Turkey Wake up call: Macro, Political and Equity News, 2nd March

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 lost another 4.01% on Friday as the Damascus regime attack on Turkish troops in Syria as well as the global coronavirus sell-off extended the recent pressure on Turkish stocks that plunged 9.27% for the whole week. Index opened gap lower at 99.3k on Friday morning amid panic selling and lack of buyers, but quickly rebounded to 105k in a matter of minutes. Further gains took the BIST100 to 107.8k in early afternoon followed by some pull-back to 106k where it closed. Banks were again in the eye of the storm and lost 6.35% on average. AEFES, MPARK, KOZAL, TAVHL, ULKER, KCHOL, SAHOL, and TTKOM topped the decliners while BIMAS, FROTO, TOASO, and SOKM were among the rare gainers for the day. Today, our macro agenda involves February'20 PMI that will be announced at 10AM local time. The index had climbed 3.6% on a sequential basis to 51.3 in January in its first print above the 50 no-change mark in 22 months. Rise in new orders as well as export business after a five-month sequence of moderation had led to an increase in output at the fastest pace in almost 2 years along with additional hiring, underpinning the headline index. Separately, BRSA will release the banking industry aggregates for January'20 at 2PM. Cumulative industry profits stood at TL3.204bn in January'19 and at TL2.684bn in December'19. BIST seems headed into a gap higher start as the global markets are finally staging a rebound on hopes that major central banks will intervene to support the economies. U.S. futures are up 0.5% in early trades on top of the 2.1-2.7% overnight surges from the hour we left on Friday. Asian equities are almost all trading in the green with gains in China surpassing 3%. Lira is also a bit stronger with the USDTRY pair at 6.2352 vs 6.2406 at Friday’s closing bell. Meanwhile, the short-selling ban in the BIST imposed by the capital markets regulator CMB on Friday remains in place as of this morning.
Macro and Political News:
(-) Turkey keeps gate open for refugees to enter EU… The number of refugees who decided to move toward Europe, making it to the Turkish-Greek border gates reached over 100K since Turkey’s change of policy regarding the border crossings last week, Turkey’s presidential communications director Fahrettin Altun said on Sunday. This number may increase in the following days, according to Fahrettin Altun. Mr. Altun said that Turkey continues to implement “temporary protection” for Syrians in Turkey and that none of our Syrian brothers and sisters have been asked to leave. He added that if they choose to stay, they can; if they choose to leave, they can. Altun underscored that Turkey has modified its policy and will no longer stop refugees from leaving Turkey. Altun also underlined that Turkey can no longer accept additional refugees from the Idlib region in Syria and yet, still, the country is ready for any irregular migration flows from its southern border. He expressed Turkey’s disappointment over the international community that left Turkey to face their refugee burden alone. According to Altun, despite many calls that have been made from Turkey to the Western world seeking assistance to handle the refugee issue, these cries for help have been mostly ignored, leading the country to eventually take such a decision to let the refugees go. Recall, Turkey has intercepted 1.2 million irregular migrants and over 27,000 human traffickers over the past five years, according to data by the Directorate General of Migration Management. Also note that more than a million Syrians have moved toward the Turkish border due to Assad regime attacks..
(-) Turkish military downs two Assad regime jets, hits air bases in northwestern Syria… Two Assad regime Su-24 jets were downed in a dogfight with Turkish planes over northwestern Syria’s Idlib province, the Defense Ministry said Sunday. The ministry noted that two air defense systems, including one which earlier downed a Turkish drone, was destroyed. The Turkish Armed Forces continued Sunday to destroy regime targets in Syria, as part of an operation launched in the wake of deadly regime attack on Turkish troops in Idlib. On the other hand, the Bashar Assad regime downed a Turkish drone in Syria’s northwest Sunday after announcing the closure of airspace in the region. The Syrian regime said it was closing the airspace for aircraft and drones over northwestern Syria, mainly Idlib, which is the focus of a month-long campaign to retake control of the last opposition stronghold. The regime said in a statement that any aircraft violating our airspace will be treated as hostile that must be shot down.
