Turk Telekom: Structural Attractions Unchanged, Valuation Reasonable, Fixed Momentum Needs to be Regained
Evident in 4Q11. The main areas of weakness were fixed voice revenues
(declining 7.3% oya vs 3.3% for the year) and fixed margins (45.8% underlying
EBITDA margin vs 50% in 4Q10). While ADSL revenues were still up a strong 15.3%
oya, most of that growth came from the price increases in 1Q11; subscriber
growth was just 2.6% for the year, and there was little ARPU growth after 1Q11.
· Pricing Power In Fixed, Track Record Gives Confidence in Guidance. Management has several initiatives in place to turn these trends around. Moreover, while no pricing decisions have been made, in a context of relatively high inflation and very limited competition, the company could increase PSTN/ADSL prices if needed to meet its guidance of 6 to 8% revenue growth, with a low 40s EBITDA margin.
· Real Strength in Mobile Revenues, but Growth Still Too Costly. Mobile revenues grew 18% oya in 4Q11 (20% for the year). With termination contribution declining from 18% to 16% – a sign of improving subscriber quality – underlying growth was closer to 19/21%. However, underlying EBITDA margin was 12% in 4Q11 vs 14% oya, eroded by 24% growth in both interconnection and commercial costs.
· Reiterate OW, but Cut PT to TL8.85; 1H Could Still be Slow. As we lower our estimates (6%/8% for 12E/13E EBITDA), we cut our 2012E price target to TL 8.85 (ex dividend) from TL9.25. The key attractions of TTKOM remain – demand potential for broadband, limited competition and benign regulation in fixed, solid growth and exposure to potential market repair in mobile. Renewed strong broadband sub growth on the back of government programs and/or mobile market repair could lend upside to our estimates, although we assume some gradual mobile margin improvement. 1Q/1H12 could still be slow barring price increases, and renewed momentum on sustainable growth drivers (ADSL subs, ADSL ARPU, mobile margins) needed for the stock to perform.