Turkcell Iletisim Hizmetleri A.S (TCELL): Promising Telecom Business
Growing operating results, solid Unit Economics, and strong balance sheet despite macroeconomic challenges
Summary
Market Leader: Dominant market share of 41.5% in an attractive, three-player market with a subscriber base of about 41.7 million (37.5 million on the mobile front) in Turkey
Revenue Growth Continues: Strong Q1/23, 61.5% YoY revenue growth, surpassing TL 17 million with and EBITDA margins maintained around 39%
Strong Unit Economics: ARPU growth of 67.9% in 1Q/23 (YoY) outpacing inflation, impressive churn numbers of less than 2%, both for mobile and fix segment
Low Leverage: Despite the Turkish Lira's depreciation against major currencies, the company managed to reduce its leverage level (net debt/EBITDA) to 0.9x
Challenging Business Environment: Despite Turkcell's strong performance, current price reflects the problems with Turkish Lira and Turkey’s economy leading to a general dislike in investing of Turkish stocks
Introduction of Turkcell
Turkcell İletişim Hizmetleri A.Ş, established in 1993 and started operations the following year, has emerged as the premier telecommunication operator in Turkey. Known for its mobile and fixed network services encompassing voice, data, and TV, Turkcell successfully pivoted into digital services, offering digital services such as streaming media, gaming, messaging, and payments. With an extensive customer base totalling 41.7 million, Turkcell has firmly established itself as the leading communications and technology company in Turkey, commanding an impressive market share exceeding 40%. The company also operates through subsidiary entities in Northern Cyprus, Ukraine, and Belarus. Turkcell has been listed on the New York Stock Exchange (Ticker: TKC) as American Depositary Shares (ADS) and on the Borsa İstanbul Stock Market (Ticker: TCELL) since July 2000.
Products & Services
Turkcell Groups divides its main products and services into three key segments
Telecom Services
Turkcell offers a wide range of services including voice, data, TV, and other value-added services on both mobile and fixed networks. This is the core of Turkcell's business today, accounting for more than 80% of the total group revenue
Digital Services and Solutions
Turkcell is successfully transforming from an a mobile service provider into a digital innovative digital operator provides and serve the consumers with a unique portfolio of digital services delivered via their own mobile and fixed-line networks.
It provides digital business solutions such as data center management, cloud solutions, cyber security, and managed services, aiming to support its corporate customers digital transformation processes
Source: Investor Presentation May 2023 Turkcell engages in strategic collaborations with leading IT companies like HP and VMware, aiming to deliver top-notch digital business services to its customers. This partnership has been instrumental in driving remarkable revenue growth, reaching triple-digit growth figures, across the entire spectrum of the digital business service segment.
Source: Q1 2023 Presentation
Techfin Services:
Turkcell's strategic emphasis on digital finance transformation has resulted in the successful development of techfin products, like Paycell the leading payment platform in Turkey and Financell which offers financing services to individual and corporate customers
Source: Investor Presentation May 2023 Paycell, the leading financial “Super-App” in Turkey, with 3-months active users of with 7.7 million to 40 million customers, it provides substantial opportunities for upselling and cross-selling the diverse range of digital services
Source: Annual Report 2022
Another unique aspect of Turkcell's business is the tower business reported under Telecom Service. Global Tower, established in 2006, is the sole tower company in Turkey and operates in Turkey, Ukraine, Belarus, and Cyprus. It offers independent infrastructure services such as tower leasing and tower build & sell to a diverse range of customers including mobile operators, radio and TV broadcasters, internet service providers, energy companies, and public institutions.
Based on the Annual Report 2022, the management outlined a potential IPO of it 100%-owned towers subsidiary. Turkcell has chosen not to reveal the specific number of shares available for purchase. However, they have stated that the initial public offering (IPO) will take place at an appropriate time, considering market conditions and legislation. Interestingly, in a presentation titled "Unlock Turkcell's Potential" by LetterOne (the second largest shareholder of Turkcel via IMTIS) in Feb 2022, it was stated that the IPO of the towers subsidiary could contribute significant value to the business and potentially increase Turkcell's market capitalization.
Shareholders
As of June 2023. Türkiye Wealth Fund (TVF), is the largest shareholder of Turkcell.
As stated on their official website, the purpose of Türkiye Wealth Fund (TVF) is described as follows
Türkiye Wealth Fund realizes investments that have strategic priority for Turkish economy and adds value to our well-established institutions.
The second largest shareholder is IMTIS Holdings, part of the Luxembourg-based global investment vehicle LetterOne Group. They have maintained a significant economic interest in Turkcell for over 16 years. In October 2021, LetterOne expressed concerns to Turkcell’s Board of Members regarding various aspects of the company's operations, including margin compressions, execution of value-realization strategy, and governance. While some of the points mentioned may no longer be relevant, the document is recommended for interested readers seeking insights into the telecommunications industry and peer valuations. Turkcell's management has responded to these concerns, making it an interesting read as well.
Industry & Business Environment
Mobile Communications in Turkey
Turkey's mobile communication market has significantly evolved since its inception in 1994, experiencing a multitude of changes over time. Here are some key highlights
Originally, Turkcell and Telsim were the only two providers operating between 1994 and 2001
The sector witnessed an increase in competition from 2001 to 2004, with two more players, Aria and Aycell, taking the total operator count to four. Post-2004, the market consolidated to three operators: Turkcell, Telsim, and Avea.
In 2005, Telsim was was acquired by Vodafone, and since then, the company has been providing its services under the brand “Vodafone”.
Since 2016, Avea has been operating under the "TT Mobil" brand
Today, Turkey's mobile subscriber base exceeded 90.8 million which represents a unique phenomenon in the market: an over-saturation, as indicated by a penetration rate of ~107.2% (100% penetration is possible and implies multiple subscriptions by some users).
In line with this remarkable growth, the Turkish mobile communication sector has established itself as one of the densest markets in Europe. It is dominated by three major players - Turkcell, Vodafone and Turk Telekom - each holding significant market share, based on number of subscribers, of 41.3%, 30.8% and 27.9% , respectively.
Despite the economic challenges, Turkey's demographics — a young, tech-savvy population, and growing digital adoption — make it a potentially ideal environment for telecommunication investments, and the low share prices today are probably disconnected from the long-term trend and opportunities, due to a generic dislike in the market for investing in the Turkish economy.
Turkey, the Turkish Economy and the Turkish Lira
Turkey the 19th largest economy in the world, has a nominal GDP of almost a trillion dollar and GDP per capita of USD 10,680. It shows favourable demographics, where young people, defines as under age 14, making up 26.5% of the total population of 85 million. According to OECD figures, Turkey has been the fastest growing economy in the world in 2021 with 11%, averaging 5.8% yearly GDP growth between 2002 and 2021, and slowed down to 5,6% in 2022. Political turmoil and, Erdogan’s “unorthodox” understanding of monetary policy have led to some financial and currency market instability and uncertainty about Turkey’s economic future in recent years.
Despite its operational success, Turkcell like any other businesses operating in Turkey, faces challenges due to inflationary pressures that led to the significant Lira depreciation against the USD over the last decade. As Turkcell receives subscription fees in Turkish lira from its subscribers, the value of that currency has decreased by over 90% when measured in US dollars.
The recent substantial policy rate hike of 650 basis points to 15% by the central bank marks a significant shift after a two-year period without any increases. However, despite this monetary policy reversal, analysts remain cautious and concerned about the uncertain macroeconomic conditions that persist, leaving the situation in uncharted territory.