Also note that the Turkish Armed Forces targeted the Syrian regime’s military airport in Aleppo, according to local sources on Sunday. Al-Nayrab military airport, on the outskirts of Aleppo city center, was known as one of the bases that the Assad regime frequently used in the attacks against the Turkish Armed Forces and civilians in Idlib, northwestern Syria. The regime army transported aircraft and equipment to Al-Nayrab from the Kuweires military airport in eastern Aleppo, which was targeted by Turkish forces the previous day, it added. Local sources said the regime's range of action has been further restricted as the Al-Nayrab military airport has been made unusable.
(=) Russia denied involvement in airstrikes on Turkish troops in Idlib… Russian planes did not carry out strikes on the area of Idlib where Turkish units sustained aerial bombardments, according to Russia’s Defense Ministry, after 33 Turkish soldiers were killed in a brutal attack by the Moscow-backed Assad regime on Thursday night. The statement said Moscow has done everything to impose a full cease-fire by the Syrian regime since the country learned of Turkish casualties. The ministry said Turkey had not informed the Russian military about the presence of Turkish soldiers in the area of Syria’s Idlib.
(=) Defense Minister: Turkish troops attacked despite coordination with Russia… Hulusi Akar, Turkey’s Defense Minister, said on Friday that Thursday’s deadly attack on Turkish troops took place although the location of our forces was known by Russia. Defense Minister Akar told reporters that this attack occurred even though the locations of our troops had been coordinated with Russian officials in the field. Akar added that despite warnings after the first strike, the Syrian regime unfortunately continued its attacks, even targeting ambulances. He stressed that there were no armed groups around Turkish troops during the deadly Assad regime attack.
(=) Defense Minister: At least 200 regime targets hit with heavy fire after the attack… Defense Minister Hulusi Akar said Friday that after an unwarranted attack launched by the Assad regime, Turkey responded with heavy fire, hitting at least 200 regime targets with armed UAVs and ground forces, neutralizing 329 Syrian regime troops in the process. Akar said that the attack was carried out despite the locations of Turkish troops having been previously coordinated with Russian authorities, adding that no armed groups were near Turkish troops during the regime strike. Moscow earlier said Turkish troops were in the battle formations of terrorist groups. The minister stated that attacks on Turkish soldiers continued despite warnings after an initial strike, with even ambulances being hit. Five helicopters, 23 tanks, 10 armoured vehicles, 23 cannons and howitzers of various types, five ammunition trucks and unmanned aerial vehicles were hit by the Turkish army in response to the attacks.
(=) Turkey announces Operation Spring Shield in Idlib, Syria… Turkey launched a fresh Syria operation in the wake of the recent regime attack on Turkish troops in Idlib, said the country’s defense chief on Sunday. Defense Minister Hulusi Akar said that “Operation Spring Shield”, which was launched following the heinous attack on Turkish troops on Feb. 27 is successfully being carried out. On the details of the operation, Akar said a drone, eight helicopters, 103 tanks, 19 armoured personnel carriers, 72 cannons/howitzers/multiple rocket launchers, three air-defense systems, 15 anti-tanks/mortars, 56 armoured vehicles, nine ammunition depots and some 2,200 regime soldiers and elements have been neutralized so far. He stressed that Turkey’s only target during the operation would be regime soldiers and elements in Idlib under the right to self-defense. Also, Akar said talks between Ankara and Moscow are ongoing, adding that Turkey’s expectation from Russia at this point is to fulfil its commitments as the guarantor country, and in this context, to use its influence on the regime to make it halt its attacks and withdraw to the borders set with the Sochi agreement. He highlighted that Turkey does not aim a face-off with Russia and its only aim is to stop the regime massacres and to prevent radicalization and migration. Akar stressed that Ankara wants a lasting cease-fire and stability in Syria; however, he vowed to intensely retaliate any attack on Turkish troops and observation posts in Idlib.
