TURKISH EQUITIES

Strategy Update

January 2024

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Equity Market Outlook
• Looking for a re-rating in 2024
✓ Despite local elections, the new economy team remains committed to rational policies which should lead to
a material slowdown in domestic demand, particularly in 2H24. Domestic retail investors, the savior of the
past two years, are likely to assume a supporting role with high interest rates increasing the need for
liquidity. Meanwhile, foreign investors are expected to take the leading role but are not likely to be
aggressive before it becomes clear that inflation is falling and CBT is ready to start its easing campaign in
late 2024. Therefore, confidence building should take place during the preview in 1H24 while we may see
the full re-rating episode playing out in 2H24. We prefer banks, insurance, cement, food and apparel
retailers but would stay away from autos, consumer discretionary and real estate. Stocks that we like
include: BIM, Coca Cola-Icecek, Mavi, Sabanci Holding, TSKB, Turkiye Sigorta, Yapi Kredi Bank
• Earnings should decline in real terms in 2024 amid inflation adjustment chaos
✓ Inflation accounting starts but a lot of issues remain unresolved as the exclusion of financial companies
from the practice makes like-for-like comparison even more difficult. In nominal terms, our estimates
indicate a 25% y/y earnings growth (+12% banks / +33% by non-financials) in 2024. Given the 40% inflation
and just-lower depreciation expectations, there should not be any real term growth in either front.
• Valuations should also revert to normal
✓ Turkish equities trade at 4.6x on 1-year forward earnings, representing a 12% discount to its 5-year
historical average and a 56% discount to GEM median. We believe that the decoupling of CDS and PER is
only temporary and expect foreign portfolio inflows to ultimately lead to the re-rating of Turkish equities,
following the re-opening of swap markets and declining inflation, in particular. Hence, BIST100 should trade
at an undemanding PER of 7.0x, pointing to a BIST100 level of 11,900 with an upside potential of 52%
based on current TL prices.
• Risks
✓ Higher-than-expected inflation, policy reversal, lower-than-expected foreign portfolio flows, recession in
Europe, and delicate balance between US, EU, and Russia relations.
2
 Key issues
• Economic activity to slow down with return to rational policies
✓ The new economy team has shifted to a more aggressive stance in implementing rational policies. That
said, unwinding some of the popular legacy products such as FX protected TL deposit scheme will certainly
take time. Rate hikes and restriction on domestic demand may prove to be unpopular ahead of the local
elections but it is required to restore the confidence. The measures particularly on the public sector side
may be further tightened after local elections to achieve the disinflation targets.

• 2024 local elections – still a key event

✓ Turkey will be holding local elections on March 31, 2024. Following the success in parliamentary and
presidential elections, Cumhur alliance (AKP+MHP) will be having the upper hand in local elections and will
be trying to win back both Ankara and Istanbul from CHP. Local candidates play a more important role than
the party itself in local elections. Istanbul mayor Imamoglu and Ankara mayor Yavas are both popular and
have decent chances to win the municipality elections for second terms.

• Foreign portfolio flows should determine how soft the economy will land
✓ The new economy team has been meeting with investors all around the world to convince them that the
rational policies are here to stay. The size and timing of the flows will also help rating agencies to upgrade
their outlooks and credit ratings on Turkey. Given the rising interest over the past two months, we believe
that US$10bn of foreign portfolio inflow over the next 12 months is certainly possible. The size and timing
of foreign portfolio flows should determine the extent of the re-rating Turkish equities will experience in
2024, in our view.

• Inflation adjusted financials should provide a reality check

✓ With Turkish companies posting their inflation adjusted financials for the first time in 20 years, a chaotic
earnings season should be expected in 2024. That said, it should provide a reality check for those investors
who were worried about the earnings quality.
3
Potential Surprises / Key risks
• A favorable global backdrop may help
✓ Developed market central banks hiked rates aggressively as expected amid rising inflation over the past two
years. Weak global growth coupled with falling inflation may convince central banks to start the easing cycle
in 2H24 which would be welcomed by emerging markets. A favorable global investor sentiment would bode
well for Turkey’s efforts to bring down inflation and for the re-rating of Turkish financial assets.
• A potential truce in Ukraine
✓ A potential truce in Ukraine is possible but not likely in the near term. The important issue is the conditions
of a potential agreement between the Western Alliance and Russia, as Russia would be insisting on the
removal of at least some of the sanctions, i.e. partial relief on natural gas and oil exports. This would
certainly relieve the pressure on energy markets.

• Higher-than-expected inflation may postpone potential CBT rate cuts to 2025

✓ If inflation remains stubbornly high at above 45% CBT may be forced to keep policy rate and other
macroprudential measures in place in 2H24. In fact, a subdued economic performance in the form of weak
growth in 2024 and 2025 may be required to get rid of the excesses of experimental macroeconomic
policies of the past.

