Turkey Wake up call: Macro and Political News, 12th February

This analysis by GLOBAL Securities is presented to you by Raiffeisen Centrobank AG. Raiffeisen Centrobank AG acts solely as a distributor of this analysis and has not introduced any material changes to the content of this analysis or any recommendation included herein.

Wake – up call

BIST climbed 1.23% yesterday thanks to an afternoon rebound that erased earlier losses. After a positive open, benchmark BIST100 retreated to negative territory by 10:30 and stayed there until 2:30PM when the market started a comeback. BIST100 recovered almost 2,500 points from its intraday low and managed to hold onto bulk of its gains at the close. Banks fell behind with the 0.64% ascent in their sector index as YKBNK and VAKBN yielded to selling pressure. AEFES, ARCLK, ULKER, ENKAI, and BIZIM were among the laggards while KCHOL, SAHOL, PGSUS, ASELS, THYAO, ENJSA, TTKOM, TUPRS, and EREGL stood out as outperformers. Today, our local macro agenda is muted and we will be eyeing President Erdogan’s speech at the Parliament after 11AM local time when he is expected to reveal Ankara's plans to counter Damascus regime's strikes against Turkish observation posts in the north-western Syrian province of Idlib. BIST seems off to a sideways start with a positive bias amid mixed signals with some recovery in Asian equity markets while Lira is a tad weaker vs the greenback (USDTRY at 6.0261 vs 6.0072 at yesterday’s closing bell). U.S. futures are up 0.25% in early trades in partial recovery of the c.0.4% overnight losses from the hour we left. Asian markets are mostly trading in the green.
Macro and Political News:
(=) Erdogan: Turkey to announce new steps against Syrian regime today… President Erdogan said Turkey has given the necessary response and retaliated in kind but this is not enough. Erdogan underscored that Turkey on Wednesday will announce a series of new steps it will take against the recent Assad regime attacks on Turkish soldiers in northwestern Syria’s Idlib province. The president said the Assad regime will pay a heavy price for targeting Turkish troops in Idlib as part of an agreement. Ankara and Moscow agreed last year in Sochi to stop acts of aggression and turn Idlib into a de-escalation zone, which was to be monitored by 12 Turkish observation points. However, the regime, Iran-backed militia groups and Russia have consistently violated the cease-fire, launching frequent attacks inside the de-escalation zone. Three observation points in the region – point seven, eight, and nine – are currently under siege by regime forces.
(=) Defense Minister: Turkey will not vacate observation points in Syria’s Idlib… Defense Minister Hulusi Akar said late Tuesday that Turkey would not vacate any of its 12 observation posts in Idlib and warned that Turkish soldiers were under orders to retaliate forcefully to Assad regime attacks on the military posts. Akar said in an interview with the Associated Press that in the event of any action against Turkish soldiers, they have been given instructions to retaliate even more powerfully. He added that Turkey expects the Syrian regime to not take any action under any circumstances. He underscored that Europe and the world should provide serious and concrete support to stop the Assad regime's attacks in Idlib. Akar reiterated that Turkey will not pull back its personnel and soldiers from there and continue their mission. In the interview, Akar also stated Turkey was pressing Russia to use its influence on Assad regime to ensure that Syrian forces pull back to a previously agreed cease-fire line, and to vacate a strategic highway. Also, Turkey’s Foreign Minister Mevlut Cavusoglu said that Assad regime supporters Russia and Iran must halt the regime’s aggression in Idlib. Recall, Ankara and Moscow agreed last year in Sochi to stop acts of aggression and turn Idlib into a de-escalation zone, which was to be monitored by 12 Turkish observation points. However, the regime, Iran-backed militia groups and Russia have consistently violated the cease-fire, launching frequent attacks inside the de-escalation zone.
(+) OFAC lifts sanctions on Defense Minister Akar as US - Turkey tensions ease… The U.S. Treasury’s Office of Foreign Assets Control (OFAC) agency has lifted sanctions on Turkey’s Defense Minister Hulusi Akar and other Turkish officials. The state-run Anadolu Agency reported late Tuesday that the move came after the U.S. expressed solidarity with Turkey over Assad regime’s killing of Turkish soldiers in northwestern Syria’s highly contested, war-ravaged Idlib.
