JPM/ Turkish conglomerates: Incorporating the new realities; lowering PT by c20%; prefer Sabanci; long Yapi Kredi over Koc Holding

We update our Turkish conglomerates models to reflect the direct and perceived impact of EM re-pricing and Turkish political uncertainty. We incorporate the updated JPM fair valuation of Akbank & Yapi Kredi in Sabanci & Koc SOTP based Dec-13E valuations, respectively, and raise hurdle rates in both these models by +100bps to 12% to result in a new Sabanci PT TL11.6 (TL14.75) and Koc PT TL9.1 (TL11.25). JPM expectations for Turkish GDP have remained unchanged at 3.7% 13E, 4.5% 14E – this benefits Sabanci over Koc in our view – though downside risks to macro expectations from potentially prolonged social conflicts and further EM sell-off cannot be ruled out. We recommend long Yapi Kredi (OW) over Koc & Sabanci over Akbank (UW); both banks are covered by Paul Formanko.

·         Long Yapi Kredi over Koc Holding. We have lowered our Dec-13E SOTP PT on Koc by 19% to TL9.10 resulting from: i) using the updated lower fair value of Yapi Kredi (JPME new Dec-13E PT TL5.5 vs. TL7.2) within our Koc target NAV; ii) raising hurdle rate by 100bps to 12% and iii) applying higher conglomerate discount of 15% (vs. 10% in our model prev.) – while Koc portfolio is more defensive over Sabanci, higher perceived investment risk in the current Turkish market environment implies that investors would demand a deeper conglomerate discount to Koc’s NAV in our view. We have recently raised Yapi Kredi to OW. Yapi is 21% of Koc NAV on current valuations and has under-performed Koc YTD. Yapi offers better potential upside to its Dec-13 fair value (36%) over Koc (6%) and we recommend long Yapi over Koc Holding over the next 6m period. 

·         Sabanci preferred over Akbank. We have lowered our Dec-13E SOTP PT on Sabanci by 21% to TL11.6 resulting from: i) using the updated lower fair value of Akbank (JPME new Dec-13E PT TL8.3 vs. TL11.6) within our Sabanci target NAV; and ii) raising hurdle rate by 100bps to 12%. Nearly 50% of Sabanci’s NAV is derived from Akbank which offers one of the strongest Turkish banking b/s, capital position and improving asset mix (benefitting NIMs); however, JPM is UW on Akbank due to its premium valuation over peers. In addition to Sabanci’s attractive standalone characteristics (better domestic gearing, improving portfolio visibility), we see it as a cheaper way to gain Akbank exposure and recommend long Sabanci over Akbank over the next 6m period.

·         Key risks to our investment thesis arise from a more bearish economic outlook; higher oil prices impacting CAD, permanent overshooting of EM rates, prolonged political uncertainty impacting consumer confidence.