Only limited negative sector growth despite inflation
BofA economists expect Turkish inflation to pick up initially until new policies reach full steam. Overall, they have revised their year-end forecast from 44% to 58% and see the peak at 65% next May. We believe the telcos are now better prepared to withstand inflationary pressure: our new forecasts imply only limited negative real growth in 2024E at -8% (vs- 27% in 2022), rising to +8% in 2025E.
Buy Turkcell for FCF revival and relative value
Our preference remains for Buy-rated Turkcell owing to its: (i) stronger FCF restoration (7% yield in 2024E vs -2% for TTKOM), (ii) better FX protection ($98m effective net short position vs $374m for TTKOM), (iii) valuation: now at a c.40% discount to TTKOM on 2024E P/E vs the 8% average past 5Y premium. We raise our POs by 3%/23% driven by (i) new estimates (Exhibit 23, Exhibit 26), (ii) lower WACC to account for a 200bps lower 10Y risk-free rate, and (iii) new USDTRY of 37.0 (as of 3Q23E) to set our Turkcell ADR PO. We believe 2Q results should support our views.
Price hikes should accelerate from here
Affected by the earthquakes (February) and the elections (May), the sector saw few price actions in 1H23, limited to c.15% hikes in April. 2H has started on a positive note with c.47% average rises in fixed broadband by TTKOM, both in retail and wholesale. We are constructive on repricing momentum and factor in 30pp cumulative price hikes in mobile in 2H23 and 60pp in 2024, as well as 40pp in fixed in 2024. Key drivers: (i) another minimum wage hike of 34% in July, (ii) limited communication services impact on CPI inflation (Exhibit 10), (iii) below historical churn levels. However, we admit ARPU pass-through is partially constrained by (i) high promotional activity in mobile since the earthquakes, and (ii) FBB still being dominated by 24M contracts (c.70-75% of total).
Cash generation: FX blurs the picture, less at TCELL
BofA now sees USDTRY at 31/41/48 by the end of 2023/24/25. Key FX exposures: opex (c.8%. of revenue), capex (c.65% of total) and debt (c.75%). As we factor in new currency assumptions (and 5pp higher corporate tax rate) we cut TCELL 2024E FCFE by 17% to TRY7.3bn, which still implies a major revival from -TRY1.6bn in 2023E. For TTKOM (mainly due to its longer repricing and higher staff costs as a % of revenue) we project -TRY1.6bn FCFE after -TRY2.3bn in 2023E. We see TTKOM leverage at 2.1x in 2023E and we cut the 2023E dividend to zero. For TCELL, we expect clarity on dividends (and the AGM date) ahead of 2Q and see room for a 25% payout in 2022 and 50% from 2023.
2Q: what to expect – revenue guidance to be upgraded?
TCELL: revenue TRY20.8bn, EBITDA TRY8.5bn, net income TRY3.3bn. TTKOM: revenue TRY17.6bn, EBITDA TRY5.7bn, net loss -TRY1.4bn (due to wider FX losses of -TRY3.2bn vs TRY1.1bn for TCELL). We believe upward revisions to revenue growth guidance are
likely, while implied EBITDA-Capex deltas should remain broadly unchanged.
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