Turkcell’s management has provided its views on the effect of COVID-19, saying roaming will clearly be hit (a 2-3% 2020 EBITDA impact).
Corporate revenues is another area of concern for management
Lower SAC on reduced subscriber acquisition would be good for FCF. The draft law to cap dividend payouts at 25% of NI can be mitigated, in our view. Overall, we see Turkcell’s business as largely immune from the coronavirus fallout. We reduce our EBITDA for 2020F by 3%, but i) the impact on eFCF is largely neutral due to SAC savings, and ii) 2021F EBITDA is only 1% lower. We raise our recommendation for the stock to Buy with an unchanged 12-mo Target Price of TRY 17 (32% ETR).
Roaming revenue is around 3% of consolidated revenue, of which 1% is guest roaming (almost entirely falling into EBITDA), and 2% is roaming of own subscribers (which is below the telecom services EBITDA margin). Overall, we see up to a 3% risk to our 2020F EBITDA forecast from lower roaming revenue – especially as most of the guest roaming is generated in 3Q20.
25% dividend cap
Management sees the draft law limiting dividend pay-out to 25% as overriding the company’s “at least 50% net income” dividend payout policy. At a 25% pay-out, Turkcell’s dividend yield would be below 3%. However, it is our view that there are several ways to mitigate this issue: i) increase the payout the following year; ii) launch an incremental buyback; or iii) announce a special dividend.
Subscriber acquisition cost
There is a 35% drop in mobile postpaid customer acquisition in April. Turkcell spends USD 200mn a year on subscriber acquisition, so there will be a positive effect on FCF, in our view. However, Turkcell would need to support the sales channels through the crisis, which will mitigate this positive effect, we believe.
Corporate revenue is much more cyclical than consumer revenue
B2B generates 18% of the Turkey revenue (of which about half are SMEs) with most coming from larger corporates and the government. Management sees risks of increased bad debt from the SME segment, and has been seeing requests for discounts and payment extensions in April.
Consumer finance
Management expects a lower revenue contribution in the coming months. This business has already been slowing due to the caps on the maximum number of installments for device sales introduced by the government. It is to slow down further now with more limited mobility. Besides, the cost of risk will increase, which is to be partially compensated for by insurance (90% of loans are insured for unemployment). However, the impact will be limited on consolidated numbers, management thinks.
Different mobile ARPU driver
The environment now is deflationary, with the oil price drop coupled with lower demand. Thus, inflationary price increases are not a driver for ARPU presently. Nevertheless, Turkcell expects upsell on higher data demand to compensate for that. The company does not foresee a significant increase in fixed broadband ARPU in 2020F (lower than mobile ARPU growth).
By Xtellus Capital Partners