Turkcell

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Turkcell is a leading digital operator in Turkey, providing mobile communication, fixed broadband and digital services, primarily within the Turkish market, while also having a smaller international presence in Europe.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Core Business: Turkcell’s primary operations revolve around providing telecommunications services, encompassing mobile voice and data, fixed broadband, and digital TV. These are offered across its extensive network in Turkey and, to a lesser extent, through its international operations.
  • Revenue Streams: Turkcell’s revenue is generated through multiple channels:
    • Telecommunication Services: Primarily mobile communication services, which form the largest part of revenues, as well as broadband access and digital tv offerings.
    • Digital Business and Solutions: These include digital services provided by Turkcell to consumers and enterprise customers; these include digital marketplace, internet access, cloud and data services, and other information technology solutions.
    • Other: This segment includes call center business, and other minor items.
  • Industry Trends: The telecommunications sector in Turkey is characterized by intense competition, rapid technological change (including the advent of 5G), government regulation, and evolving customer expectations for innovative digital services.
    • The Turkish telecom market is relatively competitive, but due to a combination of regulatory and geographic issues, the top 3 telecom operators have a considerable influence over the market.
    • The sector is impacted by fluctuations in the Turkish economy, which creates periods of great profitability alongside economic and financial stress.
    • The Turkish government is actively working to grow digital infrastructure and promote digital transformation, impacting operators to adapt quickly.
  • Competitive Landscape: Turkcell faces competition from other mobile operators (Vodafone and Turk Telekom), as well as new entrants in the digital services space. The company is striving to differentiate itself through product innovation, customer service enhancements, and continued focus on technological development.
  • Differentiation:
    • Turkcell leverages a multi-channel strategy with a strong base in Turkey.
    • The company has a well-developed presence in the digital services sphere, and offers digital marketplaces and value-added products and services, many of which are based on its mobile core network.
    • Turkcell is also the leading investor in R&D among private companies in Turkey.
  • Recent Developments:
  • The Turkish lira has continued to devaluate over the past few years, decreasing the value of its financial results in dollar terms. The company is working to overcome the effects of inflation on its profitability.
  • The company is heavily investing in its digital operations and infrastructure for future growth.
  • Turkcell’s share price has underperformed as the company has faced multiple legal challenges and fines, and faced rising inflation, which has resulted in investors undervaluing the company’s true earnings potential.
  • The company is facing increased pressure from competition in the mobile and fixed-broadband sectors.

Financial Analysis:

  • Revenue & Profits:
    • The company reported a full year revenue of TRY 76,672 Million in 2022, an increase of 31.9% YoY and a reported revenue of TRY 87,872 Million for year ended December 31, 2023, an increase of 14.6%.
    • However, the company’s adj. EBITDA increased by 20.1% YoY in 2022 and 12.2% YoY in 2023. This shows a decrease in profitability.
    • The EBITDA margin in 2022 was 45.5%, which fell to 44.3% in 2023. The decrease was primarily caused by changes in tax and increased operating costs.
    • The company’s net profit has varied greatly in recent years due to the effect of foreign currencies and impairments, and has moved from positive to negative in many years.
  • Margins: The operating profit margin has hovered around 20% for the past few years, showing a relatively stable core business performance, but fluctuations in profits due to external causes are a cause for concern.
  • Cash Flow: Turkcell generates solid cash flow from its operations. This is then primarily used to invest in new projects and infrastructure and finance its ongoing operating activities.
  • Capital Structure: In 2022, Turkcell’s debt to capital ratio was 53%, which is still quite high. Their debt includes term loans, leases, and other obligations. The company has reduced debt by 17% in 2023.
    • The company is working to de-leverage itself by bringing its debt-to-equity closer to its target rate of 15 percent, which should bring additional value to its shareholders in the long term.

Risks to Moat:

  1. Regulatory Changes: The Turkish regulatory environment is dynamic, with frequent changes in legislation and spectrum allocation. Regulatory actions and political instability in Turkey could potentially erode the existing advantages and profit margins of the company, thus hurting its moat.
  2. Technological Disruption: The technology sector is evolving at a rapid pace, and potential disruptions in 5G, and fiber-based broadband could impact Turkcell’s competitive position. The company must continue to invest in R&D to remain competitive and retain its long-term advantages.
  3. Increased Competition: As the industry consolidates, the number of national operators is shrinking, with them competing over a smaller pool of clients. Price wars could severely impact and diminish the profitability of the Turkish telecom sector, making it extremely hard to establish any new long-term advantages.
  4. Macroeconomic Factors: The Turkish lira has experienced significant volatility, and the country’s high inflation has created a great risk in the Turkish economy, with inflation sometimes exceeding over 60% YoY. In periods of economic instability and a weakening lira, it could have a severe impact on cash flows, sales, and overall profitability of Turkcell.
  5. Cyber Security: As it has to manage increasingly sensitive customer data, data breaches and malware could impair the company’s financials, cause reputational damage, and may even attract penalties from authorities.
  6. Dependency on a Few Partners: The company may have its operations greatly disrupted by a failure of its most important suppliers or contractors.

Business Resilience:

  • Strong Brand and Market Presence: Turkcell’s established brand and significant customer base in Turkey provide a good degree of stability and predictable returns in the face of competitive headwinds.
  • Investments in Future Growth: Turkcell continues to invest into its core network and digital services, which could lead to increased monetization of new technology and increased revenues in the long-term.
  • Deleveraging Efforts: The company is now actively de-leveraging its balance sheet and taking more conservative financial decisions, which may lead to more sustainable long-term value creation.

Understandability Rating: 4 / 5

  • The business model of Turkcell is relatively easy to understand. The company offers mobile services, fixed line services, and digital services in Turkey and Europe. This business model is not hard to grasp for most people.
  • The company, however, also faces complex issues, such as fluctuating tax rules, regulatory uncertainty, political uncertainty, and the effects of inflation, which may obscure the underlying value and profitability of Turkcell’s businesses.
  • There is also a lot of information that is specific to the Telecommunication industry, which may be difficult to grasp for new investors.

Balance Sheet Health: 4 / 5

  • Turkcell maintains a decent balance sheet due to its strong financial position and significant liquidity; cash and cash equivalents amounted to TRY 26 billion in the latest report, alongside 76.6 billion in short-term financial assets.
  • The company is working on deleveraging its balance sheet and aims to bring its debt-to-equity ratio to 15% in the near future, which implies a higher rating for its balance sheet strength.
  • Though its revenues are significantly influenced by the fluctuating Turkish lira, the company has shown a strong ability to manage these effects.