Turkey Wake up call: Macro and Political News, 21st 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 took a 2.98% dive yesterday as the impact of weakness in global markets was exacerbated by local risks related to rising tensions in Syria. After an indecisive open and some wobble around 119k levels until 11AM, index turned south and gradually dropped to 118k where it found some support. Afternoon session saw further selling pressure amid reports of clashes and casualties in Syria that pushed the index down to 115k that was tested twice before it staged a partial rebound until the close. Banking sector gauge lost 4.22% with YKBNK, VAKBN, and ISCTR underperforming their peers. EKGYO, TOASO, KOZAL, TKFEN, ASELS, THYAO, DOAS, and ENKAI were among the weakest of non-financials while BIMAS, EREGL, CCOLA, and LOGO were the only 4 gainers in the BIST100 space. Today, our macro agenda highlight will be the Fitch’s scheduled review of Turkey's sovereign rating for which any related announcements are expected to be released after markets close. 14 economists surveyed by Foreks predict Fitch to maintain its BB- rating as well as the Stable outlook. BIST seems off to another negative start given the sour mood in global markets and further weakness in lira (USDTRY now at 6.1030 vs 6.0973 at yesterday’s closing bell). U.S. futures are down about 0.5% in early trades on top of c.0.4% overnight losses from the time we left and Asian markets are mostly trading in the red.
Macro and Political News:
(-) Turkish forces and moderate groups launched operation against Syrian regime in southern Idlib… Turkish soldiers and moderate opposition groups in northwestern Syria’s Idlib on Thursday launched a military operation against Assad regime forces, which have been advancing south of the province to capture the last strong opposition bastion. Opposition groups trying to recapture settlements seized by the regime in southern Idlib province and captured the village of Neirab after fierce clashes. The village on the M4 highway is some 10 kilometres southeast of Idlib city center and 6 kilometres west of the strategic town of Saraqib. Targeting regime forces with artillery, opposition groups destroyed a tank and armoured vehicle belonging to the regime. A regime tank has also been seized by opposition groups.
Later in the day, the Turkish Defense Ministry announced that two Turkish soldiers were killed in an airstrike in Idlib and five others were wounded. The ministry added that more than 50 regime elements, five tanks, two armoured vehicles, two technical and one howitzer have been annihilated. Turkey's Communications Director Fahrettin Altun said in a tweet the attack was carried out by the Assad regime. The Russian Defense Ministry also made a statement saying that opposition groups broke through the lines of the Syrian regime forces in two areas of Idlib province. The Russian air force carried out strikes and allowed the regime forces to repel the attacks, the ministry was cited as saying. The ministry added that Turkey is providing artillery support to opposition groups.
(=) Merkel and Macron want to meet Erdogan and Putin to defuse tensions in Syria’s Idlib… German Chancellor Angela Merkel and French President Emmanuel Macron told Russia’s Vladimir Putin that they want to meet him and President Erdogan to defuse the crisis in Syria. Merkel’s office said that in their phone call with Putin, Merkel and Macron expressed their concern over the humanitarian catastrophe for residents of Syria's Idlib province. The two European Union leaders expressed their willingness to meet President Putin and President Erdogan to find a political solution to the crisis. The chancellor’s office said that Merkel and Macron called for the immediate end to the fighting and unfettered humanitarian access to people in need.
(=) Turkish Defense Min. Akar: US could send Patriot missiles to Turkey amid tensions with Syria’s Assad… Ankara on Thursday said the United States could send Patriot missiles to Turkey after Turkish soldiers were killed in attacks in Syria’s Idlib perpetrated by the Syrian regime. Defense Minister Hulusi Akar told CNN Turk broadcaster that there is the threat of airstrikes, missiles against Turkey, adding that there could be Patriot support. But Akar ruled out any troop support from the U.S. earlier on Thursday as two Turkish soldiers were killed in Idlib after an air strike also carried out by Damascus. Also, the minister criticized American support for terror groups YPG/PKK terrorists. Akar touched upon the F-35 warplanes, of which the U.S. has hindered Turkish acquisition, adding that Turkey provides crucial parts for the jet. He also underlined the strategic importance of NATO for the country, highlighting that Turkey has an operational power and ability greater than that of 30 NATO countries.