• TL remains the weak link

✓ The past track record of policy reversals do not bode well for yet another attempt in normalization.
However, given the dire state of FX reserves, twin deficit, and high inflation, there is no option other than
implementing rational policies, in our view.
• Delicate balance between US, EU, and Russia relations
✓ While the recent conflict between Israel and Hamas keeps the tension high in the Middle East, foreign
relations has taken a turn for the better over the past year, particularly after the May-23 elections. Not only
have US and EU relations improved but also former adversaries such as Saudi Arabia or United Arab
Emirates have started to provide funding to the Central Bank or committed to long term investments. That 4
said, Turkey needs to maintain a precarious balance among Russia, Iran, and western countries.
 Local elections will be held on Mar 31, 2024
• Following the success in parliamentary and presidential elections, Cumhur alliance (AKP+MHP) will be having the
upper hand in local elections and will be trying to win back both Ankara and Istanbul from CHP.
• Local candidates play a more important role than the party itself in local elections. AKP announced the former
Urban Minister Murat Kurum as its mayoral candidate for Istanbul while Turgut Altinok is likely to be the mayoral
candidate for Ankara. Still, Istanbul mayor Imamoglu and Ankara mayor Yavas are both popular and have decent
chances to win the municipality elections for second terms.
• Dec-23 Metropoll study suggests that Imamoglu would get 48% against 34% of Murat Kurum. About 80% of IYI
party voters and 75 % of DEM (ex-HDP) would be voting for Imamoglu. The poll assumes that IYI and DEM parties
will not be proposing candidates in Istanbul.

Elections
Metropolitan Provinces Total Local Parliament
(# of cities) (%) (%)
Party Mar-14 Mar-19 Mar-14 Mar-19 Mar-14 Mar-19 Mar-14 Mar-19 May-23
AKP 18 15 30 24 48 39 43.1% 44.3% 35.6%
MHP 3 1 5 11 8 12 17.7% 7.3% 10.1%
Cumhur (AKP+MHP) 21 16 35 35 56 51 60.8% 51.6% 45.7%

CHP 6 11 8 10 14 21 26.4% 30.1% 25.3%

IYI 0 0 0 7.5% 9.7%
Millet (CHP+IYI) 6 11 8 10 14 21 26.4% 37.6% 35.0%
HDP/DTP 2 3 8 4 10 7 4.2% 4.2% 10.6%
Others 1 0 2 1 2 8.6% 6.6% 8.7%
Total 30 30 51 51 81 81 100.0% 100.0% 100.0%
Source: TURKSTAT, TRT Haber, CNN Turk

5
 Timeline 2024

Domestic debt repayments will be Inflation is expected to We expect CBT to

Forei gn debt repayments pea k i n Ma y a nd drop We expect GDP growth to rema in on hold until
qui te heavy throughout the year
l ooks loaded in Ma rch and s ha rply i n Summer months rema in subdued most of 4Q24. We pencil in
a nd i n those months with CPI-linker
redepmtions, i n particular. June. s upported by the base 2024. cuts towards 38% by
effect. yea r-end.

2024 Turkey-specific Timeline

January February March April May June July August September October November December
Key macro indicators
Quarterly GDP (y/y chg.) 2.5% 1.3% 0.7% 3.6%
Domestic Debt Repayments (TL bn) 94.8 175.6 86.3 222.3 116.3 119.8 89.8 69.5 118.1 63.2 50.0 47.0
Foreign Debt Repayments (US$ bn) 4.2 2.6 7.4 4.6 2.6 7.0 3.3 5.0 4.5 3.9 5.8 3.5
Inflation 62.0% 60.9% 61.4% 62.2% 65.9% 62.7% 55.2% 45.4% 42.9% 43.8% 41.9% 40.3%
CBT funding rate 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0% 42.5% 40.0% 37.5%
Corporate Earnings 1Q24 2Q24 3Q24 4Q24
Politics Local elections Constitution referendum?
Source: Turkish Treasury, Tera Yatirim

Loca l elections will be held on
31 Ma rch.
A referendum may be called
rega rding the voting threshold
i n Pres idential elections.
Low GDP, hi gh loan ra tes, gradual decline in
i nflation, and relatively l imited TL
depreciation do not bode well from earnings
pers pective. Bank earnings should i mprove a s
of 4Q24 i n tandem with rate cuts.

6
Foreign portfolio flows remain key for success
• The new economy team has already shown its commitment to rational policies. With a more favorable global
backdrop, we expect foreign portfolio flows to increase in 2024. Historical data indicates that the peak was seen
back in mid-2013 with annual bond flows reaching US$25bn and equity US$7.5bn. Given the rising interest over
the past two months, we believe that US$10bn of portfolio inflow (US$4bn in equity and US$6bn in bonds) over
the next 12 months is certainly possible. Note that US$5bn of flows in total (US$3bn in equity and US$2bn in
bonds) have entered TL assets since the May-23 elections. Additionally, we estimate that Turkish corporates have
raised more than US$10bn of long-term funding from abroad via different forms of financing, such as Eurobonds,
securitization, and bilateral deals.

