Turkey Wake up call: Macro and Political News, 14th 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 added 0.41% yesterday as the strength in some key industrials again made up for the pressure on banking stocks for the second day in a row. Index had an indecisive start and floated around the neutral line until around 3PM when the buyers started to gain control. Benchmark BIST100 added 750 points and maintained good part of the gains by the close. Banking index was up only 0.04% amid pressure on YKBNK and ISCTR while VAKBN was strong. Automakers FROTO and TOASO as well as ARCLK, KOZAL, GUBRF, and ENKAI outperformed while TUPRS, AYGAZ, MGROS, TAVHL, and SISE were among the laggards for the day. Today, our local macro agenda highlight will be the December'19 Balance of Payments data due 10AM local time. Bloomberg survey puts the monthly CA deficit at USD3.00bn vs the USD1.52bn deficit recorded for the same month of 2018. Separately, TurkStat will release the residential sales data for January’20 also at 10AM. Home sales had ascended 47.7% yoy in December to 202.0k units driven by the 603.4% jumped in mortgage-backed transactions that surged for the fifth month in a row following the state banks' trimming of their monthly mortgage loan rates to an advantageous level below 1%. BIST seems off to an uptick start given the similar mood in most global peers and a stable lira just below the 6.05 mark vs the greenback.
Macro and Political News:
(+) U.S. aims to further strategic partnership with Turkey amid Idlib escalation… A senior U.S. State Department official spoke to journalists about the recent crisis in Syria's Idlib province as well as about Turkey-Russia and Turkey-U.S. relations, indicating that contrary to Iran and Russia, Turkey and the U.S. were striving for a political solution in Syria in accordance with U.N. resolutions. He said it is the Assad regime that is escalating tensions in Idlib. The official further underlined that the U.S. believes that the presence of a democratically strong neighbour in Turkey’s south is needed, adding that a democratic process can only be applied when Syria is free of Iran and Russia. The U.S. official underscored that they have a strong dialogue with Turkey on a strategic level for a long time. The official who stated that Turkey is the U.S.’ only partner on the field in Syria also said that the U.S. is cooperating with the YPG in the fight against Daesh and that this was causing friction between Ankara and Washington while this problem was could be solved currently within the scope of Operation Peace Spring. He reiterated that his partner on the field is Turkey.
Indicating that Turkish-Russian relations are not sustainable for the long term, the State Department official argued that tensions between Ankara and Moscow would increase and that this will become obvious soon, underscoring that Russia’s initiative is tactical and the interests of Russia and Turkey are not joint. The official said the US’s common interests with Turkey are more important than anything which applies to Syria, Iraq and Libya.
The official who mentioned that disagreements with Turkey continued regarding the S-400 missiles purchased from Russia and Turkey's acquisition of F-35 fighter jets from the U.S., stated that members of the Congress and the administration have expressed their concerns. He however said they are highly determined to overcome this problem.
(=) More Turkish troops to ensure lasting cease-fire in Idlib, Syria… Hulusi Akar, Turkey’s defense minister, told reporters after a NATO defense ministers meeting in Brussels. Akar said, Turkey will send additional troops to Idlib, northwestern Syria, for the sake of a durable cease-fire. He underscored that Turkey is sending additional troops to enable a permanent cease-fire, adding that force will be used against those who do not comply with the cease-fire, including radicals, and all measures will be taken. The announcement followed recent deadly attacks by Assad regime forces on Turkish troops holding the existing cease-fire, as well as attacks on Idlib civilians, sending hundreds of thousands of them flocking to the nearby border with Turkey. Akar said the additional observation posts in the region will enable Turkey to monitor the situation in the field. Akar added that the attacks by the Assad regime are worsening both radicalization and migration in the region.
(=) Turkish and Russian military chiefs discuss Idlib on phone… Turkish and Russian military chiefs had a phone call to discuss latest developments in Idlib, a de-escalation zone in northwestern Syria, the Turkish army said on Thursday. Turkey’s Chief of General Staff Gen. Yasar Guler and his Russian counterpart Gen. Valery Gerasimov also exchanged views on the current issues, the Turkish Armed Forces said on Twitter.
