TELECOM SECTOR UPDATE: Revising up the estimates
Despite solid growth for the last decade, Turkey’s telecom metrics are still behind peer averages, which should support further expansion of the sector for the foreseeable future. Fixed broadband penetration is at 17% vs. OECD average of 31%, while mobile penetration stands at 98% (vs. peer average of 131.5%)
As a matter of editorial policy PA Intelligence does not conduct its equity research, or add comments to those it publishes by respectable financial institutions. This equity recommendation report is by Yatirim Finansman Security. Its research analysts likes telecoms.
Low penetration to support growth
Despite solid growth for the last decade, Turkey’s telecom metrics are still behind peer averages, which should support further expansion of the sector for the foreseeable future. Fixed broadband penetration is at 17% vs. OECD average of 31%, while mobile penetration stands at 98% (vs. peer average of 131.5%). Share of post-paid subscribers (59%) and mobile ARPU (EUR5.9/month) are visibly below peer countries. Although we do not expect Turkey to exceed these averages, we believe the growth should be faster than other countries, especially in the mobile market.
Concessions and capital expenditures
All mobile and fixed concessions will be renewed in 2020s. Starting from 2023, Turkcell and Vodafone’s 2G licenses will expire, followed by Turk Telekom’s fixed concession and 2G license in 2026. 3G and 4G licenses expire in 2029 for all operators. In the meantime, the regulator will hold a tender for 5G license soon, as additional spectrum is needed for this technology. This renewals/new licenses would inevitably increase the capex needs of the operators via both license fees and new technology equipment needs. Although it is not easy to estimate the fees, we factor in a higher capex to sales ratio for our terminal assumptions and apply a sensitivity. The upcoming events may be one of the major reasons of listed Turkish telecom companies’ around 30% discount to peers, despite growth potential.
Turk Telekom relatively higher upside, TP revised to TL10.40
We like the management’s vision for user experience in mobile and upsell opportunities in broadband, which would likely to help them to keep their market share above 60%. On the mobile side, we believe the Company may surpass Vodafone in terms of number of subscribers, and become the second player for the first time, as the gap between to players narrowed to 500K from 3.3mn in 2014. We pencil in a revenue CAGR of 13% for the segment. The balance sheet is getting healthier every quarter, with reduced short FX position. Dividend payments would re-start this year, with a relatively low c. 4% yield. However we believe pay-out may reach historic averages going forward. We revised up our TP for TTKOM to TL10.40 from TL7.90, on back of better prospects and healthier balance sheet. Our new TP implies an upside of 33%.
Turkcell: also outperform on fundamentals, new TP stands at TL17.80
We like Turkcell owing to its strength in the mobile market, and its growing size in broadband. The growing digital service and fintech revenues should also support revenue expansion. We expect a 50% pay-out ratio, with around 5-6% yield, yet there were times that the management opted for higher distribution. As majority part of the LTE investments have been completed, the company may generate high free cash flow until the new concession/spectrum tender, which is another supporting factor for dividend distribution. We revise our TP for TCELL to TL17.80, from TL17.66, owing to our declining risk free rate and updated estimates for our valuation horizon. The new TP implies 22% upside.
EVREN GEZER, RESEARCH, YF Securities
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