Turkcell Continues To Execute Well, But Macro Remains An Uncontrollable Risk

I believe I’ve been fair, if not effusive, in my praise of Turkcell (NYSE:TKC) management, and nothing has changed since my last article on this leading Turkish telecom provider to change my view. Management continues to do a good job of navigating a difficult inflationary environment (running at around 85%/year), as well as keeping the company ahead of rivals and continuing to reinvest in the long-term growth potential of the business.

While I thought the challenging macro environment in Turkey would mitigate potential gains in the share price, I’m happy to say I was wrong – Turkcell shares have risen more than a quarter since my last update, a strong performance against a backdrop of largely negative emerging market telco performances over that time. While the shares still look undervalued, the challenges of modeling in a high-inflation environment are considerable and ongoing erosion in the value of the Turkish lira remains a real risk.

 

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Turkcell Continues To Execute Well, But Macro Remains An Uncontrollable Risk

Turkcell Under Pressure On All Sides

 

Nothing has really improved for Turkcell (TKC) since my last update, as the inept handling of the Turkish economy by the government continues to send the value of the Turkish lira spiraling ever lower. While Turkcell management has done a good job of managing its core operations, that’s cold comfort when the currency deprecation utterly undermines what progress there is.

It would be bad enough if it were just the incompetence of Turkey’s government impacting Turkcell – it’s not good to own a house on block that’s on fire – but that’s far from the only challenge here. In addition to a potentially restive major shareholder, Turkcell is facing significant capex in the coming years as it will need to participate in upgrading to 5G while still spending to upgrade its fiber offerings. On top of that, inflation is driving operating and subscription acquisition costs higher, but it’s unclear if pricing can continue to keep pace.

Considering all of this, the upcoming capital markets day, where management will discuss its new three-year plan, is going to be a critical event for the stock. While the shares do still look undervalued, the reality is that until and unless some stability returns to Turkish economy, whatever Turkcell can accomplish on its own will likely be for naught as far as the share price goes.

 

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Turkcell Under Pressure On All Sides

Turkcell Continues To Execute Very Well, But Macro Issues Cancel Out The Benefits

 

I really wonder what sort of valuation Turkcell (TKC) would get if it weren't operating in Turkey. Management has done a very good job here in terms of execution, and I largely agree with the company's growth priorities … but double-digit revenue growth and improving EBITDA margins are only worth so much when your country's currency has lost two-thirds of its value in just five years.

Turkcell remains a very small position that I carry mostly for the purposes of "loss farming" (carrying a tax loss to offset a gain someday) and mostly out of spite, since it irritates me to no end that Turkcell's strong operational performance has been canceled out by the inept leadership of Turkey. In any case, I do think Turkcell is meaningfully undervalued, but I don't know that any large Turkish company will get much love in the market until there's a change in the government in Ankara.

 

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Turkcell Continues To Execute Very Well, But Macro Issues Cancel Out The Benefits

Strong Operating Performance Still Getting Turkcell Nowhere Fast

My “neutral” call on Turkcell (TKC) in August had almost nothing to do with the quality of the company or my opinion of its financial performance and everything to do with sentiment around the Turkish economy and stock market. Since then, the ADRs have barely budged despite two more good quarters, and the shares have lagged the iShares MSCI Turkey ETF (TUR), as well as the main Turkish index (up almost 50% over that time).

Whether that underperformance is due to rotation away from more defensive ideas, worries about increased capex spending in 2021, or some combination is not all that important (and would be impossible to answer definitively anyway). Higher capex spending in 2021 won’t threaten the dividend or capital structure, and should only help drive more growth over the long-term in the fiber/IPTV business.

I continue to believe that Turkcell is meaningfully undervalued on the basis of long-term revenue growth of 8% and double-digit FCF growth. I also believe that this is a tough stock to recommend and investors have to have an exceedingly high level of patience to consider this one.

 

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Strong Operating Performance Still Getting Turkcell Nowhere Fast

Turkcell Can't Swim Faster Than The Negative Currents Around Turkey

As far as “controlling the things they can control”, I find almost nothing to fault Turkcell (TKC) management for as the company has navigated a change in leadership and the challenges of COVID-19 quite well. Turkcell continues to do a good job of shifting its sub base towards postpaid plans, while supporting increased data use through prudent network upgrades and a growing suite of services. The company’s non-cellular activities also continue to grow well, as the company expands its fiber and IPTV businesses.

The problem remains the economy of Turkey and the political leadership of the country. Whether “basket case” is a harsh or fair assessment, inflation remains persistently high (low double-digits recently) and President Recep Erdoğan’s eccentric views on economics remain a problem. Foreign investment in Turkey has dropped, and the average exchange rate between the dollar and the lira fell another 11% from the first quarter to the second quarter. Although I continue to believe that Turkcell is fundamentally undervalued, the currency and country risks remain high, and that makes this a difficult recommendation.