(=) Assad’s parliament recognizes 1915 events as genocide… Syria’s Assad-regime controlled parliament on Thursday recognized the 1915 events as genocide, as tensions run high in Idlib after the regime killed 13 Turkish soldiers and a civilian contractor in two attacks in the past weeks. The controversial decision was made just a day after President Erdogan announced that the Turkish military will hit all targets deemed a threat on its observation posts in the opposition-held Idlib province and accused the Assad regime of committing a massacre against civilians in Syria.
(+) Industrial production surged by 8.6% in December… Turkey’s industrial production posted an increase of 8.6% YoY in December 2019. In the month, all the three main sub-indices - mining and quarrying, manufacturing, and the electricity, gas, steam and air conditioning - rose by 9.8%, 9.1% and 0.3%, respectively. Industrial production is considered a vital indicator for the economy, as it is seen as a preliminary gauge for GDP growth. However, the figure up by 1.9% in December, compared with the previous month. Turkey’s industrial production also saw an increase of 5.8% YoY in the last quarter of 2019. Hence, industrial production index hit the 21-month-high in December. On an annual basis, all components of the index remained positive. The strong trend in the fields of capital goods, intermediate goods and high technology is an indication that we are on the right track for the future.
(+) Retail sales volume up 11% in December… The retail sales volume with constant prices in Turkey increased by 11% YoY in December 2019, according to official figures released on Thursday. In the month, the highest annual rise was seen in non-food sales - except automotive fuel - with 15.5%. The institute noted that automotive fuel sales, and food, drinks and tobacco sales followed it with 7.8% and 5.3%, respectively, year-on-year in December. Among non-food, the volume of computers, books, telecommunications equipment rose 21.9%, while textile, clothing and footwear sales climbed 17.8%, medical goods and cosmetic sales went up 8.9%, and electronic goods and furniture sales increased by 5.7% in the same period.
(=) Renewables account for almost half of Turkey’s installed power… Turkey’s renewable energy capacity has registered a remarkable surge over the last decade, with a steady increase of 11% per year amid a 7% annual capacity rise in other fuels for power generation. Turkey’s installed power capacity was calculated at a total of 91,267 megawatts (MW) by the end of last year, while only around a decade ago, the country possessed only 15,500 MW in renewable capacity. The installed capacity in renewables totals 45,000 MW, accounting for 49% of the total installed power, nearly half of it. According to data from the Turkish Electricity Transmission Corporation (TEIAS), solar power made up nearly 6.6% of the total installed power, with an approximate capacity of 6,000 MW. Meanwhile, wind power, with an installed capacity of 7,600 MW, accounted for 8.3% of Turkey’s aggregate installed power.
On the generation side, local and renewable resources including solar, wind, geothermal, hydropower and bio-waste, generated more than 44% of the total power. The total gross power generation was calculated at 303,674 billion kilowatts per hour. Surprisingly, Turkey's power generation from natural gas drastically dropped to below 20% last year. In 2018, natural gas accounted for nearly 30% of the total power generation, and the figure had stood close to 50% of that amount a decade ago. The figures also translate into the fact that 60% of the added installed power capacity has come from renewables. Thanks to this significant rise, Turkey now ranks sixth in Europe and 13th in the world in terms of renewable capacity.
The local and foreign investors in the Turkish renewable energy sector are expecting the announcement of a new scheme, as Turkey’s currently running feed-in-tariff program Renewable Energy Support Mechanism (YEKDEM) will expire at the end of this year. The new program will also apply feed-in tariffs although the figures will be different, especially for solar and wind power plants. Launched in 2011 to use the country's vast clean sources efficiently and support its development, YEKDEM offers a feed-in tariff of USD0.073 per kilowatt-hour (kWh) for wind and hydropower projects, USD0.105 for geothermal facilities and USD0.133 for solar energy and biomass geothermal plants. The local content clause is expected to be preserved in the new post-2020 investment mechanism. According to data from the International Energy Agency (IEA), Turkey’s renewable energy capacity of 42 gigawatts (GW) is predicted to reach 63 GW by 2024, placing Turkey among Europe's top five and 11th worldwide in terms of renewable capacity.
(=) Current account balance (Dec) to be announced at 10:00AM local time… Consensus estimates conducted by Bloomberg expects USD3bn deficit in the December current account balance.

