- In 2023, after being positive between May and September, we had been cautious on Turkish Equities since the beginning of the third quarter. The key reasons for our opinion change has been lessening catalysts such as: (1) a 65% rally (25% in USD terms) during this period, (2) added competition from alternative asset classes, our expectation of higher deposit rates in particular, (3) a decline in earnings growth, which has been skyrocketing over the last 18 months due to their low base, higher inflation creating sales price increases, and frontloaded consumer demand, (4) slower global growth, creating a challenge for exports, and (5) valuation levels reaching a saturation point.
- Going into 2024 most of these themes remain intact, with some creating even harder challenges for Turkish stocks – today rates continue to rise and consumer demand is getting softer. On the other hand, in terms of the potential equity market performance, we split the year into two periods – the first half, where uncertainty is likely to be higher, and the second half, where current macro policies could bear fruit.
In the first half of the year, rates are likely to remain higher and peak, resulting in continuing pressure in earnings growth, investors are likely to be willing to see the impact of the first set of inflation adjusted results given Türkiye’s accounting policy switch, and the political noise is likely to be elevated due to the upcoming municipal elections in March.
On the contrary, in the second half, we expect the inflation trend begin to ease, and more importantly for equity market purposes, this should follow by rate cuts. Hence, the latter two events could raise 12 month forward looking earnings expectations as well, helping for a solid stock market performance. Also, throughout the year, we expect upgrades on Türkiye’s sovereign ratings from various agencies.
- In terms of our estimates and comparable multiples (in 2 year real terms) we observe that Türkiye is likely to experience a slower period compared to its peers. Yet, as mentioned above, we believe 12 month forward looking growth expectations could pick up during the course of the year. In terns of multiples, Türkiye’s EV/EBITDA discount has dropped from 40% from three months a go to 26% at present.
- Our BIST-100 target is barely changed and stands at 10,300 – upside 30%. Consequently, our upside is 40% for Banks and 25% for industrials.
Sectoral Outlook: Overall Outlook – a slowdown is in place and who are the winners?
- In 2022, total EBITDA rose by 153% and net earnings by 272%, which corresponds to high double digit growth in EBITDA and triple digit growth in real terms.
- In 2023, in real terms, stocks in our coverage should show flat EBITDA and an earnings decline of 19% in real terms. Sectors in which we expect a meaningful real growth in both EBITDA and net earnings are limited to autos, consumer durables, clothing retail, food, food retail, IT services, and healthcare.
- In 2024, in real terms, we expect a 13% contraction in EBITDA and another 17% net income contraction for companies under our coverage universe. Sectors where we expect a positive are steel, electricity production, food, food retail, selective ready ware retail, healthcare, defence, selective contracting, and telecoms.
Our Model Portfolio: Adding Aksa Enerji, Is Bank, and excluding Garanti, MLP Care, and Tekfen
- We are adding AKSEN to our model portfolio due to the growth potential linked to the recently signed 430 MW plant deal in Uzbekistan along with a relatively higher expected EBITDA contribution from the coal plant in Goynuk in 4Q23 due to the removal of the maximum settlement price mechanism. Stock trades at FY24E 5.1x EV/EBITDA based on our 2024 estimates and has underperformed the BIST100 index by 51% YtD.
- We are switching out of Garanti into Isbank whose balance sheet is better structured for inflation accounting even though inflation accounting will not be applied to banks. We also find the “partial demerger” of subsidiaries from the bank in 2024 positive due to its potential to create a story for the bank.
- Despite MLP Care is and operates in one of the most buoyant sectors for 2024, and we like the quality of the business, we remove the stock from our model portfolio due to our share overhang concerns.
- Finally, we are taking a stop loss from Tekfen.
Gedik Investment Research
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