Turkey Wake up call: Macro and Political News, 27th February

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Wake – up call

BIST climbed 0.71% yesterday as Turkish stocks demonstrated some resilience despite the coronavirus related weakness in global markets. Index had an indecisive start and then tested the 113.2k level around noontime before staging a rebound. Losses were erased after 2:30PM, followed by further gains into the close. Banks gained 0.92% on average with VAKBN, AKBNK, and ISCTR leading the pack while GARAN was under pressure. EREGL, KRDMD, BIMAS, FROTO, TOASO, KCHOL, and MPARK topped the non-bank gainers while THYAO, PGSUS, TAVHL, TCELL, TTRAK, and OTKAR were among the weaker spots. Today, our local macro agenda involves TurkStat’s February’19 Economic Confidence Index due at 10AM local time. The index had climbed 0.6% on a sequential basis to a 18-month high of 97.1 in January. We expect another weak start for the BIST as ongoing worries about the virus outbreak are extending the exodus from risk assets. Lira is weaker with USDTRY pair at 6.1620 in early trades vs 6.1525 at yesterday’s closing bell. U.S. futures are down 1.3% this morning on top of their 1.1-1.2% overnight losses from the time we left and Asian markets led by Japan are almost all trading in the red.
Macro and Political News:
(=) Erdogan: Turkey running out of patience with Assad regime… President Erdogan said, Turkey is running out of patience with the Assad regime forces besieging the Turkish observation posts in Syria’s Idlib as the deadline for the regime is approaching. Speaking at the ruling Justice and Development (AK) Party’s parliamentary group meeting, President Erdogan highlighted Turkey’s determination to find a solution to the ongoing crisis in Idlib, adding that Turkey has been trying to facilitate all efforts to prevent a humanitarian crisis in Syria’s Idlib, while Russia refuses to see the grave situation. Erdogan underscored that Turkey demands the regime forces end their attacks as soon as possible and retreat behind Turkish observation points. He stressed that the deadline for the regime is approaching, reiterating that after the end of the month, Turkey will do anything to secure its observation points in Idlib. Also, he said that Turkey will not take a single step back and push the regime out of the delineated zone. He continued by saying that one of the major problems now is that Turkey is unable to use the airspace over Idlib, which is controlled by Russia.
(=) Turkish FM: Turkey expects Russia to facilitate ending Assad regime attacks in Idlib… Foreign Minister Mevlut Cavusoglu said that Turkey’s expectation from the Russian delegation in Wednesday’s meeting is to ensure the Bashar Assad regime permanently halts attacks in Idlib. The foreign minister noted that the regime forces need to retreat behind the lines specified in the Sochi agreement. He continued by saying that this will not be possible without establishing a cease-fire in the area, and the delegations will discuss details of this in the meeting. FM Cavusoglu noted that the delegation that will attend Wednesday’s meeting will include military and intelligence officials.
(=) Erdogan: Ankara won’t compromise on Sochi deal as deadline for regime’s withdrawal nears… President Erdogan said that Turkey has no intention to renegotiate the Sochi deal reached with Russia, warning the Bashar Assad regime of the approaching deadline for withdrawal from the delineated zone. Erdogan stressed that Turkey would do whatever necessary if they don’t, underlining that it is not possible for Turkey to compromise on this issue. Erdogan underlined that the Turkish army is not an invasion force in Syria since it was invited by Syrian people to the country.
He said that Turkey has a legitimate presence in Syria, a right that is given to the country with Adana agreement which was signed between Turkey and Syria in October 1998, which stated that Syria would not allow any PKK activities within its borders and would block any terror activities that would threaten Turkey’s sovereignty. Under the agreement, Syria recognized the PKK as a terrorist group and banned all its activities and those of its affiliated groups within the country's territory. The Syrian regime guaranteed that it would not permit any activity which emanates from its territory aimed at jeopardizing the security and stability of Turkey.
(=) Turkey will work out use of airspace in Syria’s Idlib province… President Erdogan on Wednesday said that Turkey is looking for a way it can use the region’s airspace. Erdogan reiterated that the biggest problem is that Turkey is not able to use the airspace over Idlib. just south of Turkey's border. He added that they will hopefully figure out something soon for this. Erdogan reiterated that Turkey will definitely take the Assad regime out of the borders.
The region’s airspace is currently being controlled by Russia and it has been supporting the regime’s offensive against the Syrian opposition forces, which Turkey backs in the conflict. The president also ruled out Ankara taking any step back in Idlib and recalled the end-of-February deadline he set for the Syrian regime’s withdrawal from the region, highlighting that Turkey will not take the smallest step back in Idlib but it will certainly push the regime outside the borders.
Erdogan also repeated his call for Damascus to stop its attacks as soon as possible and pull back from Turkish army outposts by the end of February, reminding that the deadline for those who besieged Turkish observation towers has been expiring. Erdogan underlined that Turkey’s demand is the regime to withdraw to boundaries set by the Sochi Agreement, meaning behind Turkey’s observation posts, reiterating Turkey’s plan to liberate observation posts from the encirclement by the end of this month, one way or another.
To remind, Turkey and Russia held several rounds of talks between delegations as well as the presidents, yet no concrete result has been reached. Turkey, Germany and France also made efforts for a four-way summit with Russia set for March 5. The Kremlin ruled out the possibility and said on Feb. 25 that it was working on a trilateral summit with Turkey and Iran. Erdogan, however, said that his Russian counterpart Vladimir Putin may still come to Turkey next week for a bilateral meeting. On his phone calls last week with Putin, German Chancellor Angela Merkel, and French President Emmanuel Macron, in which the leaders agreed on a meeting for Idlib on March 5, Erdogan said the venue of the meeting will probably be Istanbul. He said whether the meetings would be bilateral or quadrilateral would be agreed on later.