 

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Turkcell Can't Swim Faster Than The Negative Currents Around Turkey

A Simplified Ownership Structure Should Help Turkcell Investors

I suppose there’s both cosmic and comic justice that one of the most Byzantine (and dysfunctional) ownership structures I’ve ever seen with a public company would involve a Turkish company – the mobile services operator Turkcell (TKC). For years, a fractious ownership structure has impaired the company’s ability to pay regular dividends, and has likely contributed to a discounted valuation relative to the underlying fundamentals.

With a series of transactions led by the Turkey Wealth Fund, those years of sometimes-childish squabbles should be over, and Turkcell investors should be able to look forward to a more consistent future for the company and its dividends. While there are still significant risks here, and some investors may actually see this transaction as adding to the risks, I believe Turkcell remains meaningfully undervalued even with the inclusion of a “Turkey discount” that reflects the elevated economic and political risks of that country.

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A Simplified Ownership Structure Should Help Turkcell Investors

Still Nothing To Delight Turkcell Investors

When I last wrote about Turkcell (TKC) in late February, I wrote, “Turkcell still looks undervalued to me, but it also still looks like a potential value trap unless and until the situation in Turkey improves.” And so it goes, with ADRs down another 15% or so, as the Covid-19 outbreak has further sapped investor enthusiasm in emerging market stocks. If there’s a bright side, it’s that Turkcell’s performance over the last three months has been better than at least some emerging market names like America Movil (AMX), MTN Group (OTCPK:MTNOY), Telefonica (TEF), and Telkom (OTCPK:TLKGY), so … yay?

For better or worse, the Turkcell story remains as it was. Management has actually done a good job with respect to drivers like data and digital services, as well as growing fixed-line fiber and IPTV businesses. Overall, the company is shifting toward a richer service mix and one with fewer less-lucrative prepaid subscribers. Still, it’s an emerging market telco in an unpopular country during a risk-off phase of the market, so it’s going to take time before the stock’s apparent undervaluation makes any real difference.

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Still Nothing To Delight Turkcell Investors

Turkcell Remains A Good House In A Very Unpopular Neighborhood

Not only is emerging market telco a largely out-of-favor sector, but Turkcell (TKC

) also continues to be hurt by the relative unpopularity of Turkey as an investment destination. I’ve discussed the many and varied issues with Turkey in prior articles and I won’t rehash that here other than to say that there remain substantial valid concerns about the health of Turkey’s economy and the quality of the government. Even so, Turkcell continues to execute well, with strong performance in the consumer post-paid and fiber businesses.

Turkcell still looks undervalued to me, but it also still looks like a potential value trap unless and until the situation in Turkey improves. Positive ongoing execution will certainly help sentiment, and the dividend outlook is likewise good, but even if Turkcell is one of the best options in Turkey today, that’s only worth so much.

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Turkcell Remains A Good House In A Very Unpopular Neighborhood

Turkcell Continues To Execute, But Macro And Strategic Concerns Remain

Turkey's leading mobile services provider Turkcell (NYSE:TKC) has had a mixed performance run since my last update on the shares. Operationally, the company continues to do quite well, with relatively stable share in the mobile business despite aggressive pricing and ongoing growth in ancillary services. While the shares have risen more than 10%, they've lagged the broader Turkish market a bit, and I'd say the performance is relatively lackluster, given the heightened macro risk.

Although I still think Turkcell shares are undervalued, I likewise still think that macro issues tied to Turkey's economy and international relations loom large. I would also note that there seems to be some uncertainty in the market regarding the company's new strategic priorities regarding business and fintech growth - priorities that are going to demand investment spending. Turkcell pays a decent dividend, and its cash flow will likely support improved dividends from here, so at least, there's a "get paid to wait" argument in play for Turkcell shareholders.

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Turkcell Continues To Execute, But Macro And Strategic Concerns Remain

Turkcell Sticking To A Plan That's Working, While Turkey Continues To Churn

It has been a while since I've written on Turkcell (TKC), and much of what I said last time still applies. Taken in isolation, Turkcell continues to run itself well, with a business strategy focused on its higher-value services like 4G, digital services, and e-commerce. But at the same time, Turkey's macroeconomic challenges have not gone away, and Turkcell continues to face significant inflation and foreign currency headwinds and an overall lack of investor confidence/interest in Turkey.

You can't really fully separate the company-specific and macro factors here, as the U.S.-listed ADRs have fallen more than 40% over the past 12 months versus a roughly 20% drop in the locally-traded shares. What's more, I can't honestly tell readers/investors that this a stock that is worth the hassle and risk, particularly with the recent CEO change. Turkcell is undervalued even under what I believe to be conservative assumptions, and the company is well-placed to continue funding a healthy dividend, but with a lot riding on the overall health of the Turkish economy and investor confidence in the government, it's a tough recommendation to make.

