Raising our estimates and valuations with our new BIST target of 134K (from 119K) indicating 21% upside potential for the market
The pandemic has been sad for the people, but it turned out to be not necessarily bad for the markets. Even though world economy is now in a recession, massive liquidity response from global central banks and willingness to reopen economies as quickly as possible helped markets recover much of the ground lost during the initial shock. Just as young people are believed to recover from the virus more quickly than elderly ones, Turkish economy is better positioned in terms of the cycle (as opposed to some overheating economies) and this is an advantage in the rebound from the pandemic.
Nevertheless, we underline the damage caused by the Covid-19 as Turkish Lira depreciated by 14.9% YTD, Turkey sovereign CDS soared to 465, unemployment jumped to 13.2% and GDP is set to contract by 1.5% in 2020E. While our estimates point to weak aggregate earnings outlook for this year, we believe much of the investor focus remains on pace of recovery in 2H and the next year. On our 2021E estimates, BIST still looks attractively valued at 6.5x P/E multiple, a discount of 46% compared to MSCI EM and 26% lower than the 5-year historical average. Based on aggregate valuations, our target prices point to 34% upside potential for banks and 17% upside potential for non-bank names (risk-free rate assumption revised of 13%). This implies a BIST target of 134K and 21% upside potential for the overall market.
Bank valuations remain broadly unchanged and point to 34% potential upside
Our 2020E net income is c5% lower than the Bloomberg consensus (versus the 17% gap in our last market update note on 20 March). BRSA’s favorable regulation change around NPL classification prevents a more bearish view this year, especially for state banks. It remains to be seen how the banks would adjust their risk scenarios and reflect the potential impact on their balance sheets after the sharp hike in 1Q provisions. Given the stabilization of GDP estimates and exchange rates, we think the risks are on the upside for earnings. One important caveat is different credit risk pricing among state and private banks and the regulator’s stance towards balance sheet expansion via loan growth; which can be a challenge for private peers (i.e. in meeting the Active Ratio requirement). Top Picks are GARAN and YKBNK.
Non-bank valuations revised up by 11%
At net income level, we estimate aggregate earnings of non-financials would drop 40% in 2020E with FX losses pressuring bottom-lines, whereas our estimates for 2021E indicate a strong recovery in earnings by 93% on the back of base effects and expected recovery in demand outlook. Our top-picks among non-financial names are EREGL, TTKOM, ULKER, KOZAL, MGROS, TKFEN, ALARK and MAVI.
Excerpt from Y.F. Securities Research Monthly Report
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