Turkey Wake up call: Macro, Political and Equity News, 4th March

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Wake – up call

BIST jumped 3.63% yesterday as continuing rebound from last week’s sell-off was beefed up by FED’s surprise rate cut during the closing session. Banks led the charge with the 6.06% surge in their sector index. ASELS, THYAO, TTKOM, ENJSA, KCHOL, EKGYO, and KRDMD were among the top performers of non-financials while FROTO, CCOLA, ALARK, and MAVI stood out as the handful of decliners for the day. Coming to this morning, Central Bank will release the February'20 real effective FX rate at 2:30PM local time. The CPI-based index is expected to decline further from its 6-month low of 75.72 mark for previous month given ~4.45% depreciation of lira vs the currency basket dwarfing the 0.35% headline CPI print for February. BIST seems off to a negative open as the U.S. markets tanked more than 4% after the time we left as the FED move and statements triggered worries on economic impacts of the virus outbreak. Lira is weaker with USDTRY pair at 6.1392 vs 6.1280 at yesterday’s closing bell and off the overnight lows of 6.0319 during last night’s intensified volatility. There is a 1.3% rebound in U.S. futures this morning in partial recovery of yesterday’s sharp losses while Asian markets present a mixed picture.
Macro and Political News:
(+) Kremlin: Trilateral Syria summit may be held between Erdogan, Putin and Rouhani… The Kremlin said Tuesday that possible meeting on Syria between Russian President Vladimir Putin, President Erdogan and Iranian President Hassan Rouhani is being discussed. The Kremlin did not specify whether the meeting would take place on March 5, when President Erdogan will travel to Moscow to meet with Putin.
(=) US delegation briefed on aid to Syrians… The U.S. ambassador to the UN and its special envoy for Syria arrived in southern Turkey on Tuesday near the Syrian border to be briefed on international aid provided for Syrians fleeing attacks by Syrian regime-aligned forces. Kelly Craft and James Jeffrey visited a logistics center in the district of Reyhanli in Hatay province. At the center which distributes UN aid to Syrians, Craft and Jeffrey were informed by UN humanitarian affairs chief Mark Lowcock on the latest developments on the ground. They were accompanied by Turkey's UN envoy Feridun Sinirlioglu and U.S. Ambassador to Turkey David Satterfield.
(+) US willing to provide ammunition to Turkey for Idlib… US special envoy James Jeffrey said that U.S. is willing to provide ammunition to Turkey for Syria's Idlib. Separately the U.S. Ambassador to Turkey, David Satterfield, said at the briefing that Washington is examining Ankara’s request for air defense systems. Recall, Turkey has requested Patriot missiles amid heightened military tension in Idlib.
(+) U.S. Senator Graham appreciates Turkey’s moves in Syria’s Idlib, urges no-fly zone… U.S. Senator Lindsey Graham urged on Tuesday a no-fly zone in Syria’s war-ravaged Idlib town and said that he appreciates Turkey’s moves in the face of heavy Assad regime and Russian aggression in the area. Graham said that Russia’s Putin and Syria’s Assad are behaving like war criminals.
(-) Turkish jet downs Assad regime warplane in NW Syria… Turkish F-16 jet downed an Assad regime warplane in Syria’s northwestern Idlib province near Maarat al-Numan, the National Defense Ministry said Tuesday. The ministry noted in a statement that an L-39 type warplane belonging to the Syrian regime was downed by the Turkish forces. The Turkish military has carried out the operation throughout the night and has destroyed a warplane, one drone, six tanks, five howitzers, two air defense systems, three armoured combat vehicles, five technical, six military vehicles, an ammunition dump and neutralized 327 regime soldiers, according to the Defense Ministry.
(-) Turkey neutralizes 299 regime forces in Idlib, Syria… Turkey’s Operation Spring Shield in northwestern Syria hit 82 Assad regime targets, destroyed nine tanks, two howitzers, six rockets, and two vehicles, and neutralized 299 regime elements, said the National Defense Ministry late Tuesday. Turkish authorities often use the word “neutralized” to imply the elements in question surrendered or were killed or captured. In addition, Assad regime attacks martyred one soldier and wounded nine in the northwestern Idlib region, said a ministry statement.
