Turk Telekom: Executing a five-year plan well (BUY - transfer of coverage)

Due to a change of analyst, we transfer coverage of Turk Telekom (TT) with a BUY rating and a 12M price target (PT) of TRY 7.41/share. Although, in 2017, there was no progress on the long-expected ownership change at TT (triggered in 4Q16 by parent OTAS’ default), given the proactive involvement of the Turkish government (which sees TT as a strategic asset), we expect the ownership uncertainties at TT to be eliminated in 2018E. Although the recent board proposal to suspend dividend payments from the 2017 earnings was disappointing, we believe it was a necessary measure to strengthen TT’s balance sheet and cut its significant short FX position and thus partly remedy TT’s earnings exposure to FX volatility. In our view, following TT’s brand reunification initiative and organisational restructuring in 2016/17, management’s execution has accelerated visibly and TT has delivered its highest subscriber growth (1.1m additions in FY17) since its IPO, which was led by momentum in the fixed broadband, pay-TV and mobile segments. We expect gradual operating margin expansion and declining capex to result in a significant boost for TT’s FCF generation from 2018E-onwards.