We expect TTKOM to continue posting strong operating figures in 4Q18 mainly thanks to the inflationary pricing and healthy growth in the subscriber base. The robust trend in operating performance should also go on in the medium term as the positive impact of price hikes in fixed broadband, becoming effective in 4Q18, will be fully seen this year. In 4Q18 the company will also benefit from TL appreciation due to TL12.5bn unhedged FX position. Hence we forecast a net income of TL1.9bn (cons: TL2.1bn) in 4Q18 vs TL3.6bn and TL0.1bn net losses in 9M18 and 4Q17, respectively. Thanks to the sustained operational efficiency accompanied with the rising ARPU levels, for the longer term we estimate TTKOM to post double digit growth both on the top line and EBITDA levels. We forecast revenues and EBITDA to post circa 15% CAGR between 2019-2022.
Target Price raised to TL6.35/share, maintaining our Outperform rating
We made three main adjustments to our DCF analysis: i) incorporating our new risk-free rate assumption of 16.0% ii) reflecting the positive effect of TL appreciation on the company’s net debt, and iii) increasing our consolidated average capex/sales (exc. potential license fee payments for 5G) estimate to 19% from 16.5% between 2019-22. All in all, we set our new Target Price at TL6.35/share (up from TL4.95/share), indicating a hefty upside potential of 41%. Hence we maintain our Outperform recommendation. The stock also trades at an undemanding 2019E EV/EBITDA of 3.3x, which implies a deep 42% discount to the peer group. TTKOM’s trailing 12M EBITDA multiple also stands at 4.6x vs. 3-year average multiple of 5.4x.
Dividend distribution set to restart in 2020
After paying out TL0.24/share dividend in 2016 (2010-2016 avg.: TL0.48/share), TTKOM was silent for 3 years without distributing any dividend mostly due to increasing financial losses stemming from TL depreciation. According to our macro estimates, we also forecast TTKOM to restart its dividend payment next year (TL0.64/share with 10% dividend yield).
Building future through synergy
TTKOM would continue to execute and benefit from its strategy by offering bundled services in the long term. The company already increased its broadband subs. to 10.6mn in 3Q18 from 8mn in 4Q15 and the share of fiber subs. from 18.3% to 32.1% during the same period. TTKOM has also further room to intensify its strength in broadband market by focusing on enlarging its fiber network. As the biggest fixed line operator in Turkey, through newly created penetration in broadband, upsell possibilities along with cross sells might bolster revenue growth through increasing customer loyalty.
The key downside risks to our valuation are i) intensified competition in mobile segment which could force down ARPU, ii) depreciation of TL against hard currencies which threatens bottom line and future dividend payments, and iii) uncertainty about 5G tender and licensing fees.
RESEARCH, Yatirim Finansman