Investors' options for investing outside the United States have steadily gotten better over the past decade, and it's no longer that difficult to find online brokers who will handle trades for Canadian, Japanese, or Western European markets. It's still not easy to invest in Turkey, though, and that leaves investors with a rather limited menu of options, including the iShares MSCI Turkey ETF (NYSEARCA:TUR) and Turkey's leading mobile network service provider, Turkcell (NYSE:TKC).
I am generally not in favor of substituting a company as a country investment, even when an argument can be made that the country's fortunes and the company's success are tied relatively closely together. So setting aside the scarcity of Turkish investment options, is Turkcell still a worthwhile holding for aggressive investors?
Will Saner Competition Boost Margins?
I wouldn't go so far as to say that Turkcell is past a point where the company needs to worry about market share erosion to Vodafone (NASDAQ:VOD) or Turk Telekom's Avea, but it seems like everybody's respective shares have largely settled into stable ranges. That, and recent pricing actions, lead me to be more optimistic on the potential for better margins in the Turkish mobile market.
Still holding more than 50% of the market, Turkcell has seen average revenue per user (ARPU) trend up in recent quarters. While there's still that risk that either Vodafone or Avea makes another grab for share with further price cuts, mobile data and broadband revenue continue to accelerate (likely to end 2012 up close to 40%) and that's helping margins.
It's also worth noting that Turkcell's premiums over Vodafone have shrunk considerably, but it still has a superior network. As part of the (relative) price stability and network quality advantage, Turkcell is also seeing lower churn rates, which helps margins. To that end, Turkcell has now seen four straight quarters of sequential EBTIDA margin improvement, and while I believe the pace of improvement will slow (and may be more erratic on a quarter-to-quarter basis), I think mid-30% EBTIDA margins are reasonable in the coming years (against 31% in fiscal 2011 and estimates between 30.1% and 30.9% for fiscal 2012).
Might The End Finally Be In Sight For Owner Squabbles?
Part of the bullish thesis on Turkcell is that the ownership squabbles that have prevented annual shareholder meetings and annual dividends for multiple years are at last near an end. Unfortunately, that has been part of the bullish thesis for multiple years and these parties have proven to be real innovators in the field of pig-headed stubbornness.
At the risk of stepping into another "this time it's different" bear trap, it may in fact be different this time. Alfa and Cukurova have taken their spat to the UK Privy Council, which will decide between them in a ruling that should come between the time of this writing and January or February of 2013. That the ownership of Turkcell (a Turkish mobile phone company) may be decided in the U.K. is indeed bizarre, but that's just par for the course in a squabble that has been long on ego and short on common sense and mutual self-interest for some time now.
To make a confusing situation simple, the basic question before the Privy Council is whether to uphold a decision made in an international arbitration court in the British Virgin Islands that basically conveyed Cukurova's holdings to Alfa. Should that happen, Cukurova will lose its representation on the board of directors, and Alfa and TeliaSonera, which have generally been able to work together, will get on with business.
It's also well worth noting that Turkey's own Capital Markets Board (CMB) is tired of this nonsense and is pushing for the addition of more independent board members to Turkcell's board (from one to three). This should mitigate the risk of the Privy Council ruling, and should position the combine to declare a "super-dividend" in the first or second quarter of 2013.
Dividends Or Deals … Or Both?
With $2 per share of net cash sitting on the balance sheet, that may well be a rough estimate of the potential dividend (meaning a roughly 13% yield on today's price). Here again, though, there's debate, dispute, and potential disappointment. It's thought that TeliaSonera and Alfa will be sensitive to the concerns of Turkish regulators regarding the foreign control of a "crown jewel" Turkish asset, but they need to step carefully here.
Likewise, there are questions as to what is in the company's best interests in terms of international expansion. It is commonly reported that current management favors expanding into Eastern Europe (and the company has made a non-binding preliminary bid for Bulgaria's Globul), Africa, and the Mideast, but it's unclear that TeliaSonera is on board with that plan.
Turkcell's expansions into Ukraine and Belarus haven't really been breakaway successes, and there are legitimate concerns about overpaying for business that could add more volatility and uncertainty than growth. Consider, for instance, that a devaluation in the Ukraine could hit Turkcell's finances through its U.S. dollar-denominated debt in the country and you get some sense of the potential problem.
At the same time, Turkcell needs to act now or perhaps forever hold its peace. America Movil (NYSE:AMX) is buying its way into some Eastern Europe markets through its minority stake in Telekom Austria (OTCPK:TKAGY) (which it may well turn into a majority stake). Likewise, MTN Group (OTCPK:MTNOY), VimpelCom (VIP), Bharti Airtel, Zain, and Etisalat are hardly sitting still, and China Mobile (NYSE:CHL) has ample cash to deploy if they want to make deals outside of China.
But Is The Potential Worth The Headache?
The biggest question for Turkcell shareholders, or prospective shareholders, is whether there is still enough potential in these shares to put up with the turbulence and murky future growth plans. Unfortunately, the answer there is not an unequivocal "yes".
If Turkcell can grow its revenue at a mid-single digit clip and lift its free cash flow margin into the mid-to-high teens, the fair value per share works out to about $15 or $16. Each additional point of revenue growth is worth about $1 per share in fair value (holding the free cash flow margin steady), so boosting the target to $17 or so may not be entirely out of line, particularly as data/broadband demand grows.
That makes Turkcell an iffy proposition. There's nothing wrong with holding a fairly-priced stock where free cash flow can grow at a double-digit clip, but it's worth noting that Turkcell's performance this year, while good, has lagged the broader Turkish market. Consequently, though I'm in no rush to sell Turkcell shares today, it would likely be a source of funds if a compelling emerging market idea came to mind and/or if it became easier to buy shares in other Turkish companies like BIM, Tekfen, or Trakya Cam.
Disclosure: I am long AMX, OTCPK:MTNOY, TKC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.