Turkcell: Aiming to build its own digital ecosystem (HOLD - transfer of coverage)

Due to a change of analyst, we transfer coverage of Turkcell (TCELL), with a HOLD rating and a 12M price target (PT) of TRY 15.80/share, implying 14% upside. Recently, we had the chance to hear TCELL’s executive management present its medium-term game plan at the Turkcell Capital Markets Day in Istanbul, and we left the meeting impressed positively about management’s ambition to further monetise the mobile data take-off story in Turkey, by creating TCELL’s own digital ecosystem via a rich portfolio of digital services (such as mobile wallet app Paycell and search engine Yaani). We believe management’s revised medium-term group revenue growth target of c.15% for 2018-20E is achievable, and mobile data growth and the digitalisation of sales channels (lower S&M costs) should help it to improve its EBITDA margin to 37-38.5% on our 2018E-20E numbers (vs. guidance of 37-40%). In our view, however, the execution of this strategy will come at a price in terms of TCELL’s working capital (WC) needs and capex dynamics. Although we assume improving WC needs trends in our model (to 6-8% of revenues in 2018-20E, from 13% in 2017), this is still burning through 18% of our annual EBITDA forecasts and keeping TCELL’s FCF under pressure. We believe this is the key difference between our and the street’s understanding of TCELL’s FCF generation capability in the medium term. Our capex/sales ratio assumption for TCELL declines to 16-17% by 2022/23E (vs. management’s aim to reach this level by 2020E).