We present five stocks that we prefer in Turkey from a growth and valuation perspective in the current market.
Our five stocks are Garanti Bank, Turk Telekom, Tofas, Enerjisa and Migros, all rated Buy.
Our TPs are TRY10.3 on Garanti, TRY8.6 on TT, TRY24.8, on Tofas, TRY11.5 on Enerjisa and TRY40 on Migros.
Worst behind with COVID-19 but earnings visibility remains poor
Turkish equities have posted a good recovery recently (up 25% in the past two months) driven mainly by expectations of a post COVID-19 normalisation in economic activity.
Currently HSBC’s Turkey coverage trades at a 2020e PE of 7.5x and banks at a P/B of 0.4x, levels comfortably below the past five-year averages. Earnings, however, are highly volatile and visibility remains poor. Many corporates have pulled back their 2020 guidance set at the beginning of the year and are refraining from providing an update at this stage as there is uncertainty about how fast the recovery may be.
Five preferred stocks in current market
Despite HSBC’s neutral equity strategy weighting on Turkey (see GEMs Equity Strategy, 20 May 2020), this report highlights five key ideas from our Turkey stock coverage, which our equity analysts believe have the most compelling stories, ticking at least one of the following boxes: earnings growth/defensiveness, inexpensive valuation, high dividend yield, or a near-term positive catalyst.
Garanti – trailing P/B at historical low of 0.55x, an overly punitive valuation as it implies a sustainable ROE of 13% whereas we see 15-16% achievable by the bank
Turk Telekom – defensive qualities in the current macro situation, healthy cash flow generation, solid position in the fixed segment and discounted valuation vs peers
Tofas – well positioned to benefit from potential incentives and consumers’ likely trade-down post COVID-19; resilient earnings thanks to take-or-pay protection
Enerjisa – high-growth and defensive earnings model; attractive dividend yield (2020e 10.1%); regulatory backdrop likely to remain supportive post 2020
Migros – strong domestic operations, limited competition in the supermarket space, high growth in online delivery, potential multiple re-rating thanks to de-leveraging
BBVA Gatanti: Looking oversold
Current valuation looks disconnected from sustainable profitability. Garanti’s trailing PB has hit an all-time low of 0.55x amid uncertainties caused by COVID-19 and concerns around the Turkish currency. This valuation looks too punitive to us as it prices Garanti for a sustainable ROE of 13%, but Garanti’s very strong PPP margins revealed in its Q1 results suggest that the bank can easily achieve 15-16% sustainable ROE once COVID-19’s transitory impact on asset quality subsides. We use an 18.5% COE when valuing Turkish banks. We believe that Garanti should deliver a sustainable economic profit that deserves more than 0.7x book value. We reiterate our Buy rating on Garanti with a TP of TRY10.30.
Strong PPP margins overshadowed by the frontloaded provisioning
Garanti delivered a very strong PPP margin of 4.6% in Q1 thanks to strong core revenues in addition to well-contained operating expenses. This strong top-line performance didn’t trickle down to net income as the bank frontloaded provisions to prepare for the anticipated negative impact of COVID-19 on asset quality. Q1 net CoR was a very high 360bps. Despite that, the bank achieved a healthy 12% ROE. While we expect FY20e CoR to remain around 300bps given the challenging economic outlook, we expect it to gradually ease to 180bps in FY21e and to a sustainable 140bps in FY22e. This should lift Garanti’s ROE from 12% in FY20e towards a sustainable 15.5%, in our view.
Robust capital position leaves room to take up leverage once the market normalises
Garanti’s 14.03% fully loaded CET1 ratio gives it ample shock absorption capacity and limits dilution risk for minorities. In addition, it gives the bank the means to step up growth once market conditions improve and thereby enhance ROE through leverage. Meanwhile, Garanti’s robust 8% provision coverage of gross loans (ignoring collateral) suggests that it should quickly get out of the woods once the economy recovers, as it won’t need to top-up provision buffers.
We believe that the bank’s current valuation of 0.55x trailing PB offers positive optionality as it implies an impairment in profitability, which in our view is unlikely.
Excerpt from HSBC “Turkey Best Ideas” report
Importance Notice: PA Turkey does not comment on or add text to equity recommendation and stock recommendation reports to comply with Turkish Capital Market Board and BRSA guidelines. The opinions expressed here are not necessarily shared by PA Turkey. This report doe does not constitute investment advice.
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