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We’re holding out hope for this Turkish communications company

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR


Friday February 4, 2022

Think inflation is ugly here? It ain’t nothing, folks, compared with Turkey, where the annual inflation rate is currently 48.7 percent. That has humbled the lira, which tumbled 44 percent in 2021. Talk about shrinking buying power!

In the midst of this — well, September actually — Benj decided to buy Turkcell Iletisim Hizmetleri at US$4.41. Given that it now trades at around US$3.40, it has not worked out well. The initial sell target is a beefy US$14.74, far below the US$27 where it traded 15 years ago.

Interesting to note is that this is the only company in Turkey that is dual-listed on the Borsa Istanbul and the NYSE, and while the stock price in New York has dropped substantially, it recently reached a record high on the Borsa. That currency exchange thing.

Established in 1993, this Istanbul-based enterprise offers voice, data and video communications, television, digital music and cloud storage. There is more, but you get the drift. Its footprint extends beyond Turkey to Ukraine, Belarus, Azerbaijan, Belarus, Cyprus, Germany and the Netherlands.

Turkcell’s most recent quarter was boffo. Revenues were up 22.3 percent; EBITDA was higher by 18.7 percent and net income set a record, up a hearty 18 percent. The subscriber base jumped by 1.2 million, the best number since 2007. Success looks like it will beget success, with forward revenue estimated to grow 20 percent, up from 18 percent.

But investor beware: if the dramatic fall in the lira is not stanched, it will be difficult to receive a positive return on the NYSE — even if the company does beautifully.

In 2020, the Turkish Wealth Fund became Turkcell’s largest shareholder, buying 26.2 percent of the shares. The goal of the fund is to invest in strategic sectors, which this one certainly is. To guard its position, TWF can elect five of the nine members of the board of directors. Although the risk of financial problems is already low, it feels comforting to have this deep-pocketed investor behind Turkcell.

What is an acceptable strategy when investing in a company that is in a country with high inflation? Well, to some degree, one must remain calm and be prepared for super volatility. For example, on December 7, as the lira plumbed new lows, the Turkish stock market was halted. Twice.

And there are major questions about President Recep Tayyip Erdogan’s strategy. Conventional wisdom is that when inflation is excessively high, interest rates are raised to quell it. The classic example was when Paul Volcker, then chairman of the US Federal Reserve, raised the fed funds rate to 20 percent in June of 1981.

While that worked, the unemployment rate swelled to above 10 percent, which may not have hurt the mucky mucks so much, but people lower on the food chain were suffering, to be sure. In contrast, Erdogan recently raised the national minimum wage by 50 percent to help maintain popular support.

And towards the end of last year, Erdogan actually lowered interest rates for four straight months. It is hard to find an economist who concurs with this approach, but Benj thinks it may not be so stupid. His feeling is that when interest rates are continually raised, it naturally increases borrowing costs, forcing suppliers to raise prices of many goods to cover the additional burden.

In addition, labour will demand higher salaries to absorb the dual blows of inflation and higher interest charges. Hey, this isn’t just a Turkish thing; it's happening in North America, where we are facing the same problem on a more nominal scale.

Fortunately for investors, Turkcell pays a dividend, recently at eight cents. In 2017, one payout touched 27.6 cents, so it varies dramatically —and often there is no money coming investors’ way. Overall, though, this dividend is another reason why Benj feels the stock will ultimately be a good deal.

Another way to derive a benefit from Turkey? With the lira being smashed, travel in the country is becoming cheaper, especially for those willing to explore the roads less trodden. A beaten-up currency has often provided Benj with a good reason to visit another country. In this case, he could also check out his investment firsthand.

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