(=) Defense Min. Akar: Turkey has no intention to be at odds with Russia… Defense Minister Hulusi Akar said late Thursday that Turkey has no intention to be at odds with Russia, the negotiations will continue based on the terms set forth by the Sochi deal. Akar said that there was healthy dialogue between Russian and Turkish officials on the ground in Idlib and that Turkey would not accept any proposals to move its observations posts in the region. He added that they are discussing the use of Syrian air space in the northwestern region of Idlib and the problem can be overcome if Russia steps aside. Akar underscored that there is no doubt that the S-400 missile defense system will be activated, regarding Turkey's acquisition of the Russian system, which caused major diplomatic tensions with the U.S. He also emphasized that Turkey’s operations are well-received by Syrian locals.
(+) Ankara says talks with Russia on Syria warming but more needed… Foreign Minister Mevlut Cavusoglu said on Feb. 20 that there was some rapprochement with Russia in talks about Syria’s Idlib region, but Turkey is not at the desired point. FM Cavusoglu spoke in a televised interview that there are differences in the two sides’ positions. The Russian and Turkish delegations would hold further talks next week on how to reduce tensions in Syria’s Idlib province and that the Turkish and Russian leaders could meet too, if necessary. FM Cavusoglu noted that in negotiations with Russia, documents indicating mutual positions were exchanged. Recall, Syrian troops supported by Russian warplanes and special forces have been battling since December to eradicate the last rebel bastions in Idlib and Aleppo provinces in what could be one of the final chapters of the nine-year-old civil war. FM Cavusoglu said that the Sochi and Astana agreements, which were launched with the aim of establishing a ceasefire in Syria, did not disappear, but were harmed.
(=) Turkey, Russia and Iran to hold talks on Syria’s Idlib in March… Turkey, Russia and Iran will meet in Tehran next month to discuss the situation in northwestern Syria’s Idlib. According to an undisclosed official, Turkish and Russian delegations may hold preliminary talks in Ankara. The source also said, Turkey and Russia were discussing possible joint patrols around Idlib province as one option to ensure security there. Speaking on Thursday, Foreign Minister Mevlut Cavusoglu said there was some rapprochement with Russia in talks about Idlib, but the discussions were not at a desired level yet. Cavusoglu said Ankara and Moscow would intensify their talks in the coming days, adding that President Erdogan and his Russian counterpart Vladimir Putin may discuss the issue in person as well.
(=/+) Finance minister vows to continue fight against inflation and interest rates… The Treasury and Finance Minister Berat Albayrak told a meeting with businessmen in Turkey's southeastern province Gaziantep on Thursday. Albayrak underscored that Turkey has achieved success against inflation and high interest rates but needs to press on in the fight. Commenting on the CBRT’s 50bps reduction in interest rates, Albayrak said the bank continues to use all of its instruments to fulfill financial stability targets. To remind, the inflation rate is expected to hit 8.5% this year, as laid out in the New Economic Program (NEP) for 2020-2022 announced by the government last September. The CBRT recently reaffirmed its view that inflation will converge gradually this year as it made no changes in its midpoint inflation forecast for the end of this year and next. Policymakers at the bank project inflation at 8.2% in 2020.
Speaking to lawmakers from the ruling Justice and Development (AK) Party Wednesday in the capital Ankara, President Erdogan said the government maintains its determination to lower interest rates and inflation. In tandem, Albayrak highlighted the growth in the Turkey’s industrial production, the drop in borrowing costs, and the surge in the Purchasing Managers’ Index (PMI), all of which the minister said have contributed to the country re-entering the path to healthy growth.