(=) Turkey to deploy domestic air defense systems in Syria soon… Turkey will deploy domestically developed low and medium-altitude air defense systems in Syria, Defense Industries Presidency (SSB) head İsmail Demir said Tuesday. Due to escalating clashes in northwestern Syria’s Idlib province bordering Turkey, the HİSAR-A low-altitude air defense missile system will be deployed on the ground in Syria in a week, while the HİSAR-O medium-altitude air defense systems will also be deployed soon, Demir said. The defense systems were jointly developed by leading defense contractors ASELSAN and ROKETSAN, under the coordination of the SSB.
(-) Migrants leaving Turkey to reach Europe exceed 130,000… Interior Minister Suleyman Soylu said in a tweet that the number of migrants leaving Turkey to cross to Greece via its northwestern border in Edirne exceeded 130 as of Tuesday morning. Recall, Turkish officials announced earlier that they would no longer try to stop irregular migrants from reaching Europe. The decision was made after 36 Turkish soldiers were killed by regime forces in the northwestern Syrian province of Idlib on Feb. 27. Since then, thousands of irregular migrants have flocked to Edirne to make their way into Europe.
(=/+) Erdogan and Merkel discussed Syria and refugee issue… President Erdogan spoke by phone with his German counterpart about recent developments including Idlib and the refugee crises, the Communications Directorate said early on March 3. In a statement, the directorate said Erdogan and Chancellor Angela Merkel also discussed bilateral relations. On the refugee crisis, the directorate said Erdogan stressed that everyone should fulfill their international obligations by sharing responsibilities fairly.
(+) Inflation edged up less than expected to 12.37% in February… CPI rose less than expected to 12.37% Y-o-Y in February with a better monthly data print of 0.35%. Recall, a Reuters poll forecast annual inflation would rise to 12.7% in February from 12.15% in January. The month-on-month figure was also lower than a poll forecast of a 0.65% rise. The median of 22 forecasts in a Bloomberg survey was for 12.7%. Despite better than expected data print, the February CPI continued to mark a climb for the fourth straight month after a dramatic drop last year that opened the door to aggressive rate cuts.
In details, the rise in February inflation was driven by food and non-alcoholic drink prices which surged 2.33% month-on-month, while prices in the health sector were up 2.03%, the data showed. Clothing and shoe prices declined 4.83% in February, while alcoholic beverage and tobacco prices declined 1.34%. Alcoholic beverages and tobacco saw the highest year-on-year price increase with 40.15%, while the lowest annual rise was 2.27% in communication. The data also showed the producer price index rose 0.48% month-on-month in February for an annual rise of 9.26%. The 12-month average hike in consumer prices was 13.94% as of February.
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. Nevertheless, further FX weakening and the likely pass through to final prices seems to be the main threat to disinflation. We expect loan growth and domestic demand to lose momentum through the end of the year which could restrain price pressures. Also note that lower global inflation and ongoing weakness in energy prices should also help the CBRT’s policy making. We expect annual inflation to ease gradually towards a bit below 10% by the end of the year. This trend should keep the door wide open for another 50bps rate cut in the 19 March MPC meeting, following the U.S. Fed’s extraordinary 50bps rate cut yesterday, in our opinion.
(+) Turkish exports and imports on rise in February… Turkey’s exports and imports increased on an annual basis in February. Ruhsar Pekcan, trade minister said in a written statement that Turkish exports rose 2.3% year-on-year to reach USD14.7bn last month, while imports went up 9.9% to hit USD17.7bn in the same period. The country’s foreign trade volume totalled USD32.3bn in February, marking a 6.43% rise compared to the same month of last year. Ms Pekcan also said that export-import coverage ratio rose to 83% in the month. Germany, Iraq and the U.K. were the top receivers of Turkish exports while the country imported the most from Russia, China and Germany. In January-February, Turkey’s exports totalled USD29.4bn, rising 4.3% on a yearly basis. Imports also posted an annual rise of 14.4% to USD36.9bn in the first two months of this year.
Sector and Company News:

