Revenue Outlook Stable for Turkcell

Turkcell Iletisim Hizmetleri A.S. (TKC - Analyst Report) missed our estimates for the fourth quarter of 2007 in revenue terms although lower operating expenses and higher financial income enabled it to surpass our earnings estimates. We were encouraged by the strong growth in revenues and earnings during the fourth quarter as well as the growth at its affiliates, although some of this growth has to do with the weakness in the US dollar against all major currencies. This has led us to maintain our revenue outlook for 2008 while we have increased our earnings outlook although we expect growth to slow slightly in 2008 as the Turkish market closes in on its saturation point. The recent outlook upgrade from Moody’s is a big positive for Turkcell.

Turkcell missed our estimates in revenue terms for fourth quarter of 2007 although lower operating expenses and higher financial income enabled it to surpass our earnings estimates. The stock is trading at 11.3x our newly-raised 2008 EPADS estimate and 8.9x our new 2009 EPADS estimate, which represents a slight discount to the average of European wireless carriers. While the company’s growth prospects are solid and we are maintaining our 2008 revenue estimates while increasing our earnings estimates. The company’s expansion in other regions has led to an increased debt level.

However, the economic scenario in Turkey has become more uncertain as the country is in skirmishes at the Iraqi border, upsetting the US and Europe. We were encouraged by the strong growth in revenues and earnings during the fourth quarter as well as the growth at its affiliates, although some of this growth has to do with the weakness in the US dollar against all major currencies since the company reports in US dollar terms but its income and expenses are in Turkish lira (which increased 17.1% year-over-year against the US dollar, and increased 3.3% sequentially in the fourth quarter) and other European currencies. We also have concerns that the 3G license grants in Turkey may increase debt levels further, which may put our estimates at risk in the near term.

We, therefore, continue to rate shares of TKC a Hold at this time as most of the positive developments are already discounted in the stock price. We are encouraged to see a strong performance from the stock despite current market turmoil. We have fixed our target price at $25.50 based on the company selling at 11.9x our new 2008 EPADS estimate as the company’s expansion in Syria and the recent outlook upgrade from Moody’s bodes well for the future while high churn rate and its 3G build out should keep its margins in check. The biggest concern surrounding the company is the overall risk of the economies in which it operates, given that they are some of the most volatile markets in the world.

Udayan Mukherjee contributed to this report.

Read the full analyst report on TKC.