Talking Turkey With Chris Mayer
Arbitrage, Contrarian, Long/Short Equity
Seeking Alpha Analyst Since 2012
By: Chris Tell at http://capitalistexploits.at/
Turkey holds many fond memories for me. It was a country I first travelled to on a whim, after watching Midnight Express. The film is based on the true story of a young American student sentenced to spend 30 years in a Turkish prison for smuggling hashish out of Turkey. His life becomes a living Hell before he manages to escape. Strangely enough I felt compelled to visit the country after watching the film!
The country did not disappoint. After just a few nights in Istanbul I agreed, after far too many beers I concede, to be a tour guide for backpackers travelling around the country by bus. Needless to say I had to educate myself swiftly indeed. Turkish history, geography and even language, I was expected to know it all.
Fortunately for me most of my patrons were more interested in getting laid, and consuming more alcohol than was reasonable, responsible or seemed humanly possible, than they were in the history of the country. It was one of the only "real jobs" I've had in my life, and thankfully threw me boots-and-all into the deep end. It's easily the fastest way to educate yourself. See my post Education vs Schooling for my thoughts on the topic.
My friend and fellow world traveller and investor extraordinaire Chris Mayer recently visited the country looking for investment opportunities. I thought it'd be useful for readers to tap into Chris's thinking on the country.
Chris is not only the editor in chief of Capital and Crisis as well as Mayer's Special Situations, but a genuinely intellectually curios and intelligent guy. His track record on investments is impressive and it's one of the reasons we asked Chris to provide us with some of his top investment picks for a Special Report we've just put together for readers.
Chris and I were recently exchanging emails. I've edited slightly so as to make it more readable…Enjoy!
Chris Tell: Yields on the 2 year lira note are bumping up under 10% while in May of this year they were at 4.79%. A pretty dramatic move, and indicative of the capital fleeing Turkey. I have to wonder if this presents an opportunity?
Chris Mayer: I think Turkey is a place of opportunity, though it may get worse before it gets better. Turkey's central bank is trying to prop up the lira, but it has only so much firepower and it's losing the battle. The market is already pricing in a rise in interest rates, which seems inevitable. Turkey's stock exchange has reacted negatively as well. Still, I like Turkey for other reasons, which I'm sure we'll talk about.
Chris Tell: Go on then…
Chris Mayer: I like its location. It's a good base to service the whole of the Middle East and North Africa. So, one of the companies I visited and that I've been following is Alliance Grain Traders. It processes pulses - think lentils, chickpeas and beans. They also make pasta. In fact, I believe they have the largest pasta making facility in Turkey. Alliance basically takes in the raw crop from the heartland and washes it, sorts it, polishes it, bags it among other services.
At the end of the chain, is a packaged food ready for use in the kitchen. In addition, they have their private label pasta and also make pasta for other brands, From the main port in Mersin, Alliance then ships all over the Middle East and North Africa and beyond. In a macro sense, I love where Alliance sits. And 35% of its capacity is in Turkey. The stock is a good value; it trades only marginally above book and pays a hefty dividend, plus the insiders own a bunch of stock so their interests align with yours. Management is motivated and I like their long term plan for the company. The stock has come alive this year, but has a long way to run.
Chris Tell: The recently negotiated peace deal with Kurdish separatists is interesting from a number of perspectives. Turkey's Southeast regions are distinctly poorer due to the conflict. Land and labour in these regions is substantially cheaper than in western provinces near Europe. On top of this the government are reportedly introducing tax incentives to companies setting up shop in the border provinces. What I think is potentially really exciting is how this could play out.
The cross border exports to oil rich Iraq are one thing but Turkey is a huge importer of oil and gas. It is in fact Turkeys biggest import item. Most of the pipeline projects in the region are plagued by high insurance costs due to the conflict resulting in higher energy costs for Turkey. If these regions develop and the friction costs of energy transportation are lowered we could well see an investment bonanza in the region. What are your thoughts on this?
Chris Mayer: Yes, this is a big story in Turkey. As you say, Turkey imports nearly all of its oil and gas needs. This is becoming an expensive bill. Natural gas prices in Turkey topped $10 when I was there in February, compared with just $3 in the U.S. And Turkey pays Brent Crude prices for its oil. So, the country's energy bill is high.
What most people don't know is that Turkey is actually a net exporter of refined products. It has a pretty sophisticated and substantial refining capacity. Large amounts of oil and gas flow through Turkey.
Turkey is a key energy hub largely because of its where it is. For example: It sits between the world's second largest natural gas market - which is Europe - and the large gas reserves of the Caspian Sea and the Middle East. You mentioned Iraq. The product from those rich Northern Iraqi oilfields will flow through Turkey.
All of that is interesting and then there is potential for Turkey to produce oil and gas itself. Turkey is largely unexplored on this front. It's virginal territory. And there are some formations that have geologists excited, and that they compare to America's shale plays. It's too early to call it, but there is potential for Turkey to produce more of its own energy.
One the companies I've followed is Transatlantic Petroleum. It has millions of acres in turkey. I met with the head honcho Malone Mitchell while I was in Istanbul. He owns a lot of the stock and has bought more. This is a company with tremendous potential, but for a variety reasons they've not made it work just yet. In the end, I've come to prefer the easier consumer plays like Alliance and companies that are further along in their development. But if you want to speculate on the energy story in turkey, then TAT is the best idea I have on that front.
