Buy - Sell

· COMPETITON BOARD INVESTIGATION INTO ALLEGED LOAN/DEPO RATE FIXING: Reportedly, the Competition Board is set to charge large penalties for banks on fixing loan and deposit rates. Recall that the investigation began in Nov 2011. The regulation states that the penalty cannot exceed 10% of gross revenues and Hurriyet daily suggests that if banks are found guilty of establishing a cartel, the min charge will be 2% of the revenues.

Competition Authority’s definition of gross revenue is somewhat uneconomical, calculated as gross interest income (before inte exp) plus non-interest income (includes trading losses but not fees paid). Reports say banks are trying to negotiate the calculation of revenues, which would create a base for the fines. Recall that in March 2011, the Competition Authority had announced penalties related to the probe into bank practices in attracting wage accounts.

The aggregate TRY72m of penalties (with a range of TRY8-15m per bank) was below expectations, as banks were charged only c0.12% of their gross revenues on avg. However, wage accounts were a small portion of banks’ business and not very profitable, so it is likely that fines could be higher this time around, as the probe is into setting of general interest rates, the main business of banks. We calculate that if charged at 10% of gross revenues, fines could be around TRY1b per bank while at 2% charges would average around TRY200m, which would hit 2012E book values and 2013E pre-tax incomes by c.1.3% and c.7%, respectively while shaving off CARs by c.16bp. More in a separate note.

· ARCLK: 3Q12 missed est on higher opex & fin exp: NI TL137m (-9% y-y; our est: TL185m, CNBC-e cons: TL183m). EBITDA TL280m (+9% y-y) lagged behind our TL310m est (cons: TL305m) mostly on higher opex & sl. miss @ gross mrg lvl. Higher financing exp & effective tax rate => other reasons for NI miss. Electronics segment rev growth slowed down as exp (+13% y-y vs. 59% in 1H12) => GPM -4ppt y-y,=> incr’d competition due to market slow down. +VE => durables segments GPM +1.9ppt q-q thanks to decline in commodity costs & favourable pricing. 2012 EBITDA mrg guidance maintained @ ~10.5% (mgmt aware of challenges) & rev growth guidance @ min +20% (our est: +27%). WC/sales -1.4pp q-q to 37.3% (Sep-11: 41%:) based on 12-m trailing sales. Net debt remained almost unchngd @ TL2,473m (Jun-12: TL2,534m). Paid TL43m divi to minorities & spent TL116m for Capex in 3Q12. More to follow.

· ULKER 3Q12 (HOLD; TP TL7.2) > Beat our f/casts on strong volume growth => NI TL42m, above our TL24m and cons TL28m est <= better than exp’d operating perf and higher FX gain & other income. EBITDA @ TL52m, again above our and cons est of TRY41m. Improved profitability on i) strong vol growth across all categories despite seasonally weak chocolate confectionary sales (normally higher margin), ii) low prices of cacao and flour, which account for roughly 20% of total production costs. Net/Net: Raised TP by 8% on better than exp’d earnings growth => we raised our NI and EBITDA est by 10% and 42% for 2012 and by 5% (each) for 2013. However, we continue to think that the valuation for ULKER is not attractive and maintain our "HOLD" rating => trades on 17.0x P/E and 12.7x EV/EBITDA on 2013 estimates <= potential improvement in operating perf is in the stock price.

· Confectionary sector & ULKER > Barry Callebaut, one of the largest global chocolate confectionary producer, plans to build a cacao and chocolate confectionary plant in Eskisehir. Although Ulker is the market leader with 49% shr, followed by Eti and Nestle (each with 11% mrkt shr), a potential new investment may incr competition further in the chocolate sector. Some other int’l (Kraft, Mars) and local players (Solen, Sanset), and private-label products also exist in this segment.

EARNINGS TODAY:

· TSKB (BUY; TP TL2.38) > We est +2% q-q loan growth in FX-basket terms in 3Q12, as loan demand was relatively weak. Looking for c50bp q-q NIM contraction on lower CPI-linked bond yields, narrower “other security” spreads and lack of o/n arbitrage opps. Don’t expect any NPL problems. Forecast 23% q-q decline in net income (no divi income). See earnings +34% y-y and 18% ROAE.

· FROTO (HOLD, TP TL17.7) => TEB-BNPP NI TL99m & EBITDA TL155m, Consensus NI TL121m & EBITDA TL162m. We expect weak EBITDA in 3Q12 due to intense domestic competition, –ve impact of tax hikes and weak export vols. We expect co to lower 2012 guidance by 9% and to continue with high dividend policy in 2013.

· TAVHL (BUY, TP TL12.50) => TEB-BNPP NI E52m & EBITDA E123m, Consensus NI E47m & EBITDA E116m. We expect TAVHL rev growth to slow in 3Q12 y/y due to TL appreciation against the EUR but still expect a slightly higher percentage EBITDA margin y/y. Note that 3Q12 financials will consolidate Medina operations for first time.