Sector and Company News:

(=) ENKAI bought 719k lots of its own shares with TRY6.58-6.70 price range per share.

(=/+) KCHOL posted TRY1.11bn net income in 4Q19 (3% QoQ vs. -35% YoY) 26% above the consensus estimate. The main contribution to the bottom line sourced from the automotive segment of the company which increased its revenue by 34% QoQ and 18% YoY by solid international revenues and export contracts in addition to their strong opex control abilities. While YoY contraction in domestic demand, which led deterioration in bottom-line, maintains, the evident improvement in demand since Sep 19 assisted the automotive segment to recover slightly.

The most severe negative performance came from two main segments of the company which are finance (YKBNK) and energy (TUPRS) that constitutes the 14% and 22% of company’s NAV respectively. On the finance segment front, YKBNK’s consolidated net income was TRY350mn, down by 64% QoQ and -68% YoY. although YKBNK managed to expand its NIM benefiting the declining interest rate environment starting from the second half of 2019, its prudent stance on dealing with bad loans and amount of provisions earlier than 2020 affected its bottom line negatively. A further contraction in the net income was prevented by the well-controlled opex growth and solid increase in fees and commissions income.

The main player of energy segment, TUPRS has been adversely affected by the narrow crude oil differentials and lower crack margins in addition to planned RUP maintenance through 1H19. Higher natural gas prices in 2019 also played a cost elevation factor for the company’s energy segment. The segmental net income narrowed down by -81% YoY from TRY1,509mn in 4Q18 to TRY293mn in 4Q19. However, the 221% sharp increase in quarterly net income has not been sufficient to improve its outlook.

In terms of durables, the main challenges have been evident in lack of solid demand both in domestic and international markets. The consumer durables segment net income decreased by 20% QoQ from TRY280mn to TRY225mn and 14% from TRY261mn YoY.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 39.260 0 0 n.a 39.621 -1% 39.219 0%
EBITDA 2.571 0 0 n.a 3.325 -23% 2.912 -12%
margin 6,5% n.a n.a n.a 8,4% -1,8 pps 7,4% -0,9 pps
Net profit 1.110 877 1.169 27% 1.710 -35% 1.076 3%
margin 2,8% n.a n.a n.a 4,3% -1,5 pps 2,7% 0,1 pps
Net Debt/EBITDA (x) 2,10 1,86 24 bps 2,09 1 bps
EV/EBITDA 6,8 4,5 6,3
P/E 11,4 6,5 9,6
ROE (%) 12,1% 16,6% -5 pps 14,3% -2 pps
Net debt 22.480 25.236 -11% 23.938 -6%
Working capital 9.976 16.169 -38% 12.313 -19%
Δ in WC -2.336 1.276 -283% -351 565%
CapEx -1.976 -1.465 35% -1.012 95%
FCF to firm 3.444 724 375% 2.093 65%
Shareholders' Equity 36.282 33.284 9% 34.805 4%

Segment Breakdown 4Q19 4Q18 3Q19 QoQ YoY 2019 2018 YoY 9M19 9M18
Revenues 39,402 39,835 39,365 0.10% -1% 153,516 143,248 7% 114,114 103,414
Energy 37,537 41,546 40,425 -7% -10% 153,426 153,250 0% 115,890 111,704
Auto 22,884 19,361 17,063 34% 18% 74,448 65,716 13% 51,564 46,355
Durables 9,541 8,118 9,166 4% 18% 36,311 30,244 20% 26,769 22,126
Finance 11,247 12,803 11,953 -6% -12% 47,844 43,227 11% 36,596 30,424
Others 4,805 4,282 4,317 11% 12% 17,014 13,837 23% 12,209 9,555
Combined Total 86,014 86,111 82,923 4% 0% 329,042 306,275 7% 243,028 220,164
(-) Participations -44,115 -43,487 -41,324 7% 1% -166,126 -156,294 6% -122,011 -112,806
(-) Eleminations -2,498 -2,789 -2,235 12% -10% -9,401 -6,733 40% -6,903 -3,944
Net Income 1,110 1,710 1,076 3% -35% 4,391 5,537 -21% 3,281 3,827
Energy 293 1,509 91 221% -81% 1,145 4,007 -71% 852 2,498
Auto 1,329 1,149 1,034 29% 16% 4,227 3,851 10% 2,898 2,702
Durables 225 261 280 -20% -14% 977 881 11% 752 620
Finance 350 1,098 983 -64% -68% 3,738 4,734 -21% 3,388 3,636
Others 343 173 213 61% 98% 724 507 43% 381 334
Combined Total 2,540 4,190 2,602 -2% -39% 10,812 13,979 -23% 8,271 9,789
(-) Participations -995 -1,274 -1,239 -20% -22% -4,891 -5,554 -12% -3,896 -4,280
(-) Eleminations -436 -1,205 -287 52% -64% -1,530 -2,888 -47% -1,094 -1,683

Stand-Alone Net Cash 2,579 2,258 2,412 7% 14%
(417mn USD) (417mn USD) (417mn USD)