Unlu &Co 3Q earnings preview: Modest EPS increase on the horizon
FX gains on the back of TL appreciation should lead to strong EPS growth for Migros, Anadolu Efes and Coca Cola Icecek
3Q19 earnings season kicked off this week
The 3Q19 earnings season started on 22 October with Bizim Toptan and will last until 11 November. Based on our projections, Turkish banks will show a 24% y/y EPS contraction (down 16% q/q) in 3Q19 on the back of a rise in provisions. As for non-financials, we look for a 21% y/y EPS increase (up 18% q/q), mainly on the back of FX gains, while EBITDA should decline 8% y/y (up 20% q/q). Overall, we expect the Turkish equities we cover to post a 5% y/y EPS increase in 3Q19 (+7% q/q).
Banks: Increase in provision expenses to more than offset higher NII
We expect the banks under our coverage to record aggregate net income of TL5.2bn in 3Q19, corresponding to 16% q/q and 24% y/y declines. We anticipate 35bps of expansion in swap adjusted NIM with the help of a 75bps improvement in the TL loan/deposit spread, leading to a 7% increase in NII. Nevertheless, higher provision expenses following BRSA’s request to reclassify some loans to NPLs will more than offset this higher top line.
We forecast a 58bps q/q increase in net CoR in 3Q19. Loans declined 0.2% q/q in the sector while deposits increased 4.3%, leading to an improvement in LDRs.
Fee income growth is projected to remain strong, at 29% y/y, and we forecast 18% y/y opex growth, in line with inflation. We estimate Halkbank to have flattish q/q and y/y bottom line growth, though this is due to very weak bases in 3Q18 and 2Q19, and its ROE is expected to remain weak, at 4.1%, Similarly, Vakifbank’s anticipated 20% q/q NI growth is due to a low base, and the bank is forecast to see a 55% y/y earnings contraction. Among private banks, Akbank stands out with the help of a lower increase in its CoR.
Non-financials: Looking for 21% y/y EPS increase in 3Q19
For the non-financials under our coverage, we expect EBITDA to have declined 8% y/y, with net income to have risen 21% y/y in 3Q19. Ongoing headwinds in the global commodities space and weak economic activity in the country have hurt non-financial companies’ operational performances. However, appreciation of the TL in the quarter (TL appreciated 4% in 3Q19 vs the basket vs. 31% depreciation in 3Q18) led to significant FX gains and boosted bottom lines (up 21% y/y and up 18% q/q).
Relatively strong performers
FX gains on the back of TL appreciation should lead to strong EPS growth for Migros, Anadolu Efes and Coca Cola Icecek. A strong pax yield should continue to boost Pegasus’ profitability. Turkcell and Turk Telekom look to have benefitted from cost efficiencies and FX gains. Higher gold prices and production should improve operational performance for Koza Gold. Ford Otosan should benefit from a quarterly pickup in its exports.
Relatively weak performers
On the contrary, commodity-driven equities are likely to post weak sets of financials, as a global economic slowdown has pressured the demand and pricing environment (Petkim), with higher costs denting profitability particularly for steel companies (Erdemir and Kardemir). Tightness in crude differentials and inventory losses are likely to hurt complex refiners (Tupras) despite the relative strength of product cracks in the quarter. Following a strong 2Q, food retailers (Bim, Sok, Bizim Toptan) should see some pressure on operating profit margins. Potential deterioration in the net cash position at Aselsan could weigh on its results. Lastly, a lower CUR and cost pressures could hurt Trakya Cam’s results.