(-) Russia says no longer guarantees safety of Turkish aircraft in Syria… The head of the Russian military’s Reconciliation Center in Syria said Sunday that Russia can no longer guarantee the safety of Turkish aircraft flying in Syrian airspace. In a statement released late Sunday, the Russian top ranking official said that in view of the sharp exacerbation of tensions in the air space over Idlib, the Syrian regime was forced to declare it closed, adding that in this situation, the Russian troops’ command can’t guarantee security of flights of Turkish aircraft in the skies over Syria.
(=) Erdogan: Russia should stay out of Turkey's fight against Assad regime… President Erdogan said Saturday that Ankara has asked Moscow to stay out of its fight against Assad regime forces in Idlib as Turkish forces continued to target regime positions in northern Syria. President Erdogan told a group of the ruling Justice and Development (AK) Party deputies at a meeting in Istanbul over the weekend. He said he asked Putin for Russia to leave Turkish forces alone to fight the regime.
The president said Turkey is not seeking an adventure or an opportunity to expand its territories but simply protecting its territorial integrity against the Assad regime. He underlined that if Ankara does not clear borders from terrorists now, Turkey might have to fight bigger wars inside the country later on. Erdogan added that the Turkish Armed Forces (TSK) managed to break the siege in the south of Idlib completely and blamed the regime for pushing Turkey to take military action against it at such large scale. Erdogan stated that he told both Putin and U.S. President Donald Trump during separate phone conversations on Friday night that their countries did not fulfil promises made to Turkey in the region.
Erdogan also said the TSK has destroyed seven chemical sites, and nearly 300 military vehicles, including 94 tanks, and killed more than 2,100 Assad troops, adding that several sites, including airfields, ammunition depots, air defense systems, hangars and chemical weapon production facilities were put under heavy fire and destroyed.
(+) Erdogan and Putin agree to meet face to face… Presidential Communications Director Fahrettin Altun said that Erdogan and Russian President Vladimir Putin had agreed during a phone call to meet face to face as soon as possible. Altun reiterated that Russia is the sole party responsible according to the Sochi agreement in the context of Article 3 which requires Russia to halt the Assad regime’s assaults in Idlib. Altun also said that during the phone conversation with Trump, President Erdogan will convey Turkey’s messages in order to work with the U.S. to maintain Syria’s territorial integrity and keep a political solution on the table. According to Altun, Erdogan also said Turkey expects that the regime will be obliged to comply with the Sochi agreement.
Turkish officials have been urging the international community to take action to prevent another humanitarian crisis as the Assad regime continues its flagrant attacks on civilians and infrastructure in Idlib. Regarding the potential new refugee influx from Idlib and Turkey’s changing refugee policy in which Turkish borders were opened to Syrians on Thursday night, Altun emphasized that Western countries’ inaction and idle position over the crisis remains the same. He said that Turkey never used the refugee crisis as a weapon toward Europe, but European countries have not fulfilled their responsibilities so far.
(+) Kremlin: Erdogan and Putin meet on Thursday… Kremlin said the meeting between President Erdogan and his Russian counterpart Vladimir Putin may be held on Thursday (March 5). Kremlin spokesman Dmitri Peskov added the two presidents discussed the possibility of face-to-face talks during a phone conversation Friday. Erdogan and Putin spoke over the phone Friday to try to defuse tensions that rose significantly in northwestern Syria after 33 Turkish troops were killed in a Syrian regime airstrike.
(+) Turkey and Russia agree to reduce tensions in Idlib… Turkey and Russia have agreed to reduce tensions on the ground in Syria’s Idlib province while continuing military action there, the Russian foreign ministry said on Feb. 29 following several days of talks in Ankara. The ministry said concrete steps to achieve lasting stability in the Idlib de-escalation zone were considered, adding that both sides confirmed their goal to reduce tensions on the ground while continuing the fight against terrorists. Recall, attacks from the forces of the Bashar Assad regime have killed 55 Turkish soldiers this month.