(+) US Secretary of State Pompeo: US to stand by NATO ally Turkey… U.S. Secretary of State Pompeo said Tuesday that the ongoing assaults on Turkish forces by the Assad regime and Russia must stop. Pompeo said on his Twitter account that he had sent Jim Jeffrey to Ankara to coordinate steps to respond to this destabilizing attack. The tweet ended with a pledge that the U.S. would stand by NATO ally Turkey.
(+) US and Turkey re-evaluate situation in Idlib… The U.S. special envoy for Syria visited Turkey late on Tuesday to re-evaluate the recent developments in the region. Speaking to reporters at Ankara’s Esenboga International Airport, James Jeffrey said Turkey, as a NATO ally, encountered a great threat in Idlib, northwestern Syria, coming from the Assad regime and Russia. Jeffrey said he came to Ankara to re-evaluate the situation with the Turkish government, adding that the U.S. will give as much as possible support to Turkey. Jeffrey was previously in Ankara as part of a high-level U.S. delegation led by Vice President Mike Pence to discuss Turkey’s anti-terror operation in northeastern Syria.
Jeffrey will meet with senior Turkish officials to discuss the Assad regime’s Russian-backed destabilizing military offensive in Idlib and how they can work together toward a political solution to the Syrian Conflict. The U.S. Embassy in Turkey said on Twitter that the destabilizing actions of Russia, the Iranian regime, Hizballah & the Assad regime are hindering the establishment of a nationwide ceasefire in Syria as called for an UNSCR 2254 & the safe return of hundreds of thousands of displaced persons in northern Syria to their homes.
(+) Putin and Erdogan to discuss Syria in phone call… The Kremlin announced on Tuesday that President Erdogan and his Russian counterpart Putin will discuss Syria in a phone call. The timing of the phone call remains uncertain yet.
(=/-) Pentagon budget proposes whopping USD200mn funding to YPG/PKK terrorists in Syria… The USD740.5bn Pentagon budget proposed by the U.S. government will continue to provide funding for outlawed YPG/PKK terrorists in Syria but it will slash it by a third compared with the previous year, while it includes more funding for nuclear weapons, research and development spending. The Trump administration’s proposal will slash funding for the YPG/PKK-dominated SDF to USD200mn from USD300mn in 2020. To remind, the SDF is an umbrella organization predominantly led by the terrorist PKK’s Syrian wing YPG. Washington views the SDF as a “reliable partner” in its fight against ISIS and continues to provide it with arms and equipment in the face of strong objections by Turkey.
(=) Energy holds potential to play greater role in Turkey-US trade volume… Turkey and the U.S. could reach mutual trade volumes of USD100bn through a consistent strategy that could cover trade in liquefied natural gas (LNG), renewable energy and petrochemicals, according to the director of Atlantic Council in Turkey. Recall, President Erdogan and U.S. President Trump agreed to raise the mutual trade volume to USD100bn during a meeting on the sidelines of the G20 summit held in Osaka, Japan, in June 2019. Official claim that to meet this aim, the U.S. may introduce some supportive trade regime and the Turkish private sector may focus more on how to penetrate into U.S. markets. U.S. LNG exports may also play a key role in supporting the trade relationship in the near future. To accommodate greater LNG exports, Turkey’s LNG infrastructure capacity is increasing, and this has been reflected in the escalation of U.S.-sourced LNG import volumes to the extent that Turkey now ranks second after Spain as Europe’s second-largest importer. Since the U.S. started exporting domestically produced LNG in February 2016, it has become the second-biggest LNG importer from the U.S. in Europe and Central Asia, after Spain, based on data from the U.S. Department of Energy's LNG Monthly report in August 2019.
According to Turkey’s Energy Market Regulatory Authority’s (EMRA) data, Turkey imported 7.14 billion cubic meters (bcm) in the first half of 2019. The country imported 2.94 bcm of LNG from Algeria and 1.27 bcm from Qatar. Turkey imported 884 million cubic meters (mcm) of LNG from the U.S. over the same period, greatly surpassing that of the previous year of 191 mcm, marking a 363% boost. The increasing share of LNG in Turkey's natural gas system is largely due to the expansion of Turkey’s LNG import capacity at its onshore terminals and the two floating storage and regasification units.

