JP Morgan Cazenova: Top picks to play 2020 macro outlook
Following PT adjustments to reflect lower rates, our top picks are Ford Otosan, Arcelik, Medikal Park (MLPCare) and Migros, all offering 12-month TSR potential over 30%
After two years of recession and sizeable rate cuts, Turkey is now in a sweet spot for investment with green shoots of rapid economic recovery in domestic consumption. Our recent meetings with Turkish real sector players as well as high-frequency data highlight that growth risks are skewed to the upside.
The burden on the Turkish consumer is likely to ease with real wage growth, falling unemployment and rising availability of credit at cheaper rates. We also expect a benign global economic backdrop to improve momentum in Turkey further with contained risks to the currency and external balances, leaving rather comfortable room for CBT to continue with monetary easing in 2H yet at a slower pace. In this positive framework, we find valuations still supportive for cyclicals and high-leverage companies while we would delay investing in staples and food retailers to 2H. Following PT adjustments to reflect lower rates, our top picks are Ford Otosan, Arcelik, Medikal Park (MLPCare) and Migros, all offering 12-month TSR potential over 30%. We also highlight Turkish Airlines with its ~60% TSR potential as the best value stock to play the structural turnaround in operations. We downgrade much less cyclical company Tofas to Neutral and see its valuations as stretched for a business model that is unlikely to grow fast.
Recovery cycle should bring the most positive surprises in autos and white goods sectors
High-margin Turkish demand has fallen to a level that is almost half of its peak in autos, back to the level of the 2008 crisis period, while relatively affordable white goods demand is now 25% lower than its 2017 peak. Experience highlights a sharp improvement in these sectors during a recovery cycle with large players albeit being an exporter enters into a sizeable recovery period in earnings. We think we are still conservative in reflecting a 20% domestic pick-up in autos and 5% in white goods in 2020E.
Boost to equity valuations and EPS in high-leverage companies
With credit interest rates down from 25% to c.10-13%, leveraged companies that have low interest coverage ratios, such as Migros and Medikal Park, should draw investor attention back to their competitive and profitable operating business models. We expect fast deleveraging and increase our cash-flow-driven PTs by c. 17% for these stocks.
Turkish Airlines – time to catch up with peers
We see this as a best value turnaround story, triggered by stable costs vs an improved revenue outlook. Recent management guidance highlights upside risks to earnings which we forecast almost doubling in 2020. Low multiples despite its competitive cost base vs peers and faster capacity expansion indicate room to catch up with re-rated sector multiples.