Turkey Wake up call: Macro and Political News, 13th 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 inched up 0.21% yesterday after a volatile day as the strength in some key industrial stocks made up for the losses in banking names. After a flattish start and some wobble in early parts of the morning session, BIST100 turned north and ascended to 121k levels around which it spent good part of the day. But good part of the daily gains fizzled out with selling in the last hour of trading. Banking index was down 1.75% amid pressure on YKBNK, ISCTR, and AKBNK while HALKB was rallying. Strength in non-financials like ASELS, THYAO, PGSUS, GUBRF, KORDS, TTKOM, FROTO, and TTKOM supported the headline index while KCHOL, SAHOL, EREGL, ARCLK, and SODA were among the weak spots. Today, our local macro agenda showcases the December'19 Industrial Production numbers due 10AM local time. Bloomberg consensus +6.8% yoy based on the estimates for calendar-adjusted series and +0.3% mom based on the seasonally & calendar-adjusted series. BIST is off to a negative open amid resurfacing coronavirus concerns in global markets as well as local media reports that government is finalising the draft legislation to enable the transfer to the Treasury of ISCTR shares represented by main opposition CHP as the testamentary heir to the shares initially held by Ataturk as founder of the bank. Lira is flattish with the USDTRY pair just below the 6.05 mark. U.S. futures are down about 0.3% in early trades and Asian equity markets are mostly trading in the red.
Macro and Political News:
(=) Erdogan: Turkey to hit regime anywhere if troops harmed again… President Erdogan said on Wednesday that if Turkish soldiers in Syria are again targeted, Turkey will strike at Assad regime forces regardless of the 2018 Sochi deal with Russia. President Erdogan told his party’s parliamentary group meeting that if any harm comes to Turkish soldiers in observation posts in Idlib or anywhere in Syria, Turkey will hit regime forces everywhere regardless of the Sochi deal. Erdogan said Turkey is determined to push back Syrian regime forces from Turkey’s observation posts in Idlib by the end of February. Recall, the observation posts were established in 2018 under the Astana peace process. Erdogan added that to push back the Syrian forces, Turkey will do what is necessary via land and air without hesitation.
(+) Turkish delegation to visit Russia to talk Syria’s Idlib… Foreign Minister Mevlut Cavusoglu said that a Turkish delegation will soon visit Russia to discuss the situation in Idlib. Following Wednesday’s phone conversation between President Erdogan and his Russian counterpart Vladimir Putin, Mevlut Cavusoglu said that a Turkish delegation will visit Moscow, highlighting that Turkey will continue to work with Russia to ensure that the cease-fire is permanent. He underscored that the Sochi agreement between Turkey and Russia on Idlib is still in effect, despite a number of flaws.
(+) Putin and Erdogan discussed Idlib over phone… The Russian and Turkish presidents discussed the latest developments in Idlib, a de-escalation zone in northwestern Syria, over the phone, both countries said on Wednesday. Erdogan told reporters after his party’s parliamentary group meeting that they assessed the situation in Idlib with Putin. The two presidents agreed to hold additional consultations via proper channels, the Kremlin said in a statement published on its official website. The statement by Kremlin said that the two leaders continued discussions of various aspects of resolving the Syrian crisis, primarily in the context of the worsening situation in the Idlib de-escalation zone. The importance of full implementation of the existing Russian-Turkish agreements, including the Sochi memorandum of Sept. 17, 2018, was noted. Kremlin added that it was agreed to conduct additional contacts through the relevant departments.