(+) President Erdogan to discuss Idlib crisis with Trump and EU leaders… President Erdogan is expected to hold talks with U.S. President Donald Trump, French President Emmanuel Macron, German Chancellor Angela Merkel, European Commission President Ursula Von Der Leyen and Bulgarian Prime Minister Boyko Borisov to discuss recent developments in Syria’s Idlib.
(=) Turkish and Iranian presidents discuss Syria’s Idlib over phone… Turkish president on Saturday spoke over the phone with his Iranian counterpart to discuss the recent situation in Idlib, northwestern Syria, the Turkish Communications Directorate announced on Saturday. President Erdogan and Hassan Rouhani also discussed the regional issues and bilateral relations, said a directorate statement.
(+) Turkish Foreign Minister: Turkey wants US to send Patriot missiles for support in Idlib… Foreign Minister Mevlut Cavusoglu said Ankara sought for the United States to send Patriot missiles to Turkey for back-up in Syria’s northwestern province of Idlib. Cavusoglu made the comments to reporters Saturday after a meeting with U.S. Secretary of State Mike Pompeo in the Qatari capital Doha. Cavusoglu also said that the Bashar Assad regime must immediately stop the aggression in Idlib. He stressed that Turkey’s goals are to stop the regime assault on civilians in Idlib and secure a lasting cease-fire in the region.
(+) Trump says discussing Turkey’s Patriot request with Erdogan… U.S. President Donald Trump said Saturday he was in talks with President Erdogan over supplying Turkey with Patriot missiles. Trump said when asked to comment Turkey's request for the air defense missiles that they are discussing this issue with President Erdogan. On a separate note, President Erdogan discussed the latest developments in Idlib on Saturday with French President Emmanuel Macron. Reportedly, Erdogan told Macron that Turkey was expecting a clear and tangible action from NATO regarding Idlib.
(+) NATO voices solidarity with Turkey… NATO Secretary General Jens Stoltenberg told a Friday press conference after an emergency alliance meeting in Brussels. Stoltenberg said that all NATO member states expressed solidarity with Turkey in the wake of Thursday’s deadly Assad regime attack in Idlib, northwestern Syria that killed 33 Turkish soldiers and wounded dozens. He stressed that the NATO allies express full solidarity with Turkey, and that NATO has already provided political and practical support to Turkey and the allies are looking to make further contributions. He concluded that the allies will continue to follow developments on the South-eastern border of NATO very closely.
(+) Moscow committed to deals between Turkey and Russia… Russian Foreign Minister Lavrov said Friday that President Erdogan and his Russian counterpart spoke by phone after recent developments in Idlib, discussed the implementation of agreements reached previously, amid mounting tension after 33 Turkish soldiers were killed by the Russia-backed Assad regime forces late Thursday. Lavrov told reporters that the distinction of terrorists and moderate opposition forces needs to be the main goal, adding that Moscow and Ankara are ready to continue coordinating on the developments in Idlib. He continued by saying that the two countries need to specify the steps that need to be taken to fulfil the goal, as he noted contacts with the Turkish military continue to take place on a daily basis. The Russian foreign minister also claimed they had no information about the Turkish troops hit by the Assad regime forces, highlighting that they will continue to work to ensure the safety of the Turkish troops in the de-escalation zone in Idlib. Lavrov also noted that Turkey was entitled to request an emergency NATO meeting on the issue. However, he claimed what is currently happening in Syria does not fall under the founding treaty terms.
(+) Turkey grew 6.0% in 4Q19… Turkey's economy posted a growth rate of 0.9% in 2019, according to the Turkish Statistical Institute (TurkStat). GDP stood at TRY4.28tln (some USD755bn) last year. The data showed that GDP per capita reached USD9,127 in 2019 at current prices. On a sectoral basis, the value added by the agricultural sector rose 3.3% in 2019, compared to 2018 while the services and industrial sectors enjoyed annual rises of 1.5% and 0.2%, respectively, while the construction sector dropped 8.6%. Recall, a panel of 17 economists polled by Anadolu Agency on Thursday expected Turkey's 2019 economic growth rate to be 0.6%. TurkStat data showed that in the last quarter of the year the economy expanded 6.0% YoY vs consensus forecasts of a growth of 5.1%. All told, GDP expanded 0.9% year-on-year in the third quarter of last year after contracting 2.3% in the first quarter and 1.6% in the second, on an annual basis. Hence, Turkey re-entered the road to growth in the third quarter of 2019 after three weak quarters. To remind, Turkey’s New Economic Program, announced last September, targets growth of 0.5% in 2019 and 5% in the following three years.