Albayrak underscored that the improvement in macroeconomic indicators and markets will spread to every segment of the society, hence adding that Turkey will achieve a year-end growth of at least 5% within the frame of this mode. The minister attributed the success to the government measures as well as the strong coordination of all institutions in the economy and their support for the business world. The common market expectation for the fourth quarter estimates ranges from 4.5% to 5.0%. While the government forecasts 0.5% annual growth for the whole of 2019, its NEP targets a 5% annual growth rate for 2020, 2021 and 2022.
Later in his speech, the finance minister pointed to instruments that the government launched to support production and export-oriented sectors, including the Advanced, Productive, Indigenous, Industry (IVME) Financing Package. He noted that the government has provided TRY30bn to industrialists with the IVME package alone, and up to TRY50bn has been allocated. Albayrak added that another TRY35bn was allocated with the employment-oriented financing package ISTOD and that TRY23bn of it has turned into investments. The minister stressed that they will continue to support production and continue increasing employment with strong financing models, in addition to the IVME package.
(=/-) Turkish consumer confidence index down in February… Turkish consumers’ confidence in the economy fell 2.7% this month. On a monthly basis, the index was at 57.3 in February, down over one point from the previous month, the Turkish Statistical Institute (TurkStat) announced. In January, the consumer confidence index rose slightly 0.1% to 58.8 versus December 2019. In February, the index for general economic situation expectations fell to 75.9 from 77.4 in January. The financial situation expectation of household index dropped 3.4% from the previous month to stand at 76.8 in February. Also, the probability of saving index in the next 12-month period which was 21.6 in January increased by 4.2% to 22.5 in February. The number of people unemployed expectation index also fell 5.3% to stand at 53.8 month-on-month in February.
(=) Short-term external debt stock at USD118bn in December… Turkey’s short-term external debt stock amounted to USD118.2bn as of the end of December. Turkey’s short-term external debt stock soared by 4.3% in December versus the end of 2018. Official data revealed that the currency breakdown of the debt stock was composed of 48.1% U.S. dollars, 30.9% euros, 13.3% Turkish liras and 7.7% other currencies. Banks’ short-term external debt stock posted a decrease of 1.7% to USD56.2bn and other sectors’ short-term external debt stock rose by 6.6% to USD53.6bn during the same period. The rest of the amount - some USD8.4bn - belonged to the CBRT. From the borrowers side, the short-term debt of public sector, which consists of public banks, decreased by 3.1% to USD21.8bn. And the short-term debt of private sector increased by 3.6% to USD88bn compared to the end of 2018. Short-term foreign exchange (FX) loans the banks received from foreign countries fell by 29.7% to USD7.8bn. Also note that non-residents’ Turkish lira deposits decreased by 2.9% and was recorded as USD13.6bn in the same period.
(=) Central government gross debt stock hits USD218bn… The gross debt stock of Turkey’s central government stood at TRY1.33tln (around USD218bn) at the end of January. The Treasury and Finance Ministry announced that the figure was 21.7% higher than the corresponding month last year. The gross debt stock includes the outstanding debt of public sector institutions, the Central Bank, private companies, and households. More than half of the debt stock is denominated in local currency, while 49.5% is in foreign currency. A total of 57% of the debts were domestic and the rest were external. The stock of Treasury receivables stood at TRY17.8bn (USD2.9bn) as of Jan. 31.
(=) Fitch to review Turkey’s Sovereign debt rating… Fitch ratings has a scheduled review Turkey’s sovereign rating today and any related announcements are expected to be released after markets close. Fitch could affirm Turkey’s BB- rating with negative outlook with stressing the increased risk of TRY depreciation amid relatively high geo(political) risks as well as the current front-loading policy rate cuts.