(+) Kalin-Jeffrey meeting focuses on finding solution to Idlib crisis… Presidential Spokesman Ibrahim Kalin highlighted the importance of the protection of civilians and Turkish troops in northwestern Syria’s Idlib province in a meeting with U.S. Special Representative for Syria Engagement James Jeffrey. The two officials discussed the ongoing Idlib crisis, according to a statement by the presidency. They highlighted that the Assad regime attacks on Turkish observation posts in Syria are unacceptable while noting that the agreement needs to be upheld to prevent further deterioration of the ongoing humanitarian crisis in the region. Kalin and Jeffrey also agreed that the regime needs to halt attacks and speed up the constitutional process to facilitate talks to enable a political solution process with the support of the international community. Kalin also reiterated Turkey’s determination to fight all terrorist groups in the region to protect its own security. The recent developments in Libya, as well as the sustainability of the cease-fire and the transformation to a political process were also discussed during the meeting, the statement added.
(=/+) Turkish and US defense chiefs meet in Brussels, discuss Syria and Iraq… Turkish and U.S. defense ministers on Wednesday discussed the situation in Syria and Iraq on the sidelines of the NATO defense ministers meeting in Brussels. Hulusi Akar and Mark Esper agreed that NATO and the U.S. should take more concrete steps in the region, during the closed-door meeting. Prior to the main meeting, Akar expressed content with statements by U.S. officials regarding Idlib.
(=/-) Turkey neutralizes 55 Syrian regime troops… Turkey’s Defense Ministry said Wednesday that its forces neutralized 55 Syrian regime soldiers in northwestern Idlib province. Turkish authorities often use the term “neutralized” to imply those in question surrendered or were killed or captured.
(=) Current account expected to post USD1.2bn surplus by the end of 2019… Turkey’s current account balance is projected to post a USD1.2bn surplus in 2019, according to the survey results conducted by the state-run Anadolu Agency. In tandem, December’s current account balance is forecast to register a deficit of USD3bn. Estimates hover between USD2.6bn and USD3.3bn. Turkey's current account balance in November 2019 saw a deficit of USD518mn. To remind, the new economic program, unveiled in September, forecast a current-account-surplus-to-GDP ratio of 0.1% for 2019.
(+) Turkey and UK eye post-Brexit trade boom with agreements… Turkey is expected become one of post-Brexit Britain’s top destinations for a trade deal after the European Union and the U.S., but despite the strong bilateral desire to strike a trade pact, experts are cool on the prospects of it happening anytime soon. The U.K. formally left the EU on Jan. 31, 2020 but will remain in a transition period with the EU and Turkey until Dec. 31 this year. During the year, the U.K. will continue to be subject to trade terms set by the EU but will also be free to strike new trade deals.
Earlier this month, the Turkish Trade Ministry said Ankara and London would discuss a free trade deal through existing working groups between the two countries. The focus will be on minimizing friction on imports and exports flowing between the two countries. The trade volume between Turkey and the U.K. in 2018 was USD18.5bn – second only to Germany – with Ankara exporting USD11.1bn to the U.K. and receiving USD7.4bn in imports. This was a 15.7% increase in exports and 13.7% increase in imports for Turkey in comparison to the previous year. Turkey will not want to risk its trade surplus with the U.K. and as such wants to be at the front of the line to strike a trade deal with Britain. With its exports to the U.K increasing, Turkey is one of the countries with the most to lose from a no-deal Brexit.
Also, Turkey and the U.K. invest extensively in each other at both the governmental and business level. British firms invested around USD409mn in Turkey in 2018, with Turkish firms investing around USD323mn in Britain over the same period. Over the past 10 years, the U.K. poured USD7.2bn in investment into Turkey, and Turkey invested USD2.5bn in the U.K.
One obstacle already in sight is the EU Customs Union, of which Turkey is a part and that the U.K. will leave after the end of the year. A customs union is a free trade area with a common external tariff. Any Turkey-U.K. free trade deal would only be able to take place following an EU-U.K. free trade deal, as Turkey must stay in line with EU trade policy due to its membership in the customs union, even if it is not a full EU member.

