Turkcell Iletisim Hizmetleri A.S: A Turkish Delight

| About: Turkcell Iletisim (TKC)
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Despite being a key ally in the Cold War fight against Soviet expansionism in the Middle East, Turkey has largely fallen off American investors' radar since the mildly Islamist AKP party rose to power in 2002. Periodic bombings by the country's separatist Kurdish militants have also shaken Western perceptions of the country, not to mention worries over Turkey's proximity to strife-torn Syria.

Western investors have been ill-served by their biases, because Turkish equities have skyrocketed by more than 30 percent in U.S. dollar terms so far this year, despite tensions in the Middle East and the European debt crisis. That's largely thanks to low unemployment, a youthful population and a large service sector that feeds the domestic economy. Analysts estimate that Turkey will be the second-largest economy in Europe by 2050, with average annual gross domestic product (NYSEMKT:GDP) growth in excess of 5 percent over at least the next decade.

Burgeoning wealth in Turkey has driven huge demand for cellular telephone and Internet services, for both residential and commercial uses.

Turkcell Iletisim Hizmetleri A.S. (NYSE: TKC) is a great way to play the strength of Turkish consumer telecom demand.

With 65.9 million mobile subscribers in nine countries, Turkcell is the leading provider of cellular telephone service in Turkey. It also commands the top slot for market share in Kazakshtan (11.7 million subscribers), Azerbaijan (4.3 million) and Georgia (2 million).

In the Turkish market, the utility has averaged subscriber growth of approximately 200,000 new connections per quarter for the better part of three years. In addition to sustaining strong subscriber growth, Turkcell has also managed to turn out average revenue per user (ARPU) growth of about 6 percent over the past two years as it up-sells subscribers from basic cellular devices to smartphones.

In the company's second quarter, more than 4.8 million customers used smartphones such as Turkcell's T-series, a 500,000 increase over the first quarter. Data usage on the company's network has exploded, pushing ARPU to TRY20.70. That trend should continue over the coming years, with a smartphone penetration rate in the country of just 15 percent and the price of the devices plunging from TRY615 in 2009 to an average TRY220 today.

As smartphones become an increasingly important component in Turkcell's device mix, mobile broadband in the company's second quarter accounted for 44 percent of revenue versus 36 percent in the same quarter a year ago.

Turkcell's Superonline division provides broadband Internet service to 342,000 Turkish subscribers, primarily in urban areas. In the second quarter, residential subscriber growth came in at 92 percent year-over-year, while corporate users and wholesale subscribers grew by 87 percent and 24 percent, respectively.

Thanks to heavy capital investment over the past several years, Superonline can reach almost 1.2 million users, giving it plenty of upside potential in subscriber growth. In the second quarter, revenue from the Internet division reached TRY162.2 million, a 54.9 percent increase year-over-year and 11.9 percent quarter-over-quarter.

Turkcell has been experiencing such strong growth across its divisions that when it released revised earnings guidance for full-year 2012, it bumped its revenue range from TRY9.9 billion - TRY10.1 billion, to TRY10.1 billion - TRY10.3 billion.

With low penetration rates in both cellular and broadband service, Turkcell has plenty of room for future growth, unlike its American and European counterparts. Public opinion polls also show Turkcell is perceived as the market leader in customer service, offering the best technology and an unparalleled network, making it a first-choice service provider.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.