(+) Turkish exports up 6.4% in January… Turkey’s exports totalled USD14.76bn in January, up 6.4% on a yearly basis. TurkStat’s data showed imports totalled USD19.2bn, up 18.8% in January versus the same month last year. In the month, the foreign trade deficit was USD4.45bn, a rise of 94.3% compared to the same period in 2019. It added that in January 2020, the export-import coverage ratio was 76.8% versus 85.8% in January 2019.
(+) Confidence in economy peaks in 21 month period in February… Turkey’s economic confidence index reached the peak level in 21 months in February after it surged 14 points to 97.5 compared to the same month last year. The composite index that summarizes the evaluations, expectations, and trends of the general economic situation of consumers and producers was at the level of 105.2 in early 2018, according to the Turkish Statistical Institute (TurkStat) data. Having started to decline since the second half of 2018, with the effect of a turbulent period in the Turkish economy, geopolitical developments and global trade wars, it went down to 75.2 in October 2018. Measures taken by the economic administration and the policies implemented as well as the drop in interest rates and inflation led the economic confidence index to return to an upward trend. The index continued to rise as of September last year, seeing an increase of 0.4 points month-on-month in February and 14 points compared to the same month of the previous year to hit 97.5.
(=/-) International reserves at USD102.5bn in January… The Turkish Central Bank's official reserves stood at USD102.5bn as of the end of January. The January figures showed total reserve assets dropped 2.9% from the previous month. Foreign currency reserves – in convertible foreign currencies – fell 4.7% to USD73.5bn during the same period. Last month, the bank's gold reserves – including gold deposits and, if appropriate, gold swapped – dropped 2.4% month-on-month to USD27.5bn. Meanwhile, on an annual basis, the bank's official reserves soared 5.9%, up from USD96.8bn at the end of January 2019. Short-term predetermined net drains of the central government and Central Bank – foreign currency loans, securities, and foreign exchange deposit liabilities – posted a 8.9% monthly increase in January, reaching USD17.1bn. Of this amount, USD12.3bn was in principal repayments and USD4.8bn in interest repayments. The bank also said the contingent short-term net drains on foreign currency last month totalled USD35.9bn, up 3.8% from end-December.

Sector and Company News:

ENKAI bought 136k lots of its own shares with TRY6.17-6.30 price range per share.

DOHOL bought 1.75mn lots of its own shares with TRY1.69-1.72 price range per share.

(=/-) THYAO announced that it has suspended flights to Italy beginning from 1 March. PGSUS also cancels flights to Italy and Iraq between 1-16 March in accordance with the aviation authority’s instructions.

(=/+) PETKM posted TL104mn net income in 4Q19 (TL44mn net loss in 4Q18, 56% down QoQ), mostly inline with the consensus estimate of TL102mn and slightly higher than our estimate of TL99mn. Top line and EBITDA are slightly higher than both consensus and our estimates. The company posted TL2,795mn net sales (consensus TL2,576mn, Global TL2,595mn) in 4Q19, indicating 38% YoY improvement, while down by 5% QoQ. Petkim’s EBITDA came in at TL294mn in 4Q19 (consensus TL281mn, Global TL237mn) up from TL41mn in 4Q18 due to weak base effect while down by 25% QoQ. Ethylene-Naphtha spread deteriorated in 4Q19 and the average spread in 4Q19 was down by 19% YoY and 30% QoQ at US$336/ton. EBITDA margin was at 10.5% in 4Q19, higher than 2% in 4Q18, yet lower than the 13.4% in 3Q19. The company will hold a conference call at 4 pm today to discuss the latest financial results and expectations. We expect initial reaction to be slightly positive thanks to the stronger than expected operational performance.

