Turk Telekom is a large Turkish telecom conglomerate controlling a number of companies with distinct specializations (broadband, mobile services, TV etc); the parent company on the other hand is the incumbent fixed line operator.

Turk Telekom has been listed on the Turkish Stock Exchange since 2008 when the Government reduced its stake from 45% to 30%, while retaining a golden share. It is controlled by the former Lebanese Prime Minister, Saad Aden R B Al Hariri, through the Saudi Arabian construction company Saudi Oger.

While the revenues have been increasing for several years now, their composition changed significantly, with mobile and broadband services compensating for the drop in fixed voice services; indeed, the contribution of the latter almost halved since 2008 when they were the largest contributor to sales. As such, the company has been successful in weathering the shifts in demand and seizing a growing market share of the services/products that have emerged as the next favourites.

Indeed, its mobile arm, Areva, is the third largest operator in Turkey and has been enjoying rapidly increasing market share. The Q2 results released this week also showed that mobile data usage continued to underpin the strong performance of the company as it boasts the highest smart phone penetration in the local market (62% in Q2).  As yet another positive, the proportion of post-paid mobile clients continued to increase and is now equivalent to 50% of the total customer base. Such a trend is positive for the longer term outlook as it enhances the predictability of revenues going forward.

Over Q2 2015, revenues grew 7% YoY as the number of mobile subscribers continued to increase, broadband users portfolio expanded further and the average revenue per user for both services was resilient. Thus, as was the case in the past, the growth in these two segments was high enough to offset the weakness in fixed line telephony.

Against this backdrop, EBITDA and Gross margin have been resilient notwithstanding their high levels, while the net profit has been subject to the volatility in the Turkish Lira (TRY). More specifically, FX gains/losses have been fairly high given the predominance of FX denominated debt which, at the end of every reporting period, has to be re-valued using the prevailing exchange rate with any increase/decrease recognised as a loss/gain.

A case in point is the first semester of this year which coincided with a significant weakening in TRY, resulting in an upward move in the book value of debt and sizable FX losses. As such, the leverage metrics deteriorated of late, with the net Debt-to-EBITDA reaching 1.6x in the most recent quarter, from 1.3x in December 2014.

Having said this, operating cash generation remains very strong and going forward, leverage is likely to decline due to lower dividends. More specifically, Turk Telekom has been abiding to a 90% of net income dividend payout policy for several years in a row, which means that the FX losses stemming from a higher USDTRY result in lower dividends in the following year. As such, in 2016 we would expect lower cash outflows to shareholders and, by extension, a rebound in cash holdings which would bring the leverage metrics back lower.

The company has two USD bonds outstanding (maturing 2019 and 2024), both of which have been range-trading for a while with some weakness observed in the aftermath of Turkish elections and during episodes of higher TRY volatility. While the local political scene can instil some weakness, the name’s fundamentals would justify tighter yields. As such, for investors with longer investment horizons, who can look past short term volatility bouts, these notes can be a viable addition to the portfolio.  

This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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