Sector and Company News:

ENKAI bought 836k lots of its own shares with TRY6.77-6.80 price range per share

The CMB approved the merger of Oyak Cement companies under Mardin Cimento (MRDIN). Recall that Adana Cimento (ADANA, ADBGR, ADNAC), Aslan Cimento (ASLAN), Bolu Cimento (BOLUC) and Unye Cimento (UNYEC) will be merged under another Oyak Cement company Mardin Cimento (MRDIN). The recently announced merger ratios as follows: ADANA 7.0311, ADBGR 5.2370, ADNAC 2.0348, ASLAN 36.6048, BOLUC 3.3089, MRDIN 5.4336, UNYEC 3.7245.

(=/+) TCELL posted TL756mn net income came in 4Q19, slightly better than consensus estimate of TL739mn and higher than our estimate of TL679mn. Top line and EBITDA are inline with both consensus and our estimates. Consensus EBITDA calculations include net impairment loses on financial and contract assets as company guided, hence TL2,753mn estimate is totally in-line with the company’s TL2,754mn announced EBITDA in 4Q19, which is also inline with our estimates. Net income in 4Q19 indicates 13% YoY and 6% QoQ decline, mostly due to the one-off tax settlement expense written in the quarter. On the other hand, the company continued its strength on the operational front in 4Q19.

The company’s revenue came in at TL6,684mn, indicating a 19% YoY and 1% QoQ improvement, thanks mostly to the strong ARPU (average revenue per unit) performance of Turkcell Turkey, supported by upsell efforts, increased data usage and larger postpaid subscriber base. Mobile subscribers’ YoY net additions in the postpaid side was at 1.5mn, while on the prepaid side, the company lost 2.7mn subscribers YoY due mostly to The Information and Communication Technologies Authority’s (ICTA) regulation requiring the deactivation of prepaid lines which lack residency documents by the 6th month of subscription. Turkcell deactivated 1.9mn prepaid lines accordingly. The share of more profitable postpaid subscribers continue its increase in 4Q19 to 62% (6pp rise YoY), supporting the robust mobile segment blended ARPU at TL45.9,indicating 22.7% YoY rise. Fiber residential ARPU has also increased by 21% to TL70.4mn in 4Q19. Mobile data usage also continued its upward trend, up by 53% YoY to 9gb/user in 4Q19.

The company’s EBITDA, including net impairment loses on financial and contract assets came in at TL2,754mn, up by 23% YoY with the strong top line performance and proactive operational expense management. Accordingly the company’s EBITDA margin improved 1.4pp YoY to 41.2%. Turkcell’s deleveraging efforts continue and net debt/EBITDA decreased from 1.40x in 4Q18 to 0.94x in 4Q19 thanks to the strong cash generation in the period. The company’s net debt position of TL12,736mn in 4Q18 declined to TL10,067mn in 4Q19.

All in all, the results are inline at the operational level and slightly better on the net income front with the lower than expected financial expense. The company continued its strong operational performance in 4Q19 and we believe results will have a slightly positive impact on the share price. Turkcell also shared its expectations for 2020 and the guidance is in-line with 2020-2022 outlook that was announced in November 2019. Accordingly, YoY revenue growth is expected to be between 13-16% (Global est. 14.1%), EBITDA margin is expected to be between 39-42% (Global est. 41.2%) and operational CAPEX/sales ratio is expected to be between 16-18% level.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 6,684 6,600 6,647 1% 5,626 19% 6,587 1%
EBITDA 2,869 2,753 2,879 4% 2,303 25% 2,959 -3%
margin 42.9% 41.7% 43.3% 1.2 pps 40.9% 2 pps 44.9% -2 pps
Net profit 756 739 679 2% 864 -13% 801 -6%
margin 11.3% 11.2% 10.2% 0.1 pps 15.4% -4 pps 12.2% -0.9 pps
Net Debt/EBITDA (x) 0.94 1.40 -46 bps 0.95 -2 bps
EV/EBITDA 3.9 4.3 4.1
P/E 9.9 13.2 9.6
ROE (%) 18.0% 12.7% 5 pps 19.3% -1 pps
Net debt 10,067 12,736 -21% 9,700 4%
Working capital 364 -54 -777% 1,001 -64%
Δ in WC -637 -817 -22% 48 -1427%
CapEx -2,156 -1,783 21% -1,447 49%
FCF to firm 1,116 1,298 -14% 1,235 -10%
Shareholders' Equity 18,046 15,922 13% 17,376 4%