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Turkcell Sticking To A Plan That's Working, While Turkey Continues To Churn

Turkcell Is Performing Well, While Turkey Wilts

Turkcell (TKC) is a great case in a point as to why you can never completely separate a company from the context of its home market. While Turkey’s leading cell phone service provider continues to perform very well from an operational perspective, the problems in Turkey (both economic and political) and the resulting pressures on Turkey’s stock market and currency have pulled these ADRs down for a greater than 30% drop over the past year. While the local shares have performed meaningfully better (down 5%), that’s really not much comfort to shareholders holding the ADRs.

Turkcell shares look significantly undervalued, and it doesn’t look like the economic issues in Turkey are really hurting the business yet, but there’s no way to say that the problems in Turkey won’t get worse before they get better. And it is likely a long road back for Turkey in terms of the currency and institutional interest in the stock market.

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Turkcell Is Performing Well, While Turkey Wilts

Turkcell's Digital Push Continues To Drive Better Growth

You wouldn't know it by the share price, but management's plans and efforts to drive growth, and more profitable growth, at Turkcell (TKC) are working well. Turkcell continues to leverage its network superiority to generate postpaid subscriber growth as well as increased data consumption, and the results are showing up in the revenue and margin performance. Turkey's overall economy remains a risk factor, as does the company's fractious ownership group, but the shares continue to look undervalued.

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Turkcell's Digital Push Continues To Drive Better Growth

Turkcell's Improved Execution And Strategy Going Unrewarded

Being a Turkcell (NYSE:TKC) shareholder has never been easy, but it has been more frustrating of late as weakness in the Turkish lira has depressed the value of the ADRs and muted the benefit of the 20%-plus increase in the value of the local shares. Going beyond currency, though, I believe there is an argument to be made that the market is still failing to give Turkcell credit for the improvements management has made - improvements that have included successful growth in 4.5G post-paid subscribers, growth in the fixed-line broadband business, growth in value-added services, and a more responsible view toward M&A.

I continue to expect high-single-digit revenue growth and mid-teens FCF growth from Turkcell as the company continues to benefit from the pre-paid to post-paid migration, greater use of data, and expanded add-on service offerings. Discounted back at current exchange rates, those cash flows support a fair value of over $12/ADR today, making Turkcell cheap enough to be worth a closer look.

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Turkcell's Improved Execution And Strategy Going Unrewarded

A Marked Improvement At Turkcell Restores Some Confidence

Shareholders of Turkcell's (NYSE:TKC) ADRs might understandably feel as though they've been cursed. Even when the company is executing very well on its strategy and seeing an exceptional improvement in results, the adverse move in the Turkish lira chews up most of the benefit. Since my last piece on Turkcell around a year ago, revenue expectations for FY 2017 have risen around 13%, and the local shares are up better 20% … and the ADRs are up less than 10%. Strong dividend payments this year sweeten the pot a bit, but Turkcell remains the sort of stock where you feel like you have to cover your eyes and peek between your fingers whenever there's news.

While I'm admittedly being a little flippant about this situation, I do believe Turkcell's strong execution over the past year deserves respect. Likewise, I think the recent trend in performance lends a great deal more credibility to management's long-term strategic view of the company. There is still a lingering shareholder dispute to resolve and ample uncertainty about Turkcell's M&A plays (not to mention plenty of uncertainty about Turkey itself), but the shares look around 20% undervalued today, and that's enough to keep me interested.

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A Marked Improvement At Turkcell Restores Some Confidence

Turkcell Still Bedeviled By Uncertainty

Turkey's largest mobile services provider, Turkcell (NYSE:TKC), continues to find itself mired in uncertainties that have weighed heavily on the shares. From questions about market share and competitiveness with Vodafone (NASDAQ:VOD) and Turk Telekom's (OTC:TRKNY) AVEA, to management's capital allocation priorities, to the seemingly endless squabbles between the largest owners, this is a consummate case of "it's always something".

While Turkcell's shares do look undervalued, and it seems as though the ownership spat may be nearing an end, I'm not sure the discount to fair value is so large as to be worth the trouble. Turkcell has its work cut out moving its subscriber base on to more lucrative post-paid contracts and higher-end phones, and I'm more concerned about the value to be gained from the company's expansion plans.

