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Friday, July 10, 2009

Wireless: Turkcell, Hidden Assets, and Socioeconomic Benefits

Although the wireless industry is competitive and subject to both regulatory and technological change/risk, well-positioned wireless telecom companies provide a utility-like service that can generate mountains of excess cash flow and enable healthy dividends. One such company is Turkcell (TKC, $13.56), which is trading near a three-year low despite meaningful revenue, earnings, and cash flow growth over the period.

Turkcell is the leading wireless carrier in Turkey in terms of subscribers (36 million for estimated market share of approximately 56%) as well as brand and network quality (akin to Verizon Wireless in the United States, but with geopolitical risk). In addition, as explained in Turkcell's annual Form 20-F, the company owns more than 15 thousand base stations (cell sites), which serve as a potential hidden asset (*some investors love U.S. wireless tower companies despite high leverage and high trading multiples presumably awarded because of stable, real estate-like business models). Beyond Turkey, the company has interests in wireless operations in Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Northern Cyprus and Ukraine, bringing the group’s proportionate number of subscribers to 61 million and total addressable market to 160 million persons (POPs).

While Turkcell is now building a 3G network in Turkey (license granted 11/28/08 for EUR358 million), the company is well-capitalized with a net cash position of $2.1 billion and total debt to annualized EBITDA of only 41% (as of 3/30/09). Trailing twelve months revenue was $6.7 billion with EBITDA of $2.3 billion (34% margin) and the company is valued at ~4.4x trailing EBITDA and ~7x trailing EPS. In 2008, Turkcell generated $1.1 billion of free cash flow (9% FCF yield on current share price). We note that foreign currency movements complicate reported financial figures and Turkcell has been experiencing margin compression, which is a risk factor to monitor.

For 2009, we believe the company is capable of slight top-line growth on modest subscriber gains and increased usage. The company's bottom-line could be flat to slightly higher Y/Y depending upon Turkcell's ability to maintain margins and manage costs related to new investments (3G and fixed network spending). Importantly, management is committed to maintaining strong free cash flow generation and paying out 50% of distributable profits in the form of cash dividends, and the annual dividend was recently paid to shareholders (approximate 6% yield). We expect forward dividends to grow modestly with excess cash flow over time.

What does Turkcell (or any other wireless telco for that matter) have to do with socioeconomic benefits? A 6/02/09 Fortune article entitled "Turning phones into plowshares - How wireless networks are transforming an ancient profession" aptly summarizes one type of benefit:

"Turkish Farmer Mustafa Bacak used to slog through muddy fields, occasionally in pouring rain, to determine the temperature inside his greenhouse. Today he simply checks his cell phone for text messages informing him that the greenhouse's climate needs adjusting. He can tweak the humidity or temperature using his phone or computer, all from the comfort of his home. Bacak is one of more than 100 farmers using wireless operator Turkcell's network and software to remotely tend their crops...."

For those interested in academic data about how wireless networks are improving life and economic productivity, we point you to page five of a research project in which we were intimately involved and published last week by the GSMA (a global wireless organization).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long TKC.

© 2009 Jeffrey Walkenhorst
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