ZachStocks

Western Europe is full of emerging countries who are rapidly adopting free market governments and embracing commerce as a way of life. An incredible amount of opportunity has been created as products and services can now be offered to citizens who would not have had access or capital to spend on discretionary items. A common theme among emerging nations is a rapid build-out of cell phone networks which bypass antiquated or non-existent wireline alternatives.

Turkcell (TKC) is on the cutting edge of this growth in Turkey with a leading position in the Turkish wireless market. At last count, 75% of the population uses cell phones and that is up from 60% only 2 years ago. The rapid adoption of cell phone use has attracted additional competitors including the UK based giant Vodafone (VOD). While there are fierce competitors vying for subscribers, TKC has managed to retain a 60% market share while at the same time charging a bit more per subscriber than its closest competitors. The company receives an average of $14.10 per customer per month versus VOD’s $11.70 and the smaller Avea which receives $9.80. Analysts point to the pricing power as the strength behind TKC’s strong margins and expect the company to be able to keep margins high throughout the next few reporting periods.

Although the company is doing well in competition against a larger foe, the issue of number portability could erode its strong position. While no official timetable has been set, the Turkish Telecommunications Board (TTB) is expected to mandate the ability to move phone numbers between carriers. This would make it much easier for clients to switch carriers without the hassle of receiving a new number. Portability would create a much more price sensitive environment which could have a negative effect on margins. However, the company can also differentiate itself based on service provided and the quality of its network.

In September the TTB auctioned off spectrum for a 3G roll-out. TKC was the only major participant as VOD decided not to bid due to the inability for customers to port their numbers. Although TKC won the spectrum auction, the government retracted the spectrum due to the lack of participation and will likely re-auction in 2008 with the hope that the number portability issues will be resolved at that time. The benefit to TKC is that it will be able to push back the capital expenditures it had planned to roll out its 3G network. Next year it is likely that 3G equipment will have declined in price so while much of the capex will still be spent, it will likely be at lower prices.

Currency issues are important to US investors buying the ADR on the US exchanges. The Turkish Lira has been steadily rising against the Dollar which propels the dollar based price of the stock higher. At the same time, the company uses currency futures contracts to hedge their exposure to the Lira which should dampen dollar based earnings. At this point, it looks like the lower dollar actually helps the stock when purchased on US exchanges. With interest rates low in the US and no sign of increases from the FOMC, it may be a safe bet that the Lira would continue to appreciate versus the Dollar.

TKC is trading at a relatively attractive multiple considering its growth potential. Investors are likely pricing in uncertainty with currency as well as the threat of additional competition. The company has an attractive debt structure and currently pays out 50% of cash flow in the form of dividends. Management may consider increasing the payout rate or possibly buying back shares. Acquisitions are also a part of the growth strategy and the company may use cash or stock to facilitate such transactions. Expansion into countries such as Ukraine, Georgia and Kazahkstan have been successful and management has indicated interest in entering Iraq and Kuwait.

I do not have a position, but I am anxious to find a good entry point with contained risk. The reversal on October 22 strikes me as an attractive spot but I am a little concerned that volume was not significantly above average. Keep an eye on this company and the competitors involved for some great opportunities for those who are patient.

TKC Notes

FD: Author does not have a position in TKC

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