A Turkish Cellular Speculation
07/09/2004 12:00 am EST
With her global focus, Vivian Lewis often draws her investment ideas from her in-depth contacts among a wide universe of investment and industry experts. Her latest feature, based on an idea suggested by Jim Grant, is a speculative bet on a Turkish cellular firm.
"Our latest stock feature, Turkcell (TKC NYSE), is based on the reasoning of Jim Grant, publisher of Grant’s Interest Rate Observer. As he wrote, ‘When a publication devoted to interest rates takes a shine to a cellular telephone company with special access to a market in one of the member states of the Axis of Evil, readers deserve a word of explanation and our explanation is that Turkcell looks like a cheap stock.’
"Turkcell is the leading provider of mobile communications services in Turkey. Its shares are quoted in Istanbul and on the Big Board, while it reports in US GAAP and in US dollars. Turkey is not a turkey. In the first quarter, the combo of economic improvement and booming consumer demand upped the firm’s subscriber base by 3.6% to 19.7 million. Revenues rose 50% to $746 million, year-on-year. EBITDA was up 120% and net profit more than tripled to hit $126 million. And as Grant is quick to point out, disinflation is alive and well in Turkey. In calendar 2003, TKC had revenue of $2.46 billion, on which net income hit $196 million, or $1.55 a share. That gives the stock a multiple of 12.5 times earnings.
"And if that were not enough, Turkey is not this company’s only bird. Turkcell finalized the acquisition of Digital Cellular Communication in Ukraine. It is also is a play on modernization of several emerging markets, including Iran - a member of the Axis of Evil and an unlikely place to find an investment opportunity. The groundwork continues to be laid for establishment of Irancell and the signing of a license agreement. Grant notes that Iran has 68 million people of median age 23. There, cell-phone penetration rate is 5%. In Turkey, about 40% of the population has cellular. Turkcell incorporated a new holding company for its operations in Iran and Ukraine, Meanwhile, Turkcell holds a 41.45% stake in Fintur International, which is growing businesses in Azerbaijan, Kazakhstan, Georgia, and Moldova; these operations in low-penetration markets should eventually pay off.
"Problems include a long-running dispute over interconnection fees with Turk Telekom, the nationalized fixed-line carrier in Turkey. In addition, domestic competition is rising. Another risk pointed out by Grant is that 70% of cell phone customers prepay, a level which is rising. And such customers are more likely to ‘churn’ into a better deal. Finally, we’d note that until this year, Turkcell was unable to make dividend payments due to its accumulated balance sheet loss under the previous Turkish Accounting Standards. However, now using international standards Turkcell will distribute stock and cash dividends for 2003 (50% cash and 50% share distributions)."