vk.com/id446425943

Turkey – market trends and company outlooks

▪Turkish mobile’s revenue growth in 2017-2018 surpassed that of any other telcos globally and it was not a one-off.

▪The government equalised the communications tax on voice and data, but because they are levied on telco revenues, the state makes it easier for telcos to inflation-adjust prices.

▪However, the government’s willingness to curb inflation has currently prompted carriers to increase data allowance in bundles to address an inflation issue – we think temporarily – until YE18.

▪The development of successful mobile apps, content and services plays well to Turkish national traits and preferences for local content in local language, and the impressive monetisation of this content distinguishes Turkey from most EM countries. TCELL is demonstrating strong monetisation of innovative products and these are likely to continue driving its superior growth. TTKOM has similar products although with less emphasis on marketing but we also see signs of improving margins.

▪FX exposure of the balance sheet mismatched with TRY exposure of P&L is the biggest problem for Turkish telcos. However, TCELL has only limited actual FX exposure due to high level of hedging.

▪TTKOM had around TRY25bn in gross debt at 3Q18 with 57% total hedge ratio – up from 44% in 2Q18, but at a higher cost. TCELL reported TRY23bn in total debt in 3Q18 – 57% in LCU after hedging and the remainder is naturally hedged with FX cash balances.

▪TCELL’s cash position will be supported by the sale of its stake in Fintuir and TCELL receiving approximately EUR350mn in cash (deal to be completed in January 2019).

▪We have a preference for TCELL given its stronger growth and more prudent hedging approach than that of TTKOM.

▪We have adjusted out forecasts upwards given the stronger guidance provided during the 3Q18 results call, and we increase out TP for TCELL to TRY16.6/sh (slightly up from TRY16.5/sh before) and $6.9/ADR (up from $6.6/ADR), maintaining our BUY ratings. We increase our TP for TTKOM to TRY4.5/sh (from TRY4.1/sh) and maintain our HOLD rating.

Renaissance Capital

8 January 2019

EMEA telecoms

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 47: Revenue growth forecast, % YoY (LCU)													Figure 48: Mobile revenue growth forecast, % YoY (LCU)
29%					TCELL				TTKOM*				20%					TCELL*				TTKOM**
													18%
24%						23%											16.7%
													16%						15.5%		15.9%
														15.2%
																					14.4%
													14%
								21%
																							12.8%
19%													12%						12.1%				12.3%	10.3%
										16%			10%
																								9.2%
14%													8%
				12%
								12%			12%			6.9%			6.7%
				11%		11%							6%
										10%
9%													4%
		7%									6%
													2%
		6%
4%													0%
2015		2016		2017				2018E		2019E	2020E
														2015	2016		2017				2018E		2019E	2020E
Note: *Excl. construction revenue													Note: * Incl. sales of handsets; **Calculated based on ARPU and subscribers
							Source: Company data, Renaissance Capital estimates													Source: Company data, Renaissance Capital estimates

	Figure 49: Mobile subscribers net change in Turkey, QoQ ’000																								Figure 50: Blended mobile ARPU growth, YoY
									TTKOM			TCELL					VOD																TTKOM							TCELL						VOD
	900																	800							18%
	800																								16%
																							600
	700																		500		500				14%
	600												400
	500													400											12%
	400																								10%
														200								200
	300																								8%
	200												100										100
																									6%
	100
	0																								4%
	-100																								2%
	-200
																									0%
	-300
	-400																								-2%
	-500																								-4%
	-600
																									-6%
	-700
																				-600
	-800																								-8%
		3Q14	4Q14	1Q15	2Q15	3Q15			4Q15	1Q16	2Q16		3Q16	4Q16		1Q17		2Q17	3Q17	4Q17	1Q18	2Q18	3Q18			3Q13	4Q13	1Q14	2Q14		3Q14	4Q14		1Q15	2Q15	3Q15		4Q15	1Q16		2Q16	3Q16	4Q16		1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18
																					Source: Company data																											Source: Company data

Figure 51: Group sales growth YoY (net of elimination)

Figure 52: Consolidated EBITDA margin

30%

TTKOM

TCELL

40%

TTKOM

TCELL

28%

25%

38%

23%

20%

36%

18%

15%

34%

13%

10%

32%

8%

5%

30%

3%

0%

28%

-3%

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18*

2Q18*

3Q18*

-5%

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

Note: Excl. new standards impact

Source: Company data

Source: Company data

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Figure 53: TTKOM and TCELL EV/EBITDA dynamics (based on Bloomberg estimates)

			TTKOM 1y fwd EV/EBITDA			TCELL 1y fwd EV/EBITDA			avg
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
Jan-12	May-12	Sep-12	Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14	Jan-15	May-15	Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17	Sep-17	Jan-18	May-18	Sep-18