Sector and Company News:

(=) EKGYO signed an agreement on Monday with (Intek Konut & Som Plus & Nurgroup & Hak Ticaret Joint Venture) for Istanbul Basaksehir Ikitelli Project, 2nd Stage after the second session of the tender that was held on Nov 7, 2019 with revenue sharing model. The estimated total sales revenue is TRY1.69bn however EKGYO’s share will be TRY625.3mn with 37% share ratio.
TTKOM is to release its 4Q19 earnings in 12th of February on Wednesday. Research Turkey consensus: TL 6.196 mn revenues, TL 2.755 mn EBITDA and TL 530 mn net profit Global Estimate: TL 6.244 mn revenues, TL 2.723 mn EBITDA and TL 491 mn net profit.

TUPRS is to release its 4Q19 earnings in 12th of February on Wednesday. Research Turkey consensus: TL 23.496 mn revenues, TL 766 mn EBITDA and TL 21 mn net profit Global Estimate: TL 23.379 mn revenues, TL 765 mn EBITDA and TL 23 mn net profit.

(=/-) EREGL announced its 4Q19 financials and accordingly net income came in at TL228mn, worse than consensus and our net income estimates of TL422mn and TL411mn respectively. Top line is in line with both consensus and our estimates while EBITDA misses consensus and our call of TL865mn and TL866mn by 19%, at TL701mn. Net income in 4Q19 indicates 86% YoY and 71% QoQ decline. The YoY decline is mostly stemmed from the revenue and profitability decrease while QoQ decline is mostly stemmed from the profitability decrease and higher deferred tax expense. Erdemir’s profit margins were on a declining trend and hit further in 4Q19 with the declining steel prices and higher raw material prices.

The company’s revenue came in at TL6,454mn, indicating a 15% YoY decline, while up by 1% QoQ. Erdemir’s total production was down by 6% YoY while it was up by 1% QoQ in 4Q19. In the same period, HRC sales declined by 7% YoY, while up by 2% QoQ to 1,326K tons, CRC sales were down by 3% YoY yet up by 16% QoQ to 453K tones and long steel sales were up by 5% YoY and 15% QoQ to 277K tones in 4Q19, bringing the total sales volume to 2,056K tones, indicating a 5% YoY decline, yet the sales were up by 7% QoQ. On the other hand, average flat steel prices and long steel prices further deteriorated by 7% and 10% QoQ respectively in 4Q19. Accordingly, lower steel prices and higher raw material costs brings the EBITDA per ton further down from USD124 in 3Q19 to USD67 in 4Q19. The company’s EBITDA came in at TL701mn, down by 68% YoY and 45% QoQ. EBITDA margin deteriorated to 10.9% from 29.2% in 4Q18 and 19.9% in 3Q19.

All in all, the results are worse than both consensus and our estimates on operational profitability and net income levels, stemming mostly from lower than expected profit margins and higher than expected tax expense. However we believe the worst is over now and the company’s sales and profitability is expected to pick up gradually in the upcoming quarters with better economic outlook in 2020 and easing raw material prices.


TRYmn 4Q19 Consensus Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 6.454 6.409 1% 7.594 -15% 6.416 1%
EBITDA 701 865 -19% 2.216 -68% 1.279 -45%
margin 10,9% 13,5% -2,6 pps 29,2% -18,3 pps 19,9% -9,1 pps
Net profit 228 422 -46% 1.684 -86% 784 -71%
margin 3,5% 6,6% -3,1 pps 22,2% -18,6 pps 12,2% -8,7 pps
Net Debt/EBITDA (x) -0,53 -0,29 -24 bps -0,13 -40 bps
EV/EBITDA 5,4 2,6 3,3
P/E 9,7 4,5 5,0
ROE (%) 10,9% 19,7% -9 pps 16,6% -6 pps
Net debt -2.889 -2.538 14% -903 220%
Working capital 9.737 11.356 -14% 10.332 -6%
Δ in WC -595 -1.200 -50% -790 -25%
CapEx -721 -315 129% -237 204%
FCF to firm 277 3.182 -91% 1.690 -84%
Shareholders' Equity 30.299 28.367 7% 28.734 5%


(=) FROTO posted TL617mn net income, up by 50% YoY. Bottom-line was 9% above consensus estimate and 4% below our expectation. Revenues grew by 14% YoY to TRY11,502mn, which is in line with the consensus estimate. FROTO’s EBITDA was up by 19% YoY, reaching to TRY975mn. 5% YoY decline in export shipments in 4Q19 led us to miss the actual top-line and bottom-line figure. Our export estimate was 340k units in 2019, which is the median level of the company guidance, 335k-345k units. But its exports down by 5% YoY to 86,134 units in 4Q19. Domestic wholesale units grew by 54% YoY to 20,425 units parallel to the automotive market recovery in this quarter. Hence total volume stood at 107k units with 3% YoY growth in 4Q19. In YE19, CUR was down by 1pp to 81% due to transit facelift transition in 2Q19 and supplier issue causing temporary delays in production schedule in 4Q19. On the B/S side, we deem the YoY improvement in net debt to EBITDA level as positive. Following the results, the Company announced its 2020E domestic market guidance, 580k - 630k units, with 60k - 70k units FROTO’s domestic volume. Export shipments target is flat with 2019, at 330k – 340k units. Recall that Ford Otosan lowered its 2019 export shipments guidance from 340k – 350k units to 335k - 345k units in 3Q19. Capex guidance is at EUR180mn – EUR200mn. Domestic market guidance signals an increase of 20-30% YoY growth in the market with 30-50% YoY growth in FROTO’s retail sales. The guidance is closed to 2018 automotive retail market and FROTO’s retail level. Company’s domestic retail volume target is 15% higher than our estimate but a flat expectation in 2020’s export shipments is in line with our estimate. However, we deem a flat export guidance may be a negative catalyst on company shares.


