Y.F. Equity Strategy Report: Running to stand still

We are moving our BIST-100 target to 1,875 (previously 1,750), while underlining risks that lower the appeal of the implied upside. Turkey’s high inflation, cost of equity and risk premium has kept BIST flattish this year, despite high GDP growth, strong earnings momentum and global tailwinds; confirming our call in January that the market valuation had reached ‘close to fair’ during this year’s peak. With this note, we are revising our bottom up valuations with pending adjustments after 1H performance and outlook for the rest of the year. Our renewed BIST-100 target points to c30% potential upside from current levels, but also assume c150bps sustainable drop in long-term TL yields as we use 16.0% risk free rate assumption in our valuations. Each 100bps increase in the said rate lowers our index by around 7%. Given the current global backdrop centered on Fed tapering impact on pricing dynamics, currency volatility and recent inflation readings, market conviction on such a benign outcome (lower cost of equity) would likely remain low. We therefore remain cautious on the short-term prospects of BIST and continue recommending a strictly bottom-up approach, which proved the right strategy so far this year (Model Portfolio performance and Top Picks on Page 7). BIST valuation remains at depressed levels on a multiples basis compared to peers and its own history; but the interest rate and cost of equity gap vs. rest of EM and pre-2018 Turkey render these benchmarks misleading at this point.

More reasons to remain selective in banks.  Bank valuations remain depressed versus rest of the market and the banking index has underperformed BIST-50 year-to-date. The sector’s earnings progression remains mixed and we think resilience against potential macro headwinds greatly differs according to provisioning cycle and FX hedging policies. With this background, our banking sector target prices show 20% potential upside, lowered by state bank valuations. We currently favor GARAN and YKBNK, as these banks have accumulated large provisioning buffers since 2018 -that would keep their cost of risk low and ROE’s at relatively high levels. They also both have proven performances of managing recent macro volatility and do proper currency hedging of their FX loan books. That said, bank valuation sensitivity to changes in macro scenario remains high and we may visit our recommendations in a worse case scenario.


Non-bank valuations indicate 32% overall upside potential. We estimate aggregate revenues of non-financials would grow 43% in 2021E, up from our earlier estimate of 30%, while aggregate EBITDA of non-financials would jump by 60% on the back of strong domestic/global demand dynamics. Despite an attractive upside across the board, we believe companies that are better positioned to tackle with rising raw material and energy prices and less exposed to regulatory risks (as government reaction to inflationary pressures might be unfavorable for some sectors) should continue to outperform. Low financial leverage and resilience against exchange rate volatility remain key stock picking criteria. Our Top-Picks among non-bank names are TUPRS, KCHOL, PETKM, SISE, MPARK, MAVI and OZKGY.


Y.F. Securities Research