TURKEY MARKET OUTLOOK - Lifting risk free rate by 200bp
We raise our TRY risk free rate (RfR) assumption by 200bp from 12.25% to 14.25% after the severe rise in bond yields. The Turkey 10-year bond yield has risen 315bp YTD to 14.9%, far outpacing our 10% sustainable inflation assumption. We set our RfR a tad below the level indicated by the overshot long end.
Our new TRY cost of equity (CoE) assumption is set: at 19.25% for 1x beta companies with a 5% risk premium. For companies with FX income streams, we apply a CoE of 12.5% with the RfR raised 50bp to 7% in EUR or USD terms.
For companies with hard currency financials (such as ENKAI, EREGL, KRDMD, TAVHL THYAO and PGSUS), valuations are supported by a weaker TRY. Thus their target prices are resilient to our updated assumptions. All in all, we lower valuations for banks 12% and non-banks 6%. Our new BIST100 target for 2018 is 118k, implying 15% upside. On our estimates, banks/non-banks offer 14%/16% upside. We maintain our NEUTRAL country rating (downgraded from Overweight as per our 9 April 2018 report, Down to Neutral).
TEB Investment equity research analysts and strategist team consists of 8 analysts with an average finance sector experience of 15 years and special focus on international investors.
With our 6 equity research analysts we cover 93 companies across 21 sectors, reflecting 80% of the total market capitalization of all BIST companies and 86% of the BIST100 companies. Our strategy team provides in depth top-down and bottom-up market views with insight on FX and bond markets by publishing sectoral and strategic reports both in English and Turkish.
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