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Turkcell Still Bedeviled By Uncertainty

Seeking Alpha: Turkcell Looking Long Term, Market Thinking Short Term

As a reader commented on a prior Turkcell (NYSE:TKC) piece, Turkey's leading mobile operator sits at the intersection of two unpopular avenues today - mobile communications and Turkey. Investors have grown impatient with the growth prospects of mobile carriers as penetration rates grow, revenue and earnings growth slows, and the capex bills grow to keep with the evolution of technology. On the Turkey side, there are no shortage of problems and concerns ranging from so-so economic growth (4% GDP in the third quarter), a high-profile spat with Russia that cost a pilot his life, and ongoing military conflict involving Daesh in Syria and the PKK in Turkey.

Turkcell's ADRs have lost about 20% of their value since early May of this year, with further adverse moves in the Turkish lira magnifying a double-digit decline in the home TCELL.IS shares. For the little to no good it does to make investors feel a little better, Vodafone's (NASDAQ:VOD) ADRs have declined about 10% and Turk Telecom's (OTC:TRKNF) local shares have fallen more than 25% in Turkey.

I realize that fighting the tape is an invitation to short-term pain, but I think the market is too worried about the near term at Turkcell and not willing to consider the long-term opportunities. Turkcell continues to gather higher value post-paid subscribers and has been generating good growth from its mobile data, and the company's substantial investments in spectrum will have the company positioned for mobile data leadership for a decade. Turkcell's ADRs definitely need a more favorable outlook/sentiment for Turkey as a whole, but with a fair value close to $12, I think these shares are worth a look from patient investors today.

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Turkcell Looking Long Term, Market Thinking Short Term

Seeking Alpha: Turkcell Looking At Short-Term Pain For Long-Term Gain

Neither Turkcell (NYSE:TKC) nor its local rival Turk Telecom (OTC:TRKNY), who operates Avea, have been getting much love in the market and it gets even worse when you factor in the currency moves between the dollar and lira. That comes despite the fact that the Turkish mobile market is actually pretty healthy relative to other emerging markets (South Africa, Russia, the Middle East, North Africa, et al) and there are credible reasons to think that the market will get more rational.

Turkcell at long last managed to hold its annual meeting and pass a dividend, a move that investors were waiting literally years to see. Turkcell being Turkcell, there are still challenges and controversies - Cukurova is trying to gain control of the company via a "shotgun clause" (that the Turkish government could reject), the company is adjusting to a new CEO, the company may be looking to make an acquisition in Ukraine, and the company will be looking at spending billions on new 4G licenses and equipment. While there are definitely some risks that cash could be flying out of the company for the next few years, I think the long-term advantages of the 4G migration outweigh the short-term volatility.

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Turkcell Looking At Short-Term Pain For Long-Term Gain

Seeking Alpha: Turkcell Twists And Turns Continue

One of the most messed up stories in international telecom continues to be exactly that, as Turkcell (NYSE:TKC) faces the operating challenges of fierce competition in the Turkish mobile phone market and the behind the scenes dramas that continue to delay an annual shareholder meeting and the declaration of long awaited dividends. While I chose to hold on to the shares after my last update and continue to believe that there are ways in which Turkcell can report better performance in the coming years, it's hard to argue that this is the name investors need to own in emerging markets.


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Turkcell Twists And Turns Continue

Seeking Alpha: Decent Earnings Not The Real Story At Turkcell

It looks like the long and ridiculous dispute between Turkcell's (NYSE:TKC) owners, a dispute that has held up a dividend for literally years, may finally be at an end. Not only that, while Turkcell is still seeing significant competitive pressures in its core Turkish voice market, the underlying earnings performance has been pretty decent.

There are still plenty of unknowns here - will Turkcell pay a dividend in 2014? Will Altimo exit its position (and if so, how?)? Will Turkcell's competitors get more rational and allow for market repair? Although there could be some upside in the resolution of these questions, the move in the shares has me thinking that it may be time to call it a day.

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Decent Earnings Not The Real Story At Turkcell

Seeking Alpha: Turkcell Executing On The Ground, But Litigation Still A Sizable Hurdle

The spat between three of Turkcell's (TKC) major shareholders was ridiculous one and a half years ago and it hasn't gotten any better since then. With a recent U.K. ruling reinstating TeliaSonera's (OTCPK:TLSNY) nearly $1 billion claim against Cukurova and the $1.6 billion payment from Cukurova to Alfa/Altimo still pending, it seems unlikely that tomorrow's annual meeting will go forward, meaning that the wait for clarity on dividends and the shareholder structure drags on.

If there's a bright side to the story it is that Turkcell is operating relatively well in its core Turkish mobile operations. Fierce competition with Vodafone (VOD) and Avea is still very much a threat, but EBITDA growth has been getting better and Turkcell should be a major beneficiary of more rational competition going forward. The dispute between Turkcell's major shareholders is definitely an ongoing risk factor, but Turkcell has been building up quite a cash pile and resolution of the dispute should lift a meaningful non-operating cloud from the shares before 2014 is over.

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Turkcell Executing On The Ground, But Litigation Still A Sizable Hurdle