Sector and Company News:
(=) SAHOL’s BoD will propose TL 0.33 gross DPS to its AGM, yielding 3.51%. (Expected dividend payment date: April 1, 2020)

Vakıfbank Personeli Ozel Sosyal Guvenlik Hizmetler sold 4.4mn lots of GUSGR shares between TL2.7-2.8 and its share declined to 5.19% from 5.99%.

(+) CCOLA posted TL1mn net income in 4Q19, significantly above the consensus of TL148mn net loss and our estimate of TL112mn net loss. Revenues grew by 11% YoY to TRY2,220mn, in line with the consensus of TRY 2,202mn and our estimate of TL2,177mn, while CCOLA’s EBITDA increased by 80% YoY to TL251mn, significantly above the consensus of TL139mn and our estimate of TL185mn. CCOLA’s EBITDA margin of 11.3% in 4Q19 was higher than the consensus average of 6.3% and our estimate of 8.5%. Better than expected operational profitability among all countries it operates is mainly attributable to effective supply chain management coupled with economies of scale. While its domestic operations were stronger YoY, international operations contributed the consolidated EBITDA slightly negative, mainly due to higher fixed costs in Pakistan as a result of softer volumes as well as lack of Turkmenistan’s contribution (production stoppage).
In 4Q19, consolidated sales volume increased by 0.8% YoY to 230mn UC, supported by 4.9% YoY and 14.5% YoY growth in Sparkling and Stills segments. However, Water and NRTD Tea categories declined by 13.0% YoY and 9.2% YoY. Volume growth from CCOLA’s core operations (exc. NRDT Tea) was 2.4% YoY in 4Q19. Domestic volume was up by 4.9% to 126 million UC, mainly derived by favourable weather conditions. International operations contracted by 3.6% YoY to 104 million UC volume. Pakistan volume was down by 15.2% YoY in 4Q19, due to continued slowdown in the overall industry and price increases in 3Q19 as well as de-stocking at distributors at year-end. Volume from its Middle East operations contracted by 3.3% YoY. Sales volume in Iraq declined by 4.8% YoY, reflecting the political unrest in the country, while sparkling category increased by 5.7% YoY. Sales volume in Jordan grew by 7.3% YoY, supported by new cooler/refrigerator placements. Central Asia registered 11.1% YoY volume growth led by double-digit growth in Kazakhstan, Azerbaijan and Tajikistan markets. Sales volume growth in Kazakhstan was 16.2% YoY, cycling 6.7% YoY growth in 4Q18. New year consumer promotions and successful consumer activities contributed to the growth in the region. As a result, total consolidated volume reached to 1,316mn UC (Turkey: 662mn UC + International: 654mn UC) with a 0.1% increase in 2019, exceeding the Company guidance but it was in-line with our estimate of 1,323mn UC (Turkey: 659mn UC + International: 664mn UC).
In 2020, management expects 3-4% consolidated volume growth with a flat domestic operations and a single digit volume growth in international operations. FX adjusted revenue growth is estimated as 15-18% with a flat/slight decline outlook in EBITDA margin. Management has also a CapEx target of 6-8% of revenues. (Guidance does not include Dogadan Tea segment, which is expected to be sold by CCI in 2020) Management guidance is higher than our estimate.
Net debt/EBITDA retreated to 1.2x YE19, from 1.5x in YE18. Strong cash generation as well as declining CAPED requirements supported net debt/EBITDA.
CCOLA trades at 2020E 5.7x EV/EBITDA multiple, implying around 55% discount compared to its global peers.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 2.220 2.202 2.177 1% 2.001 11% 3.908 -43%
EBITDA 251 139 185 81% 104 140% 856 -71%
margin 11,3% 6,3% 8,5% 5 pps 5,2% 6,1 pps 21,9% -10,6 pps
Net profit 1 -148 -112 -100% 156 -100% 556 -100%
margin 0,0% -6,7% -5,1% 6,8 pps 7,8% -7,8 pps 14,2% -14,2 pps
Net Debt/EBITDA (x) 1,16 1,54 -38 bps 1,17 0 bps
EV/EBITDA 6,1 5,8 5,1
P/E 11,7 24,5 7,6
ROE (%) 14,8% 5,7% 9 pps 17,8% -3 pps
Net debt 2.669 2.815 -5% 2.509 6%
Working capital 300 260 15% 475 -37%
Δ in WC -175 -339 -48% -349 -50%
CapEx -112 -240 -53% -194 -42%
FCF to firm 300 179 68% 903 -67%
Shareholders' Equity 6.515 5.599 16% 6.302 3%

Volume (mn uc) 4Q18 3Q19 4Q19 YoY Δ QoQ Δ 2018 2019 YoY Δ
Turkey 120 206 126 5% -39% 650 662 2%
International 108 207 104 -4% -50% 664 654 -2%
YoY Volume Δ 4Q18 3Q19 4Q19 2018 2019
Sparkling -2,2% -4,5% 4,9% 6,8% 0,3%
Stills -4,9% 1,5% 14,5% 11,6% 5,1%
Water 7,0% 0,1% -13,0% 6,0% -0,1%
Tea (NRTD) 11,5% 46,3% -9,2% -1,2% -4,9%
Total 0,6% -1,0% 0,8% 6,3% 0,1%