Sector and Company News:

(=) ENKAI bought 785k lots of its own shares with TRY6.58-6.68 price range per share.

KCHOL is to release its 4Q19 earnings today after markets close. Research Turkey consensus: TL877 mn net profit. Global Estimate: TL 1.169mn net profit.

Transfer of CHP shares in Is Bank shares to Treasury... According to the media sources, the ruling Ak Parti executives prepared the draft including the transfer of CHP shares in Is Bank to the Treasury.

(=/-) One of the shareholders of SAHOL applied to register 1mn lots of her shares to be traded in BIST.

(=/-) TUPRS announced TL186mn net income its 4Q19 financials, above consensus and our net income estimates of TL21mn and TL23mn respectively. Revenues are 8% and 7% lower than consensus and our estimates, while EBITDA margin is inline with the estimates. Positive surprise on the net income side mostly stemmed from higher than expected deferred tax income in 4Q19. Net income in 4Q19 indicates 89% YoY decline while the company’s net loss was at TL155mn in 3Q19. The YoY decline is mostly stemmed from the revenue and profitability decrease with lower revenues along with worse profit margins with lower crude differentials and crack margins.
The company’s revenue came in at TL21,631mn, indicating a 13% YoY and 7% QoQ decline in 4Q19. Tupras’ total production was up by 4.6% YoY to 6.92mn tones while total sales were down by 7.7% YoY to 6.99mn tones in 4Q19. Mid-distillate and HSFO cracks performed weaker, while Gasoline cracks were stronger in 4Q19 compared to 4Q18. Diesel cracks were down by 13% YoY at USD14.5/bbl stemming from the excess supply due to return of refineries from maintenance and new capacity additions and sluggish demand on the back of underperforming global economy. On the other hand, HFSO cracks got worsen to -USD28.9/bbl from -USD7.1/bbl in the same period on the back of the increasing de-stocking activity closer to IMO 2020 implementation.
Tupras net refinery margin was at USD3.6/bbl in 4Q19, down from USD5.0/bbl in 4Q18, while med refinery margin were down from USD4.7/bbl to -USD1.9/bbl. The main reasons behind the YoY decline in net refinery margin are the narrower differentials and weaker crack margins in this period. Accordingly, the company’s EBITDA came in at TL708mn, down by 59% YoY and 20% QoQ. EBITDA margin deteriorated to 3.3% from 7.0% in 4Q18 and 3.8% in 3Q19. The company’s net debt improved to TL8,424mn in 4Q19 from TL8,744mn in 3Q19 and working capital improved by TL1,278mn in the quarter. Accordingly the company created TL2,297mn free cash flow in the period.
All in all, the results are slightly worse than both consensus and our estimates on operational level yet beat the estimates at the bottom line thanks to the higher than expected deferred tax income. Tupras guided at around 28mt production, 29mt sales and 95-100% capacity utilization for 2020, while 2019 figures were at 28.1mt production, 29.2mt sales and capacity utilization rate was at 97.8%. Tupras expects its net refining margin to improve from 2019 average of USD3.67/bbl to USD4.5-5.5/bbl range on the back of IMO driven growth in mid distillate cracks, improvement in heavy crude differentials thanks mostly to the shift of simple refineries from heavy crude to light crude. Gasoline cracks are estimated to remain flat, while HSFO is expected to remain weak. TUPRS management decided not to propose pay any dividend from 2019 earnings to its AGM.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 21,631 23,496 23,379 -8% 24,803 -13% 23,309 -7%
EBITDA 708 766 765 -8% 1,743 -59% 885 -20%
margin 3.3% 3.3% 3.3% 0 pps 7.0% -3.8 pps 3.8% -0.5 pps
Net profit 186 21 23 805% 1,766 -89% -155 -220%
margin 0.9% 0.1% 0.1% 0.8 pps 7.1% -6.3 pps -0.7% 1.5 pps
Net Debt/EBITDA (x) 2.21 1.40 81 bps 1.81 41 bps
EV/EBITDA 9.8 4.8 7.8
P/E 54.8 7.9 13.7
ROE (%) 4.1% 37.8% -34 pps 16.4% -12 pps
Net debt 8,424 11,967 -30% 8,744 -4%
Working capital -3,560 4,697 -176% -2,282 56%
Δ in WC -1,278 3,521 -136% -1,536 -17%
CapEx -330 -285 16% -275 20%
FCF to firm 2,297 -1,924 -219% 2,152 7%
Shareholders' Equity 12,963 9,825 32% 12,839 1%