TRYmn 4Q19 Consensus Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 11.502 11.505 0% 10.048 14% 9.298 24%
EBITDA 975 970 1% 818 19% 807 21%
margin 8,5% 8,4% 0 pps 8,1% 0,3 pps 8,7% -0,2 pps
Net profit 617 568 9% 411 50% 454 36%
margin 5,4% 4,9% 0,4 pps 4,1% 1,3 pps 4,9% 0,5 pps
Net Debt/EBITDA (x) 0,90 1,09 -19 bps 1,17 -27 bps
EV/EBITDA 8,5 7,3 7,7
P/E 13,0 10,4 11,9
ROE (%) 42,0% 43,2% -1 pps 38,0% 4 pps
Net debt 3.005 3.090 -3% 3.735 -20%
Working capital 1.387 983 41% 2.062 -33%
Δ in WC -675 -935 -28% 290 -333%
CapEx -422 -404 4% -219 93%
FCF to firm 1.187 1.428 -17% 339 250%
Shareholders' Equity 4.665 3.893 20% 4.618 1%


(+) ASELS posted TL1,365mn net income in 4Q19, 19% above the consensus estimate of TL1,149mn. While its revenues of TL5,365mn was 4% above the consensus, its EBITDA margin of 25.5% came in 320bps above the consensus. ASELS’s TL412mn net debt in 3Q19 turned into TL1,281mn net cash at YE19 and the improvement in NWC was more visible in 4Q19. In details, the company’s change in NWC was minus TL340mn in 4Q19, compared to TL991mn additional working capital needs in 9M19. ASELS’s backlog was US$9.7bn at YE19, slightly down from US$9.8bn at 9M19-end. Following its 4Q19 results, ASELS shared its 2020 guidance. Thus, the company expects 40-50% revenue growth (in TL-terms) with 20-22% EBITDA margin and ASELS expects to spend TL1.5bn capex.



TRYmn 4Q19 Consensus Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 5.365 5.167 4% 3.795 41% 3.023 77%
EBITDA 1.296 1.059 22% 813 59% 610 112%
margin 24,2% 20,5% 3,7 pps 21,4% 2,7 pps 20,2% 4 pps
Net profit 1.365 1.149 19% 583 134% 642 113%
margin 25,5% 22,2% 3,2 pps 15,4% 10,1 pps 21,2% 4,2 pps
Net Debt/EBITDA (x) -0,45 -1,23 78 bps 0,17 -62 bps
EV/EBITDA 9,4 13,3 9,9
P/E 8,4 11,8 9,0
ROE (%) 24,7% 22,9% 2 pps 21,4% 3 pps
Net debt -1.281 -2.330 -45% 412 -411%
Working capital 4.751 4.100 16% 5.091 -7%
Δ in WC -340 -471 -28% -170 100%
CapEx -1.159 -1.304 -11% -174 564%
FCF to firm 399 97 313% 704 -43%
Shareholders' Equity 13.498 10.133 33% 11.939 13%



VESBE posted TL123mn net income in 4Q19, indicating 23% YoY decline. While its revenues up by 10% YoY to TL1,972mn, its EBITDA significantly grew by 97% YoY to 240mn. Reason behind the strong EBITDA growth is the very low base of 4Q18. Note that 4Q18’s GP margin was at 7.1% which was the lowest quarterly GP margin in the last five years. VESBE increased its GP margin by 4.5pps to 11.6%.




TRYmn 4Q19 Consensus Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 1.972 n.a n.a 1.797 10% 1.792 10%
EBITDA 240 n.a n.a 122 97% 210 15%
margin 12,2% n.a n.a 6,8% 5,4 pps 11,7% 0,5 pps
Net profit 123 n.a n.a 159 -23% 128 -4%
margin 6,2% n.a n.a 8,8% -2,6 pps 7,1% -0,9 pps
Net Debt/EBITDA (x) 0,74 0,60 15 bps 0,83 -9 bps
EV/EBITDA 5,9 3,1 4,4
P/E 8,3 3,7 4,8
ROE (%) 31,5% 34,4% -3 pps 35,8% -4 pps
Net debt 684 533 28% 670 2%
Working capital 324 158 105% 408 -20%
Δ in WC -83 8 -1153% 117 -171%
CapEx -134 -130 3% -73 83%
FCF to firm 190 -21 -1004% 20 871%
Shareholders' Equity 1.806 1.812 0% 1.690 7%