TKC - Turkcell: Masterclass In Managing Inflation

2023-11-13 04:38:46 ET

Summary

• Turkcell has successfully managed its business in the face of high and persistent inflation in Turkey.
• The company's Q3/2023 financial results showed revenue growth exceeding inflation, leading to margin expansion and a surge in earnings.
• Turkcell's valuation appears cheap compared to the Communications Sector, but macro risks in the Turkish economy remain.

We must give credit where credit is due. In my prior article , I was concerned about runaway inflation in Turkey and Turkcell's ( TKC ) ability to manage its business in that environment. So far, the company has been giving a Masterclass in how to manage business in the face of persistent inflation, with the company's shares gaining 12% since my article (Figure 1).

As Turkcell recently reported its fiscal third quarter results, let us review the quarter and the macro environment to see if I should change my view on the company.

Brief Company Overview

Turkcell Iletisim Hizmetleri A.S. ("Turkcell") is one of the largest telecommunication providers in Turkey, with a leadership position in mobile services with 37.6 million subscribers and coverage over 99% of the country. Turkcell is also a challenger in providing fixed-line broadband, with 3.0 million subscribers (Figure 2).

Growth Finally Outpacing Inflation...

My primary concern in my last article was that although Turkcell delivered strong revenue and earnings growth, the company's growth rates actually lagged behind Turkey's astronomical inflation rate.

For example, in Q3/2022 (the most recent set of financials prior to my article), Turkcell saw 57% YoY revenue growth, but Turkey's official inflation rate was between 60-80% during that time, so adjusted for inflation, Turkcell's financials actually lagged (Figure 3).

However, in the most recent third quarter financial results, Turkcell actually saw 77% YoY growth in revenues, 89% growth in EBITDA, and 129% growth in net income (Figure 4). This compared well against official inflation rates of between 40-60% in the last few months.

In fact, if we look through the company's operational details for the quarter, Turkcell's average revenue per user ("ARPU") finally crested CPI inflation in Q1/23 and have since stayed ahead of inflation (Figure 5).

Importantly, despite high growth rate in ARPU, subscriber trends have stayed positive, with Turkcell adding 1.7 million postpaid subscribers YoY and 392k subscribers QoQ. Mobile churn was also stable at 2.0%. This suggest Turkish consumers are quite sticky and were not deterred by the high growth rate in their mobile phone bills.

Perhaps this result should not come as a surprise, as Turkey has one of the youngest population in Europe with high penetration rates of social media and mobile data usage (Figure 6).

In fact, according to data from ExplodingTopics/DataReportal, people in Turkey spend an average of 4 hours and 16 minutes glued to their smartphones everyday, the highest in Europe and the only European country above the global average (Figure 7).

...Leading To Expanding Margins

With revenue growth exceeding inflation, this has led to an expansion of Turkcell's margins. In the most recent quarter, Turkcell's EBITDA grew 89% YoY and EBITDA margins expanded by 2.6% YoY to 43.5% (Figure 8).

Margin expansion has led to a 129% YoY surget in net income, from $2.4 billion lira to 5.5 billion lira (Figure 9).

Balance Sheet Also Improved

Turning to Turkcell's balance sheet, in my last article, I was concerned that due to the rapid depreciation in the turkish lira, Turkcell's foreign currency-denominated debts had ballooned to 52 billion lira in Q3/22.

As the lira has continued to weaken in 2023, Turkcell's debts are now valued at 83.5 billion lira. However, with the company's surging EBITDA (due to successful price increases), Turkcell's net debt / EBITDA ratio actually improved YoY from 1.0x to 0.8x (Figure 10).

Overall, Turkcell's performance in 2023 has far exceeded my expectations, so kudos to the management team for successfully managing the company in a period of surging inflation.

Valuation Appears Cheap

Turkcell's valuation appears cheap, trading at just 6.7x trailing P/E compared to 16.5x for the Communications Sector (Figure 11). However, Turkcell's valuation is likely discounted due to the macro risks embedded in the Turkish economy.

Unlike many developed country telecom companies like Verizon (VZ) and AT&T ( T ), Turkcell does not pay a dividend.

Macro Risks Remain With Turkcell

While Turkcell has successfully managed revenues and margins in the past year, this has generally occurred in a solid global economy where Turkey's GDP growth rate ranged from 3-4% (Figure 12).

It is unclear whether Turkcell's pricing power will be as strong if the Turkish economy falls into a recession, perhaps spurred by a potential recession in the broader EU-area.

Furthermore, while Turkish inflation had moderated so far in 2023, they are once again ratcheting higher in recent months. If Turkish YoY inflation returns to the 80-100% range that we saw in 2022, then Turkcell may once again struggle to raise prices fast enough to keep pace with inflation (Figure 13).

Conclusion

Turkcell has done an amazing job managing its business in the face of high and persistent inflation. The company recently reported Q3/2023 financial results that saw revenue growth exceed inflation, leading to margin expansion and a surge in earnings.

While macro risks remain, I must admit Turkish consumers' attachment to their mobile devices have been much stickier than I expected, easily absorbing the 80%+ YoY price increases that Turkcell implemented without a rise in churn.

I am raising Turkcell stock to a speculative buy , suitable for those investors who can stomach the increased volatility in emerging market stocks. If Turkey can keep a lid on its inflation rate, Turkcell's seasoned management team is capable of managing the company to deliver strong financial performance.

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