(=/+) TTKOM posted TL545mn net income came in 4Q19, slightly better than consensus estimate of TL530mn and higher than our estimate of TL491mn. Top line is in line with the estimates while EBITDA is better than both consensus and our estimates of TL2.755mn and TL2.723mn at TL2.839mn. Net income in 4Q19 indicates 75% YoY and 51% QoQ decline, mostly due to the FX losses from the depreciation of TL in the period. On the other hand, the company continued its strength on the operational front in 4Q19.

The company’s revenue came in at TL6,284mn, indicating a 16% YoY improvement, while it was down by 1% QoQ. When we look at the revenue breakdown, fixed voice revenue stood almost at the same level in 4Q19 compared to 4Q18 at TL666mn. On the other hand, fixed broadband subscribers increased from 10.9mn to 11.4 mn and ARPU (Average Revenue Per Unit) rose by 13.3% to TL52 in 4Q19, bringing the fixed broadband revenue to TL1.776mn, indicating 20% YoY improvement. Net subscriber additions on broadband subscribers were at 458K YoY (559K excluding one-off impact). Mobile segment also continued to be strong with subscribers increasing from 21.5mn in 4Q18 to 22.9mn in 4Q19 and blended ARPU rising by 8% YoY to TL33.4, bringing the total mobile revenue to TL2,312mn indicating 19% increase. Mobile subscribers YoY net additions were at 1.4mn (1.9mn excluding one-off impacts). Recall that, the new regulation of The Information and Communication Technologies Authority (ICTA) requires the subscription of customers without Turkish or Foreigner ID needs to be cancelled by December 1 2019. Within that scope, the company’s number of customers churned in mobile segment was at 284K in 3Q19 and 169K in 4Q19. In broadband and fixed voice segments, 21K and 29K subscriptions were cancelled to comply with the regulation, respectively.

The company’s EBITDA came in at TL2,839mn, up by 27% YoY with the strong revenue growth and efficiency measures undertaken in operational expense management. The company’s deleveraging efforts continue and net debt/EBITDA decreased from 1.80x in 4Q18 to 1.43x in 4Q19. The company’s net short FX position declined to USD370mn in the period with deleveraging and hedging efforts.
All in all, the results are slightly better than both consensus and our estimates on operational level, thanks mostly to higher than expected profit margins. The company also shared its expectations for 2020. Accordingly, consolidated YoY revenue growth (excluding IFRIC 12) is expected to be around 14% (Global est. 12.3%), consolidated EBITDA is expected to be around TL12.4bn level (Global est. TL12.1bn) and consolidated CAPEX is expected to be around TL5.8bn level. The company will hold a conference call today at 15 p.m.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 6,284 6,196 6,244 1% 5,398 16% 6,210 1%
EBITDA 2,839 2,755 2,723 3% 2,232 27% 2,967 -4%
margin 45.2% 44.5% 43.6% 0.7 pps 41.3% 3.8 pps 47.8% -2.6 pps
Net profit 545 530 491 3% 2,215 -75% 1,117 -51%
margin 8.7% 8.6% 7.9% 0.1 pps 41.0% -32.4 pps 18.0% -9.3 pps
Net Debt/EBITDA (x) 1.43 1.80 -37 bps 1.51 -8 bps
EV/EBITDA 4.0 3.4 4.3
P/E 12.0 -9.8 7.1
ROE (%) 25.5% -18.7% 44 pps 45.4% -20 pps
Net debt 15,837 15,427 3% 15,817 0%
Working capital 1,628 1,554 5% 2,474 -34%
Δ in WC -846 -1 148256% -192 341%
CapEx -2,205 -1,565 41% -1,211 82%
FCF to firm 1,363 226 504% 1,718 -21%
Shareholders' Equity 9,443 7,454 27% 8,985 5%