(-) TKFEN posted TL20mn net loss in 4Q19, worse than both consensus estimate of TL264mn and our estimate of TL288mn mostly due to the lower than expected profitability. Top line is inline with our estimates and slightly lower than the consensus estimates, yet EBITDA missed both consensus and our estimates of TL368mn and TL393mn respectively at TL125mn in 4Q19. The company had announced a net profit of TL421mn in 4Q18 and TL258mn in 3Q19. Net loss of TL20mn mostly stemmed from lower operating profit margins, especially in the contracting segment.

The company’s revenue came in at TL3,307mn, indicating a 13% YoY decline, while it was up by 11% QoQ. The contracting segment’s revenue was down by 24% YoY at TL2,293mn, while agri industry segment’s revenue was up by 20% YoY at TL968mn in the same period. Backlog of contracting group was at USD1.7bn as of end 4Q19, down by 38% compared to the previous year-end.

The company’s EBITDA came in at TL125mn, down by 75% YoY and 69% QoQ in 4Q19 with the weaker profitability especially in the contracting segment. EBITDA in contracting segment was down from TL385mn in 4Q18 to TL43mn in 4Q19, while agri industry’s EBITDA declined by 41% YoY to TL96mn in the same period. Accordingly EBITDA margin was down from 13.4% in 4Q18 to 3.8% in 4Q19, and contracting segment’s margin decreased to 1.9% from 12.8%, while agri industry margin was down from 20.1% to 9.9% in the same period. The company continued to be in net cash position as of 4Q19 at TL3,259mn, slightly improved from TL3,140mn in 3Q19.

All in all, the results are worse than both consensus and our estimates on operational level, and this could reflect negatively to the share price. The company also revealed its 2020 expectations. Accordingly revenue is expected to be at TL12,047mn, down by 17% YoY, EBITDA is expected to be at TL1,305mn, down by 32% and EBITDA margin is expected to be at 10.8% from 13.2% in 2019. Net profit is estimated to be at TL842mn indicating a decrease of 40% YoY in 2020.

On the other hand, the Company Board decided to propose a dividend of TL426.5mn which corresponds to TL1.15268 gross DPS to commence on 27 April 2020, to the approval of the General Assembly. The proposed dividend amount indicates a 6.5% dividend yield. The company will hold a conference call today at 4.30 p.m.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 3,307 3,450 3,319 -4% 3,789 -13% 2,991 11%
EBITDA 125 368 393 -66% 510 -75% 401 -69%
margin 3.8% 10.7% 11.8% -6.9 pps 13.4% -9.7 pps 13.4% -9.6 pps
Net profit -20 264 288 -107% 421 -105% 258 -108%
margin -0.6% 7.7% 8.7% -8.2 pps 11.1% -11.7 pps 8.6% -9.2 pps
Net Debt/EBITDA (x) -1.70 -2.36 66 bps -1.36 -34 bps
EV/EBITDA 1.7 2.9 1.5
P/E 4.6 5.5 3.5
ROE (%) 26.2% 32.1% -6 pps 34.8% -9 pps
Net debt -3,259 -3,463 -6% -3,140 4%
Working capital 72 -49 -247% 236 -70%
Δ in WC -164 23 -828% -154 6%
CapEx -123 -83 48% -48 159%
FCF to firm 161 351 -54% 431 -63%
Shareholders' Equity 5,429 4,368 24% 5,346 2%

TRYmn – TKFEN Segmental Breakdown Contracting Agri Industry Other
4Q19 4Q18 4Q19 4Q18 4Q19 4Q18
Revenues 2,293 3,017 968 809 46 44
EBITDA 43 385 96 163 -16 -25
Net Profit -78 244 52 274 6 -108


BRSA posted its weekly banking data on Thursday. According to the report, total loans increased by 2.28% y-t-d from TRY2.64trl to TRY2.70trl. The largest increase has been evident in consumer loans segment, up by 4.62% while commercial loans and SME loans continued its lagging trend since the beginning of the year, up by only 1.81% and 2.14% respectively; almost half of the consumer loans growth. Fx indexed loans continued its downward trend by -7.83%, in-line with lack of banks’ confidence in Fx - indexed instruments.

