Trading Turkey Part III: Industrials and Consumer Cyclicals

by: Nicholas Pardini

In the first two parts of my trading Turkey series I covered the Turkish energy sector and telecoms. In this part, I cover the industrial and consumer cyclical sector and how investors can capitalize off of it. Large conglomerates such as Koc Holding dominate the industrials, so buying an industrial conglomerate will give you indirect exposure to several other portions of the economy.

Koc Holding A.S. (OTCPK:KHOLY)- KOC Holding is Turkey's largest industrial conglomerate with subsidiaries in oil, automotive manufacturing, consumer electronics, defense, tourism, construction, banking, and food products along with other industries. Its role is to central manage its holding companies and properly allocate capital among these companies. KOC's holds stakes in Arcelik A.S. and Beko Elektronik, Turkey's leading producers of appliances and home electronics. With a return on investment capital of 12.8%, Koc does a decent job of managing its assets. It is also somewhat undervalued with a P/E of 8.25 (versus average of 17 for competitors) while paying a solid dividend of 3.38%. Koc Holding's growth rate of 22.82% is also significantly higher than competitors who average 12% growth. However, Koc's growth is mostly driven by acquisitions versus organic growth.

Koc Holdings is a strong company but I do not recommend buying it. Due to the fact that this company's holdings are widely spread over so many sectors and that many of Koc's holdings are publicly traded, I would recommend buying a Turkish ETF (TUR or TKF) over this stock. Koc's holdings are diversified as an ETF and through buying the ETF, investors avoid the liquidity issues related to trading the pink sheets.

Enka Insaat ve Sanayi A.S. (OTC:EKIVF)- Enka Insaat ve Sanayi is an industrial conglomerate involved in the manufacturing, energy (primarily through the construction of power plants), retail, and real estate sectors. Its revenue driver is its construction business that has projects not only Turkey, but also throughout Russia, central Europe, the Middle East and Central Asia. Financially, the company is solid with a 12.3% profit margin and 12.3% ROIC (6.74% for competition), 0.13 debt/equity ratio, and 1.31% dividend yield. Enka should benefit from Turkey's growth economically and demographically as population and economic activity are drivers of future construction.

Overall, Turkey can be a good market to enter due to its high growth along with its strategic location on the Bosphorus. However, the industrial sectors of the economy are difficult to invest in due to pink sheet illiquidity and their diversification of the holding conglomerates. Make sure to add a liquidity premium to pink to sheets investments before making a valuation.

Turkey is the leading industrial producer in the Middle East. The weakness of Greece has also made Turkey the dominant economic trading partner in the eastern Mediterranean. However, Turkey is a dangerous market as many Turkish companies (including industry leaders) have been destroying value through growth. Their weighted cost of capital is higher than their ROIC. Later this week, I will cover the best of the rest of Turkey's leading companies to conclude this series.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.