Y.F. Equity Strategy Report: Try Grounded Optimism

TL assets recover strongly in November. Recent change in economy management and rhetoric towards a shift toward market friendly policies have been well received by the markets, leading to a rebound in TL, lowering long-term rates and Turkey’s elevated CDS. BIST-100 has also recovered c20% from its low in October, reaching close to our previous target. Today’s CBRT decision is regarded as a turning point in not just updating and simplifying monetary policy framework, but conventional policy making in general. Given the multitude of challenges presented by current global conditions in general; and Turkey specific issues such as high inflation, FX volatility, external funding requirements, low level of savings and CBRT reserves, we regard today’s decision as an important starting point rather than a one-shot miracle formula. Thus, optimism in markets would prevail on continued delivery of further policies to put Turkey’s macro trajectory on a sustainable path.

Our revised estimates and valuations post 3Q results point to BIST-100 target of 1,510 (previously 1,380) indicating 18% upside potential for the

market. The rate and FX remain key to short-term equity valuations and the ongoing strength in equities would remain as these find a firm footing. Our estimates have long pointed to weak aggregate earnings outlook for this year. Recent FX and rate volatility changed the pace of recovery in 2H, or rather caused its delay into next year. We also underline the risk of implementing macro prudential measures, namely necessary tightening of monetary and fiscal policy may create downside risks to earnings recovery estimated for next year. Yet on our 2021 estimates, BIST still looks attractively valued at 7x P/E multiple, compared to consensus numbers of 18.3x for MSCI EM and 10.23x for MSCI TR.


Raising banking sector target prices on 3Q earnings & lower COE. We cut our risk free rate assumption from 14.5% to 14.0% but leave equity risk premiums at 6% and 7%, respectively for private and state banks. Our revised TPs point to 15% average upside from current levels. Sector’s current valuation multiples look very attractive from a historical standpoint, but we see significant earnings pressures until 2H21, due to a combination of higher rates and weaker TRY, exacerbated by risks around asset. Our Top Picks is GARAN on strength of capital, profitability and free provision buffers.


Non-bank valuations up 5%, pointing to 20% overall upside potential. We estimate aggregate revenues of non-financials would grow 7% this year, followed by a larger increase of 28% in 2021E on the back of recovery from Covid-19, increase in commodity-related sectors and full year impact of TL depreciation. We estimate aggregate earnings to drop 24% with FX losses pressuring bottom-lines in 2020E, while seeing a strong recovery with 93% expected earnings growth in 2021E thanks to the base effects. Our top-picks among non-financial names are EREGL, KRDMD, ARCLK, AEFES, EKGYO, TTKOM, TAVHL, ALARK and MGROS.


Source: Yatirim Finans