(=/+) TTKOM Board decided to propose a cash dividend of TL1,203mn which corresponds to TL0.34372 gross, TL0.292162 net DPS to be distributed on June 1, 2020, to the approval of the General Assembly. The proposed dividend amount indicates a 4.2% dividend yield.

(=) EKGYO announced a new loan obtained with 5 years maturity amounting TRY250mn.

(=) The last hearing of Halkbank case held yesterday postponed to March 31, 2020 upon the Halkbank’s attorneys’ request for the purpose of completing legal documentation in Turkey.

(=) BIMAS is to release its 4Q19 earnings today, 4th of March. Research Turkey consensus: TL 10,924mn revenues, TL 804mn EBITDA and TL 313mn net profit. Global Estimate: TL 11,040mn revenues, TL819mn EBITDA and TL 256mn net profit.

(+) According to Automotive Distributors’ Association (ODD) data, auto market grew by 90% YoY to 47,122 units in Feb20. (Feb19: 24,875) The growth in passenger cars were 96% YoY, and LCV sales increased by 66% YoY. (=/+) TOASO maintained its strong performance with 46% YoY growth in PC sales and 95% increase in its LCV volumes. Recall that TOASO had high base in 2M19. (=/+) FROTO’s results came in-line with the market, with 90% and 70% YoY growth in PC and LCV volumes, respectively; (+) DOAS showed a solid performance in PC segment, grew by 99% YoY in PC and 120% YoY growth in its LCV volumes. In 2M20, auto market grew by 90% YoY to 74k units. PC market increased by 98% YoY growth to 60k units and LCV market showed a strong YoY growth with a 62% YoY improvement.

Recall that a total of 479K vehicles sold in 2019, carrying 12M19 contraction to 23% YoY, with 20% and 32% respective contraction in PC and LCV. In 2019 year-end, due to consumer orientation towards lower-priced models in recent months, (+) TOASO showed a solid 34% YoY growth in PC sales so much above the market, but we saw a 33% decline in its LCV volumes which was parallel to market (-) FROTO’s PC retail sales declined by 34% and LCV sales deteriorated by 25% YoY growth, which was 28% YoY decline in total, below the market; (-) DOAS, on the other hand, showed a weak performance, falling by 26% YoY and 43% YoY in PC and LCV, below the market.

Recall that the positive signals for auto domestic sector have started from Jun19. Public banks’ loan agreement with brands that manufacture passenger and/or commercial vehicles in Turkey continued the recovery with support of low interest rate environment. In addition, the stabilization in EUR/TRY rate (recent months) also supported importers’ retail sales. Therefore, domestic light vehicle market reached 479k units in 2019 which was better than the expectations in the beginning of the year.

In 2020, market players’ expectations for auto market growth hover in a wide range between 10%-30%. Recall that, the companies’ are running out of stock for almost last six months. We observe that trend will continue by the end of Jun20. Thus, we expect solid growth in auto market to continue in 1H20, mainly due to the low-base of 1H19.

According to the media, the government does not consider a SCT and Scrap (end of life vehicle) incentive since the outlook of the automotive market is better than previously expected.

(=/+) PGSUS posted TL23mn net income in 4Q19, lower than the consensus estimate of TL64mn and our estimate of TL50mn. However revenues are in-line with estimates where EBITDA of TL560mn is slightly higher than the consensus estimate of TL538mn and higher than our estimate of TL473mn, mostly due to the higher than expected operating margins. The company posted TL2,512mn net sales (consensus TL2,510mn, Global TL2,461mn) in 4Q19, indicating 24% YoY improvement, while down by 39% QoQ. Pegasus’ EBITDA of TL560mn in 4Q19 is much higher than the TL77mn in 4Q18, thanks to the higher pax and higher load factor in 4Q19 compared to 4Q18. EBITDA margin came in at 22.3% in 4Q19, much higher than the 3.8% in 4Q18. The company’s net income dragged down by the TL29mn one-off loss written from the stake sale in Air Manas. Recall that Pegasus sold its 49% stake in Air Manas to AviaTrade Corp. LP for Eur98,918 on 15 October 2019. The company’s net profit was at TL23mn in 4Q19, improved from a net loss at TL138mn in 4Q18, thanks to the better operational performance. The company’s net debt/EBITDA improved to 1.81x in 4Q19 from 2.79x in 4Q18.

The company’s domestic pax declined by 1% YoY to 4.1mn, while international pax increased by 18% YoY to 3.5mn in 4Q19, indicating a 7% YoY improvement in total pax. The company’s domestic ASK (Available Seat Kilometers) was down by 3% YoY, while international ASK was up by 21% YoY. Accordingly, load factor in 4Q19 improved YoY both in domestic and international flights by 2.9% and 3.7% respectively. Domestic pax yield increased by 35% YoY to TL122.4 while international pax yield improved by 3% YoY in Euro ters to Eur54.8. In addition, ancillary revenue per pax rose by 19% YoY in Euro terms to Eur15.3, thanks to the increasing portion of the international flights in total flights.

All in all, the results are slightly higher at the operational level and lower on the net income front with the one-off loss written due to the sale of Air Manas dragging down the net profit. The company continued its strong operational performance in 4Q19 with the strategy shift to focusing more on international growth especially in the last two years period paving the way for higher profit margins. The company will hold a conference call at 5 pm today.