TURKISH AIRLINES Report

Transferring coverage: HOLD with TRY4.35 TP (8% upside)
Despite strong traffic growth in recent years, yields and margins have been quite volatile and frequently weak, especially since 2010. The volatility and weakness have been caused, in our view, by THY’s efforts to grow much faster than peers and its increasing share of transfer traffic.

Margin expansion likely to slow down in quarters ahead
We forecast THY’s y-y margin expansion slowing significantly in 2H12 and 2013 and see the following headwinds: 1) the disappearance of the low-base effect, especially starting 4Q12; 2) continued weakness in yields due to efforts to grow much faster than peers especially through transfer traffic; and 3) higher non-fuel unit costs on real appreciation of the TRY.

Valuation based on blended DCF and peer comparison
We assign a lower weighting (35%) to our peer-multiple valuation as THY’s multiples relative to peers have been too unpredictable and usually at a significant discount historically. THY trades at a 30% discount based on 2013E P/E but at par on 2013E EV/EBITDA.

Concerns on long-term fleet acquisition plan and airport capacity
We have two major concerns given the stock price: 1) THY’s lack of a major long-term fleet acquisition plan to enable it to grow significantly in the long term; and 2) Istanbul Ataturk Airport’s (ISD) capacity likely being reached by 2015 or 2016. We are also not sure if the potential third Istanbul airport will be ready by 2016 given its size and other construction challenges. The most important overall risks to our valuation are major changes to fuel prices, regulatory environment, financing conditions, and macroeconomic factors that would significantly affect demand for air travel. On the other hand retrenchment by any European major network airline could present opportunities.

Erdemir short view

Erdemir posted a bottom line of TRY152m in 3Q12 (down 45% y-y, BNPP estimate: TRY103m, BBG Cons: TRY120m) on EBITDA of TRY319m (down 54% y-y, BNPP estimate: TRY248m) and revenues of TRY2.35b (down 4% y-y, BNPP estimate: TRY2.16b). Results came above our estimates mainly on a combination of slightly higher than expected volumes (6% higher than expected) and prices (2% higher than expected).

The average sales price, however, was still down by 3% q-q and 14% y-y in 3Q12 which was the main reason behind the y-y declines in EBITDA and the bottom line. Volumes, on the other hand, rose by 8% y-y and 5% q-q, as Erdemir offset lower flat steel production with significantly higher long steel production in order to take advantage of relatively better margins in long steel during the quarter.

Net debt eased by 18% y-y and 4% q-q to TRY3.1b as lower steel and raw material prices reduced the company’s net working capital need and the company’s inventory position (also in number of days) improved to 145 days, down 16% y-y.

The management said they maintained the EBITDA target of 10% to 12% for 2012 (vs. 23.5% in 2011) and the volume target of 7.4m tonnes (up 11% y-y) in the 3Q12 earnings teleconference. Yet they warned that conditions for 4Q12 remained challenging, especially regarding volumes due to increased competition from imports, and they expected 2013 to be at least as much as challenging as 2012.

While the company has done better than we expected in 3Q12, we remain concerned about the volumes / margins for 4Q12 and 2013 given the emerging over-capacity in world steel industry and less strong outlook for steel demand growth with the concerns on global economic growth in the medium term. Note that while we were expecting some recovery in world steel prices starting 4Q12 in our last update on Erdemir on July 26, indicative steel prices have declined further along with raw material prices on weak demand for both types since then.

ERDEMIR, HOLD, TP2.04

Tukcell Report

3Q12 EBITDA beats estimates
Turkcell reported net earnings of TRY571m in 3Q12, (up 6% y-y, 7% q-q) in line with expectations; 3Q12 EBITDA at TRY912m was 7% better than CNBC-e consensus. While lower churn in the market decreased selling expenses, the dilutive impact of increasing off-net traffic and higher bad-debt expenses pulled EBITDA margin down 1.4ppt y-y to 33.1%.

Subscriber additions were strong on a group scale
Turkcell added 442K subscribers in 3Q12 in Turkey (Avea: +206K), which is better than our estimate. On the group scale, respective 751K and 1m sub additions in Ukraine and Kazakhstan were eye-catching. Turkcell group subscribers increased by 2.3m to 68.1m in 3Q12. Blended mobile ARPU in Turkey came in at TRY22.0 (+4.3), slightly better than our estimate.

BUY rating and DCF/Multiple-based TP of TRY11.11 maintained
Results are running above our estimates and we will revisit our numbers. Meanwhile, management once again updated its revenue guidance to TRY10.3b-10.4b (previously TRY10.1b-10.3b) and EBITDA guidance to TRY3.1b-3.2b (previously TRY3,050m-3,200m). We maintain our BUY rating. Competition remains the main downside risk.

Smartphone penetration continues to rise
Increasing smartphone penetration is one of the most encouraging trends in Turkcell. New Turkcell branded smartphone models, which have increased affordability, boosted smartphone numbers in Turkcell’s network by 700K to 5.5m in 3Q12. Mobile broadband growth remained strong at 34% y-y; TRY276m revenue in 3Q12. Superonline remains on track with 90% y-y growth on EBITDA in 3Q12. Despite strong subscriber growth in Fintur, its contribution to consolidated net income fell by 2%
q-q, which might be related to the intensifying competitive environment in Kazakhstan. Belarus operation has reached break-even on an EBITDA level in 3Q12, but still does not justify the investment there in our view.