As the world is experiencing its highest inflationary period in 40 years and all central banks are tightening at record pace, Turkey is going the opposite way, slashing its policy rate to 12% and possibly to single digit by YE22, while inflation hovers above 80%. And all of this is happening as 2022E Current Account deficit is at 7% of GDP. The 7.5% GDP growth in 1H22, driven by strong private consumption and exports has been the only bright side of all macro indicators but a slowdown in 2H22 and 2023 is inevitable as global economic slowdown will affect Turkey as well. Central Banks’ net FX position is at minus US$61.2bn (highest in 2022 was minus US$48.2bn), while the FX-protected deposit scheme, which mutes domestic FX demand reaching US$75bn, Lira stands on fragile ground with record CA deficit.
Foreign investors are waiting on the side lines to get a clue for possible results of the presidential & parliamentary elections that will be held in June 2023 (no chances for early elections anymore). Sharp decline in purchasing power with inflation hitting above 80% have dented AKP’s popularity in polls to its lowest rating in years, however not having decided on who will run against President Erdogan to this day, opposition alliance is weakening its own hand for its first win in 20 years.
2022 has been a strong year for Turkish equities, as BIST-100 is up by 109% in TL terms and MSCI Turkey outperforming MSCI EM by 93% year-to-date. BIST-Banks index is outperforming the BIST-Industrials by 40% year-to-date, as BIST-Bank profits are up 418% y/y in 1H22, while BIST-Industrials’ profits were up 162% y/y. (Transportation, banks and food retailers have been the main outperforming indices.) Local investors have become a more dominant force since 2020, as their share in free float of the equity market reached 68% from 39% at YE19. The market is now trading at 3.8x 2022 P/E (Ata coverage), at a 64% discount to EM peers, however given the 83% headline inflation Turkish companies inflation unadjusted earnings making P/E comparison with EM peers less meaningful.
We forecast 2022 earnings growth for our coverage universe to be 192.7% and followed by a 11.4% decrease in 2023.
Net income for non-financials coverage will post 95.3% earnings growth in 2022, while for banks the increase will be 331.1%
Bottom-up valuation: We revised up our 12-month BIST-100 target to 4,800 from 4,000, indicating an upside of 25%.
Our top picks: Bim <BIMAS TI>, Coca Cola Icecek <CCOLA TI>, Migros <MGROS TI>, Sisecam <SISE TI>, Tav Hava Limanlari <TAVHL TI>, Tofas <TOASO TI> and Turkcell <TCELL TI>.
Top picks Addition:
Coca Cola Icecek <CCOLA TI>: We are adding Coca Cola Icecek to our top pick list with a 12TP of TL220.0, implying 33% upside potential, including 4% dividend yield, considering the company’s resilient outlook amid high inflation environment and increasing global recession concerns. Despite the negative effect of the commodity price increases, we believe that the company will manage to increase its 2022E and 2023E net income by 88% and 81% y/y to TL4.3bn and TL7.8bn, respectively. Based on our 2022E estimates, Coca-Cola Icecek is currently trading at 5.4x EV/EBITDA and 10.2x P/E, implying 32% and 32% discount to its global bottler peers median, respectively.
Tofas <TOASO TI>: We are adding Tofas to our top pick list with a 12TP of TL135.5, implying 50% upside potential, including 10% dividend yield. Considering the strong domestic market share, take or pay agreement and potential new projects from Stellantis, we believe that rewards are much higher compared to potential risks for Tofas at current levels. Based on our 2022E estimates, Tofas is currently trading at 5.4x EV/EBITDA, implying 15% discount to 10-year median of 6.2x.
Top picks deletion:
Arcelik <ARCLK TI>: Considering the short-term headwinds against profitability due to higher raw material costs and lower Euro/US$ parity, we are deleting Arcelik from our top picks list. Although we believe in the company’s long term growth prospects, we see a deterioration in growth and operational profitability as well as pressure at the bottomline. Considering the downside risks to our estimates and short-term weakening in its earnings outlook, we prefer to replace Arcelik with Tofas due to higher rewards versus potantial risks within our top picks list. Arcelik’s ongoing buy-back program and any strategic move regarding its operations in Europe could be the risks against our call to delete Arcelik from our picks list while our outperform rating continues.
Erdemir <EREGL TI>: Amid global recession and Russia-Ukraine war uncertainties, we believe that super up-cycle in steel ended by 2Q22. Although we believe that steel prices are stabilizing after a fall from record-high levels, we still see downside risks to our earnings estimates. Considering long-term prospects and valuation, we still have outperform rating for Erdemir. However, global recession risk might put a pressure on steel shares. Thus, we prefer more defensive sector during the next 3-6 months.
Turk Telekom <TTKOM TI>: Considering the risk-reward, we are replacing Turk Telekom with Turkcell within our top picks lists. Although we see similar upside potential in both telecom companies, we foresee higher upside risk to our estimates for Turkcell versus Turk Telekom. In high inflationary environment, we believe Turk Telekom is relatively more vulnerable against inflation due to longer term customer contacts and less flexibility to reflect the cost pressure to their prices. We also see higher chance for Turkcell to be a strategic acquisition target after elections.
Petkim <PETKM TI>: Petkim trades at 10.9x 2022E EV/EBITDA, implying 51% premium compared to 5-yr historic multiple of 7.3x. Due to limited upside considering the risk and rewards, we are revising down our recommendation for Petkim to “Underperform” from “Marketperform” and we are revising down our 12M TP to TL10.61 from TL11.58/shr, implying 22% downside potential.