Apocalypse of fire
Earthquakes, job-cuts, devaluation, graft, Zionist appeasement, EU wannabes, Saddam sycophants, IMF beggars‹and the best-performing stock exchange in 1999 and Q2 2001.

by Christian DeHaemer

You may remember it well:

In October of 1998, the Russians devalued, disavowed, and defaulted on their
economy—busting loose a shock wave that spread to emerging markets around the world.

The Russian debacle and subsequent Asian contagion hit Turkey hard. The Istanbul Stock Exchange National 100 index fell from 4,322.32 in July of 1998 to 2,196.38 in October of 1998, a decline of 49% in four months!

I love it

We at Taipan have made our readers a lot of money over the years by recommending strong companies during international crises. The more blood, fear and demagoguery, the safer the profits.

We turned profits on China Telecom, South African Breweries (twice), and Indonesia Telecom (also twice—most recently for 27%).

International maelstroms are the last real haven of the contrarian speculator. For example:

In 1999, Turkey was the best performing market on the planet!

From the low of October 1998 to the April 2000 high of 19,205.71, in just 16 months, the Istanbul Stock Exchange gained 774%! This bull market was partly driven by promises of sweeping reforms and a new government in the spring of 1999, coupled with the IMF recovery package.

Shake it up

On August 17, 1999, the first of two earthquakes measuring more than 7.2 on the Richter scale killed more than 20,000 people in the densely populated northwest. Stiff 25% communication taxes were imposed to rebuild the devastated area. These will end in 2002.

The IMF sped up its scheduled charity disbursements, but the pace of government reform slowed to a crawl, and the IMF issued a series of warnings to Ankara.

Then the fez hit the hopper

In February 2000, the Turkish prime minister had an argument with the president about his listless anticorruption campaign. The Prez immediately declared a “crisis” in government.

The very next day, the Central Bank lost US$7 billion in a bid to defend the currency. Today the Turkish lira is down roughly 50% against the U.S dollar.

This reminds me of Mathir in Malaysia, who cast the blame for his economic problems on “Jews and foreigners.” Every time he opened his mouth, the currency fell. Finally, his foreign policy aides had to show him a stock market chart, with his derogatory rants marked in right before the selloffs. Blame Jews and foreigners, and they will take their money and go home. He shut up.

As in Kuala Lumpur, whenever the politicos in Turkey open their mouths, the little guy takes it on the chin. Since February, an estimated 600,000 Turks have lost their jobs—out of a labor force of 20-odd million. And you thought Berlin had an immigration problem before…

Turnaround jump shot

When you are on the bottom, you have nowhere to go but up. Last quarter, the Turkish market jumped 40%—and again was the best-performing market in the world.

The country has received billions of dollars in IMF loans in recent months, including a US$1.5 billion installment on July 12. One of the IMF’s leading hacks, Stanley Fischer, has praised Turkey’s progress in overhauling its banking system and putting its government finances in order, steps that he said financial markets were failing to take into account.

Furthermore, the central bank has increased overnight interest rates by 4 percentage points, to a staggering 67%. Higher interest rates usually strengthen a country’s currency by making yields attractive to investors. In this case, however, the lira dropped 3% against the U.S.
dollar, continuing a recent series of declines.

It is darkest before the dawn

Time and time again, I’ve seen that the best time to buy is on the worst news and during the bleakest moments. Plenty of people have made a lot of money betting on emerging market telecoms when the foreign capital is streaming for the exits. This month, you can be one of them!

Turkcell

In the past, Turkey didn’t make New York’s radar screen for the simple reason that there were no easy-to-buy issues. Until recently you couldn’t buy any Turkish companies without paying a lot of fees and suffering from the trap of low liquidity when it came time to sell.

But just recently, a company that has a de facto monopoly on the cellular phone business in Turkey got itself listed as an American Depository Receipt (ADR) on the NYSE.

I know it has a monopoly because it just got fined by the Turkish Competition Board, which said, “Turkcell has a dominant position in the Turkish mobile market… and violated certain provisions of the Law on the Protection of Competition.”

Turkcell was fined TL 7 trillion (approximately US$5.2 million). Hell, I’d buy a cell phone monopoly for US$5 million.

Turkcell will appeal

If you look at the TKC chart on p.4, you will see a 42% selloff just recently on August 8. This is
essentially a 1-for-2 stock split, though it is really a secondary rights issue. One share was offered to shareholders for 1 existing share at a price of 1,000 Turkish lira (worth about as much as Vince McMahon’s new winter baseball league).

Turkcell intended to get approximately US$200 million through this rights issue. The number of shares outstanding jumped from 263.8 billion to 500 billion at the current price of US$0.87. The ADRs are 250 shares to 1. That gives them a market cap of around US$1.7 billion.

Revenue decreased 10% to US$530.3 million in Q1 2001 from US$587.5 million in Q4 2000, primarily as a result of 34% devaluation, lower usage due to economic crisis, and the continued application of the Special Communications Tax of 25%.

As you have probably gleaned from the above, Turkcell is the leading cellular phone company in Turkey. It has a 68% market share and over 10 million subscribers on its GSM900 network. The subscriber base grew 8% in Q1, despite the harsh conditions. Incidentally, 83% of the new subscribers are prepaid.

Devaluation has wreaked havoc on their cash flow, and future revenue projections and the share price have followed suit. Annual revenue per user is projected to drop from US$19.60 to US$15.30. Capital expenditures will also take a hit. TKC planned on spending US$800 million to build out its network this year. Even half that seems doubtful.

The company’s revenue projections have dropped from US$403 million in 2002 to US$70 million (if the current crisis continues). These are obviously guesstimates, as it is nearly impossible to determine the effects of the upheaval on revenues and earnings.

The sixty-four-thousand-dollar question is whether this company has the wherewithal to come out on the other side of this economic downturn. Given TKC’s current debt of US$2 billion, including a US$400 million block owed to Ericsson, things could get tight, as interest will be about the same as TKC’s income in 2001.

TKC is expected to have a US$340 million shortfall this year. Cash reported in March was a similar number; if you add in the estimated US$200 million from the secondary, it would be enough to cover this. Obviously, TKC would like to continue to build out its infrastructure, but can reduce its capex number with cutbacks. Capex fell from $117.3 million in Q4 2000 to $101.3million in Q1 2001.

Investor sentiment

The pragmatic truth is that TKC isn’t an earnings and revenue story. It’s a blood-in-the-streets play. TKC’s share price will likely bounce back with investor sentiment. The company is the clear and unabashed market leader (10 million subscribers in a country with 20 million official citizens), with the most advanced network in place. It will likely continue to gain market share as the secondary competition gets wrung out by the bad times.

There is reason to believe that the currency will bounce back with the help of the IMF packages and a return of bargain hunters—we’ve seen this in Korea, Indonesia, and Russia. We are already seeing direct investments from major European players in terms of bank buyouts and mergers.

Any recovery in the economy and in the currency will have a direct positive impact on TKC’s revenues, revenue growth, debt levels, and income.

I believe the negative news is now priced in and TKC looks like a great speculative buy. By that I mean this could easily be a stock that trades in the US$3 to US$4 range, and over the long term could return to its IPO levels in the teens.

Buy (TKC:NYSE-ADR) below US$0.90 for a possible 400% gain as Turkey bounces back from the brink.