Source: Bloomberg

Renaissance Capital

8 January 2019

EMEA telecoms

26

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Renaissance Capital

8 January 2019

EMEA telecoms

Turkcell

Figure 54: TCELL debt and cash position at end-3Q18, TRYmn

Total debt (excl. fin leases)	21,969
Breakdown before hedging
TRY	6%
USD	50%
EUR	38%
Other LCU	6%
Total debt (incl. fin leases)	23,055
Breakdown before hedging
LCU	15%
FX	85%
Breakdown after hedging
LCU	57%
FX	43%
Cash and cash equivalents	8,749
TL and other LCU	23%
FX	77%

Source: Company data

Figure 55: TCELL net FX position*, $m

	0
	-50
	-100
		-91
	-150
					-144
	-200
			-203			-204
	-250
								-255
	-300
							-301
	-350
				-330
	-400
	-450
	-500
		1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18

Note: *Including advance payments, hedging and assuming the 4.5G licence payables in TRY for the periods before April 2017 and excluding FX swap transactions for TRY borrowing.

Source: Company data

Figure 56: Turkcell – old estimates vs new, TRYmn (unless otherwise stated)

	Old (October 2018)		New		Deviation
	2018E	2019E	2018E	2019E	2018E	2019E
Revenue	20,880	24,271	21,286	24,656	1.9%	1.6%
EBITDA	8,553	9,767	8,774	9,922	2.6%	1.6%
EBITDA margin	41.0%	40.2%	41.2%	40.2%
Net income	1,622	2,971	1,808	3,672	11.5%	23.6%
Net debt	11,490	10,592	13,495	11,279	17.4%	6.5%

Note: Including IFRS15 and IFRS16 impacts

Source: Renaissance Capital estimates

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 57: TCELL YE19 TP calculation – blended DCF and EV/EBITDA, TRYmn (unless otherwise stated)

WACC	21.0%
Perpetuity growth	2.0%
Fair value per share, TRY	15.8
Fair value per ADR*, $	6.5
Target EV/EBITDA, x	4.5
Target EV	44,649
Target MktCap	38,466
Fair value per share, TRY	17.5
Fair value per ADR*, $	7.2
Target price per share ex. div., TRY	16.6
Target price per ADR ex. div., $	6.9

Note: *Converted at TRY6.05/$

Source: Renaissance Capital estimates

Figure 58: Turkcell financials adjusted for new IFRS standards, TRYmn (unless otherwise stated)

Income statement	2017	2018E	2019E	2020E
Sales	17,632	21,286	24,656	27,585
Cost of sales	(11,404)	(12,513)	(14,734)	(16,584)
EBITDA	6,228	8,774	9,922	11,001
EBITDA margin	35.3%	41.2%	40.2%	39.9%
Depreciation & amortisation	(2,597)	(4,016)	(4,235)	(4,327)
PBIT	2,932	4,758	5,687	6,675
Net interest	(107)	(481)	(659)	(672)
PBT	2,610	2,464	4,916	5,041
Tax	(572)	(591)	(1,180)	(1,210)
Tax rate	22%	24%	24%	24%
Minorities	59	64	64	64
PAT	1,979	1,808	3,672	3,767
Shares, mn	2,200	2,200	2,200	2,200
ADR, mn	880	880	880	880
EPS per ADR, TRY	2.25	2.05	4.17	4.28
DPS per common share, TRY	0.86	0.41	0.83	0.86
DPS per ADR, TRY	2.16	1.03	2.09	2.14

Balance sheet	2017	2018E	2019E	2020E
Non-current assets	18,006	19,599	20,060	20,640
Current assets	8,062	8,940	9,369	10,207
Monetary assets	4,712	9,104	13,465	15,452
Other assets	3,202	4,566	3,782	4,294
Total Assets	33,982	42,209	46,676	50,592
Current liabilities	4,946	5,109	5,178	5,793
Indebtedness	12,536	22,599	24,744	26,889
Minorities	56	(9)	(73)	(138)
Other liabilities	1,456	1,456	1,456	1,456
Equity	14,989	13,054	15,372	16,592
Total liabilities & shareholders' equity	33,982	42,209	46,676	50,592
Net debt/(net cash)	7,824	13,495	11,279	11,437

Cash flow	2017	2018E	2019E	2020E
PAT before minorities	1,920	1,744	3,607	3,702
Non-cash items	2,597	4,016	4,235	4,327
Change in working capital and other adjustments	(714)	648	(698)	289
Operating cash flow	3,101	6,407	7,144	8,319
Capex	4,090	4,409	4,697	4,907
Investing cash flow	(3,305)	(5,010)	(2,597)	(4,907)
Free cash flow	(203)	1,397	4,548	3,412
Financing cash flow	(1,567)	100	(1,104)	(2,036)