On the deposits front, total deposits increased by 3.24% y-t-d. While real persons’ deposits inched up slightly by 150 bps, the largest upward movement has been evident in official and other institutions segment by 19.71% from TRY154.3bn to TRY185bn. Total Fx deposits of residents declined by 1% m/m while corporates contributed by -131 bps, the decline in real persons’ Fx deposits remained limited by -83 bps m/m.

(TL, mn) 14/02/2020 w/w y-t-d
Total Loans 2,707,225.06 0.58% 2.28%
Consumer Loans 488,959.44 1.04% 4.62%
Housing 205,072.33 0.60% 2.91%
Vehicle 6,976.36 0.26% -1.06%
GPL 276,910.76 1.38% 6.07%
Consumer Credit Cards 118,195.73 1.13% 1.20%
Commercial and Other Loans 2,100,069.89 0.44% 1.81%
Installment Commercial Loans and Corporate Credit Cards 443,089.38 0.56% 2.00%
SME Loans 624,816.77 0.50% 2.14%
Fx Indexed Loans 10,883.12 -1.25% -7.83%


Total Deposits 2,650,542.90 1.73% 3.24%
Natural Person 1,618,995.59 0.19% 1.49%
Demand 379,557.80 -0.41% 5.39%
Time 1,239,437.79 0.37% 0.35%
Commercial Institutions 846,556.47 1.90% 3.54%
Demand 242,568.98 2.95% 9.84%
Time 603,987.49 1.48% 1.21%
Official and Other Institutions 184,990.84 16.50% 19.71%
Demand 51,844.64 59.84% 52.87%
Time 133,146.20 5.37% 10.39%
Deposits Subject to Insurance 713,355.00 0.35% 2.06%


(USD, mn) 14/02/2020 w/w y-t-d
Total FX Deposits of Residents 176262.41 -0.14% 0.78%
Real Persons 108246.18 -0.34% 0.17%
Dolar ($) 73138.30 -0.71% -1.18%
USD Eqv. of Euro 31915.20 0.09% 1.83%
Corporates 68016.23 0.17% 1.76%
Dolar ($) 36261.10 -2.19% -2.75%
USD Eqv. of Euro 36560.20 0.92% 5.17%


(=/+) BIMAS sold its 14% share in Aktül Kağıt, a subsidiary manufacturing cleaning paper, to Omer Hulusi Topbas, a BIMAS Board Member, for TL 155mn

CRFSA posted TL64mn net loss in 4Q19 vs. TL216mn in 4Q18. The company’s revenues grew by 23% YoY with 9.4% EBITDA margin, compared to 4.5% EBITDA margin in 4Q18. Net Debt/EBITDA improved to 2.9x from 3.4x a quarter ago.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 1.742 n.a n.a n.a 1.416 23% 1.706 2%
EBITDA 164 n.a n.a n.a 64 155% 159 3%
margin 9,4% n.a n.a n.a 4,5% 4,9 pps 9,3% 0,1 pps
Net profit -64 n.a n.a n.a -216 -70% -79 -19%
margin -3,7% n.a n.a n.a -15,2% 11,6 pps -4,7% 1 pps
Net Debt/EBITDA (x) 2,89 4,31 -143 bps 3,37 -49 bps
EV/EBITDA 11,0 27,1 9,1
P/E -12,9 -211,9 -5,2
ROE (%) 113,6% -21,6% 135 pps 219,1% -105 pps
Net debt 1.579 460 243% 1.510 5%
Working capital -836 -721 16% -787 6%
Δ in WC -49 -183 -73% 4 -1243%
CapEx -61 -55 12% -35 76%
FCF to firm 165 189 -13% 139 19%
Shareholders' Equity -302 53 -667% -226 34%