the CEO has a Harvard MBA, an engineering degree from the University of Michigan and is a former Microsoft executive. His management team is also well educated, having been educated in Europe and US.

It's worth the effort doing some due diligence on TKC.

May 18 10:35 AM

[bbowen7:]

A few years ago I spent some time in Turkey talking to government and university leaders and was impressed by the extent to which they looked to the future, taking the requirements for joining the EU as a blueprint for modernization. (In comparison, I had lived for awhile in Egypt which focuses on the pharoes.) Looking for a way to capitalize on Turkey's modernization and its potential influence in SE Europe/SW Asia, I found Turkcell as the best play on the long term political/economic direction. The stock is down slightly from my 2008 entry point, but the company itself is very sound, and the business is benefiting from the geopolitics as well as good management. It is a long term diversification play, and a good incentive to follow the news in a different part of the world.

May 18 02:10 PM

[seekingvalue:]

I was also impressed by Turkey and the Turkish people on a visit in 2002. My wife has been very impressed by the quality of TKC employees in her interactions with their technical staff. But most importantly, I just like the value here. Despite a 38% drop in the lira relative to the dollar, they're still on track to make roughly $1.38 billion this year (this is just a guestimate = 4 x Q1 earnings). With a market cap of $11.33 billion, this gives them a P/E of 8.2. If the dollar hadn't had such a huge run-up vs. the lira, earnings for this year would probably be close to last year's $1.84 billion (Q1 earnings in lira dropped only 3.5%). That would leave you with a P/E of roughly 6.2. And as Albert Mayer pointed out, they've got a solid balance sheet, with Cash and Equivalents minus total liabilities of over $500 million. Finally, the dividend payout is roughly 6.2%; not bad.

May 19 06:37 PM