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 2,795 2,576 2,595 8% 2,032 38% 2,937 -5%
EBITDA 294 281 237 5% 41 611% 394 -25%
margin 10.5% 10.9% 9.1% -0.4 pps 2.0% 8.5 pps 13.4% -2.9 pps
Net profit 104 102 99 2% -44 -338% 236 -56%
margin 3.7% 4.0% 3.8% -0.2 pps -2.2% 5.9 pps 8.0% -4.3 pps
Net Debt/EBITDA (x) 2.90 2.92 -2 bps 3.61 -72 bps
EV/EBITDA 8.0 8.5 9.7
P/E 9.5 9.5 11.6
ROE (%) 16.7% 21.3% -5 pps 13.9% 3 pps
Net debt 4,384 4,316 2% 4,555 -4%
Working capital 595 1,627 -63% 1,679 -65%
Δ in WC -1,084 -473 129% -61 1664%
CapEx 419 -418 -200% -174 -340%
FCF to firm 1,767 167 958% 285 520%
Shareholders' Equity 4,860 4,090 19% 4,784 2%



(=) DOAS posted TL79mn net income, above the consensus of TL71mn and our estimate of TL 65mn. Revenues grew by 27% YoY to TL3,722mn 6% above the consensus estimate of TL3,494mn but in line with our estimate of TL3,681mn. DOAS’ EBITDA was up by 33% YoY in 4Q19 to TL206mn in line with the consensus estimate of TL206mn but 4% below our estimate of TL215mn. Reason behind missing EBITDA margin and net income is slight higher operational expenses (marketing and personnel expenses are slightly higher than our estimate). (Actual OpEx/Revenues: 6.3% - Our estimate: 6.1%) Following its 4Q19 results, DOAS announced its 2020E guidance. Accordingly, the company expects 620k - 630k total domestic market volume, and 70k - 80k units for its own sales volume (excl. Skoda). Recall that Skoda is accounted via Equity-Pick method in which Dogus Otomotiv has 50% of Skoda Turkey, Yuce Auto. Capex guidance stands between TL160mn – TL170mn. DOAS’s 2020E market share guidance stands between 11.1% - 12.9% which is c. 1.5pp below its market share recorded in 2019. When compared to our estimates, DOAS’s domestic sales volume target is c. 15% below our estimate.
The Company increased its operational cash flows thanks to its profitability orientated sales strategy, changed in 2018. As a result, its Net Debt/EBITDA ratio of 3.0x showed a significant improvement recent quarters. (YE17: 5.4x – YE18: 4.0x).

TRYmn 4Q19 Consensus Global Securities Dev. from consensus 4Q18 YoY 3Q19 QoQ
Revenue 3.722 3.494 3.681 7% 2.921 27% 2.156 73%
EBITDA 206,3 205,8 215,0 0% 155,1 33% 141,0 46%
margin 5,5% 5,9% 5,8% -0,3 pps 5,3% 0,2 pps 6,5% -1 pps
Net profit 78,6 71,4 64,9 10% 4,2 1768% 41,3 90%
margin 2,1% 2,0% 1,8% 0,1 pps 0,1% 2 pps 1,9% 0,2 pps
Net Debt/EBITDA (x) 3,01 3,96 -95 bps 3,70 -69 bps
EV/EBITDA 6,58 5,57 6,85
P/E 28,1 7,2 1.231,0
ROE (%) 6,1% 10,2% -4 pps 0,1% 6 pps
Net debt 1.790 2.345 -24% 2.013 -11%
Working capital 968 1.455 -33% 1.230 -21%
Δ in WC -261,6 221 -218% -129 102%
CapEx -33 -109 -70% -12 165%
FCF to firm 430,9 -151 -385% 264 63%
Shareholders' Equity 1.245 1.302 -4% 1.319 -6%