So, yes, I agree with you. If they can keep peace with the Kurds and that part of the country starts to develop, it could lead to a real boom.
Chris Tell: Great points. Persian history shows that the Turks have been incredibly adept traders, and I've always thought of Turkey as a country which is not only geographically well-positioned, but as one where the people have often managed to shrewdly trade with their neighbours. This is a skill which is politically very powerful, and even more so when one finds oneself in a neighbourhood like theirs.
I recall a statement made me many years ago when I was working in the country. A businessman I met who owned a boat building company in Bodrum told me something along the lines of the following, "Turkey is surrounded by scoundrels and we benefit from being more trustworthy than our neighbours, even Greeks will rather do business with Turks than Greeks…and the Greeks hate us because of Cyprus."
So with that backdrop, maybe it's no surprise that Turkey's foreign currency reserves are at multi-year highs, though with a lira that has depreciated close to 100% since 2008 and rising sovereign debt yields, what potential impact do you think the country's current situation will have on seeing a strong foreign currency base evaporate?
Chris Mayer: I think it is a risk. I heard rumblings, but did not really investigate while I was there, that the banks are a risk. They are leveraged and rely on short-term funding. Not a good combination. I'm not investing in the banks. I don't have deposits there. And I think the export-driven manufacturing story will only benefit if the lira weakens further. Moreover, companies such as Alliance, that don't need to rely on Turkey's capital markets or its banks, ought to be fine. In fact, turmoil may create opportunities as it often does.
Chris Tell: Turkey has always been a cross roads and in many ways still is. It has certainly benefited from being a relatively tolerant country in terms of religion, politically too it has been relatively stable up until now. I know you visited some consumer goods companies there recently. Did you get a sense of what the pulse amongst the business folks is like?
Chris Mayer: Yes, I talked to a lot of different folks. One memorable meeting I had was with an Iraqi Kurd who was living and working in Istanbul. I actually met him in Mersin, which is the home of a busy port on the Mediterranean. We happened to be visiting the same company. For him, it was a customer. For me, it was an investment. We shared a cab back the airport and I winded up meeting him later again in Istanbul. But he told me how Turkey really benefited from the Iraq war and the turmoil in the region. He told me Turkey is where people go to have a normal life and that's why it's growing so much.
The people I talked to were optimistic. I talked to people in manufacturing and in food products. They see the surge in demand coming out of the Middle East and Africa and even from Russia. And they see it in the sales figures they are registering. This was in March, before the Taksim Square protests got going, but I don't think much has changed. Writing off Turkey because of the protests would be like writing off the US because of Occupy Wall Street. These events may prove important politically, but they don't usually have much to do with how business is done.
Chris Tell: It's funny you mention that. For me that's what a lot of this all comes down to. The 24 hour news cycle is both a benefit and a curse. It's a curse because much of what gets pushed out is sensationalist nonsense designed to grab the average doughnut-eating Joe's attention just long enough to keep him engaged before dropping something else into his lap for consumption. Dissecting what really matters from the noise consistently provides opportunities for investors who take the time to go and take a look themselves and do some investigative work. I always liked the builders mantra "measure twice, cut once". In investing, it could be said to check, ask or investigate twice and buy or sell once.
Chris Mayer: Well, I certainly agree with that. I've been doing this long enough to know that the view in the papers and the view on the ground can be massively different. I've made my living finding such discrepancies and its what motivates much of my travel. There is no substitute for going to a place and having a look yourself and drawing your own conclusions.
Chris Tell: Turkey much like many other emerging market economies boasts a very young population. There are two sides to this coin. A young unemployed populace is a volatile cocktail, just ask Tunisia. At the same time this provides an opportunity for increasing demand in terms of consumer goods, housing, energy you name it. The catalyst of course is a relatively open and free market for innovation, business and entrepreneurship. We've witnessed this happen across Asia and Mongolia which is still in the early days of this powerful transition. Where do you feel Turkey fits into this spectrum?
Chris Mayer: I think Turkey is a more mature, almost middle-European growth story. It's not going through any kind of transition as transformational as Mongolia, for instance. Still, it's hard to characterize on a lot of levels. You the know the cliché is that Turkey has a foot in Asia and in Europe. But it's really true. And when you are there, you feel and see it and even taste it in the food. It does have elements of both.
Chris Tell: While it doesn't have the transformational potential of Mongolia on a risk reward basis we may well be provided an opportunity for out-sized returns should assets become cheap enough due to the aforementioned capital flight from skittish hedge fund managers sitting in their plush London or NY offices. Is there anything particular you'd be keeping your eye on as this plays out?
Chris Mayer: Well, I think the demographic growth trends in this part of world almost guarantee that the Middle East is going to be an important market. And Turkey's economy is well placed to prosper because of it. So mainly I plan to watch the themes we've been talking about - the continued growth of Turkey's export driven manufacturers, the growth of the domestic economy and the unfolding energy story - and perhaps most importantly, I'll be looking for bargains. As we talked about in the beginning of this conversation, things could get worse before they get better. Patient, long-term investors may get a shot at picking up high-quality assets on the cheap.
Later this week Chris and I will discuss Sangria, sunshine and Spain…another country he has visited just recently that is presenting some unique opportunities for investors and speculators.
"No matter how far you have gone on wrong road, turn back." - Turkish proverb
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