Source: Company data, Renaissance Capital estimates

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Turk Telekom

Figure 59: TTKOM debt and cash position at end-3Q18, TRYmn

Interest-bearing liabilities, TRYmn	24,713
Breakdown before hedging
TRY	0.1%
USD	70.0%
EUR	29.9%
Breakdown after hedging
LCU	36%
FX	64%

Cash and equivalents, TRYmn	6,187
TL and other LCU	16%
FX	84%

Source: Company data

Figure 60: TTKOM FX debt and hedge ratio (hedge ratio includes participating CCS & FX swaps & FX-based cash)

			Gross FX debt, $mn		Hedge ratio (RHS)
5,000				4,400	4,400			70%
4,500	4,300	4,200	4,300			4,200
							4,100	62%
4,000								54%
3,500								46%
3,000								38%
2,500
								30%
2,000
1,500								22%
1,000								14%
500								6%
0								-2%
	1Q17	2Q17	3Q17	4Q17	1Q18	2Q18	3Q18

Source: Company data

Figure 61: Turk Telekom – old estimates vs new, TRYmn (unless otherwise stated)

	Old (October 2018)		New		Deviation
	2018E	2019E	2018E	2019E	2018E	2019E
Revenue	20,167	22,079	20,359	22,258	1.0%	0.8%
EBITDA	7,922	8,557	8,219	8,847	3.7%	3.4%
EBITDA margin	39.3%	38.8%	40.4%	39.7%
Net income	(3,309)	1,623	(2,843)	1,803	na	11.1%
Net debt	16,752	15,884	16,674	15,680	-0.5%	-1.3%

Note: Including. IFRS15 impact

	Source: Renaissance Capital estimates
Figure 62: TTKOM YE19 TP calculation – blended DCF and EV/EBITDA
WACC	20.7%
Perpetuity growth rate	2.0%
Target MktCap, TRYmn	12,124
Target MktCap, TRYmn	3.5
Target 2019E EV/EBITDA, x	4.0
Target EV, TRYmn	35,387
Target MktCap, TRYmn	19,707
Fair value per share, TRY	5.6
Target price per share (blended), TRY	4.5
	Source: Renaissance Capital

Renaissance Capital

8 January 2019

EMEA telecoms

29

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 63: Turk Telekom key financials, TRYmn

Income statement	2017	2018E	2019E	2020E
Sales	18,140	20,359	22,258	23,627
Cost of sales	(11,688)	(12,140)	(13,411)	(14,279)
EBITDA	6,452	8,219	8,847	9,348
EBITDA margin (%)	35.6%	40.4%	39.7%	39.6%
Depreciation & amortisation	(2,906)	(3,680)	(3,979)	(4,138)
PBIT	3,545	4,539	4,868	5,210
Other income/losses	(1,391)	(7,518)	(1,600)	(1,400)
Net interest	(412)	(665)	(896)	(968)
PBT	1,867	(3,645)	2,372	2,842
Tax	(343)	802	(569)	(682)
Tax rate	18%	22%	24%	24%
PAT	1,525	(2,843)	1,803	2,160
Shares, mn	3,500	3,500	3,500	3,500
EPS per common share, TRY	0.44	(0.81)	0.52	0.62
DPS per common share, TRY	-	-	0.47	0.57

Balance sheet	2017	2018E	2019E	2020E
Non-current assets	17,553	18,120	18,853	19,435
Current assets	6,429	7,533	8,013	8,151
Monetary assets	4,100	6,786	8,880	9,763
Other assets	1,066	1,066	1,066	1,066
Total assets	29,149	33,505	36,812	38,415
Current liabilities	6,175	6,718	7,123	7,324
Indebtedness	16,492	23,460	24,560	25,460
Other liabilities	1,927	1,927	1,927	1,927
Equity	4,555	1,400	3,203	3,704
Total liabilities & shareholders' equity	29,149	33,505	36,812	38,415
Net debt	12,392	16,674	15,680	15,697

Cash flow	2017	2018E	2019E	2020E
PAT before minorities	1,525	(2,843)	1,803	2,160
Non-cash Items	2,906	3,680	3,979	4,138
Change in working capital and other adjustments	1,902	6,958	1,524	1,463
Operating cash flow	6,333	7,794	7,305	7,761
Capex	(4,224)	(4,247)	(4,712)	(4,719)
Investing cash flows	(3,221)	(4,559)	(4,712)	(4,719)
Free cash flow	3,112	3,236	2,594	3,042
Financing cash flow	(607)	(550)	(500)	(2,159)

Source: Company data, Renaissance Capital estimates

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