7
Sovereign rating is likely to be upgraded
• Credit rating agencies usually lag behind the market both in good and bad times. The chart below illustrates the
historical CDS levels vs Turkey’s average sovereign rating. It appears that the CDS market has already factored in
positive economic trends in Turkey, indicating a credit rating that is two grades higher than the current official
rating for Turkey.

8
 Domestic investors still rule Borsa Istanbul
• The number of retail investors reached a whopping 7.6mn in Dec-23 compared with only 2.3mn in Dec-21. True,
pandemic induced factors created a global interest in equities and crypto assets. However, Turkey decoupled from
the world in 2022 on the back of unconventional macroeconomic policies that pushed policy rate to single digits
and inflation to triple digit levels. As for 2023, robust IPO performance kept retail investors’ interest very much
alive in Borsa Istanbul.
• After May-23 elections and the appointment of the new economy team, foreign investors increased exposure,
lifting the valuations across the board. Their share in the free float exceeded 37% (adjusted for QNB and other
anamolies it is only 30%) as of Dec-23.

Foreign vs Domestic Ownership of the FreeFloat in Equities Breakdown of Free Float Ownership by Investor Type
80% 9.0
Forei gn Funds,
13%
8.0
70%
7.0

60% 6.0
Domestic Retail,
5.0 35%
50%
Forei gn
4.0
Corpora te (TL
mn), 24%
40% 3.0

2.0
30%
1.0

20% - Domestic
Jan-17

Jan-22
Sep-18
Feb-19

Sep-23
Jul-19
Aug-16

Aug-21
Oct-20

Corpora te, 18%

Oct-15
Mar-16

Mar-21
May-15

May-20
Dec-14

Jun-17

Dec-19

Jun-22

Apr-23
Apr-18
Nov-17

Nov-22

Domestic
Funds, 10%

# of retail investors Domestic All (TL mn) Foreign All (TL mn)
Source: Central Registry
Source: Central Registry

9
 Credit to domestic investors helped
• Brokerage houses extend credit to domestic retail investors. The size of the outstanding credit has been rising
parallel to the equity market, brokers’ balance sheet, as well as retail investors’ rising interest in equities. As of
3Q23, the total credit to domestic investors has risen by 135% y/y to TL51.6bn (or US$1.9bn), corresponding to
about 3% of the portfolio value of domestic retail investors.
• The average interest rate on loans was at around 46% in 9M23 which was well below the annual inflation rate of
64%. Note that the interest rate on these loans have risen towards 60-65% levels.
• The derivative products including single stock and index futures also provide a decent leverage of about 6x. The
average daily trading volume is also comfortably high at US$903mn for single stocks and US$738mn for index
futures vs spot market of US$3,655mn.

Brokerage Houses Loan to Customers

2500 6%

5%
2000

4%
1500
3%
1000
2%

500
1%

0 0%
Jan-17

Jul-19

Jan-22
Sep-18
Feb-19

Sep-23
Oct-15

Aug-16

Oct-20

Aug-21
Mar-16

Mar-21
Apr-18

Apr-23
May-15

May-20
Dec-14

Jun-17

Dec-19

Jun-22
Nov-17

Nov-22
Loans to customers (US$mn) as% of portoflio value

Source:Turkish Capital Markets Association, Tera Yatirim

10
 Local Turkey ETFs reached US$2.1bn
• Domestic institutional asset managers have grown rapidly in size driven by the structural changes in the pension
system as well as the new regulations introduced after the Feb-23 earthquake. The total assets under
management reached to US$75.6bn or about 7.6% of the GDP.
• Meanwhile, local Turkey ETFs have risen to US$2.1bn in size vs foreign Turkey ETFs dropping to US$0.4bn. The
government’s decision to raise state contribution funds’ equity share to 30% from 10% is the key reason for the
significant increase in local Turkey ETF size.
• Domestic funds have also doubled their exposure to equities, holding about 20% of their assets in equities. That
said, domestic funds still account for 10% of the free float compared with 35% of domestic retail, 18% domestic
corporate, and 13% foreign funds.

Local Turkey ETFs vs Foreign ETFs Domestic Institutional Assets under Management vs Equity exposure
2,500 27%
75.0
2,000
22%
65.0
1,500

17% 55.0
1,000
45.0
500 12%
35.0
0 7%
Dec-23 Dec-22 25.0

Local Turkey ETFs Foreign Turkey ETFs

2% 15.0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
Jan-24
Source :Takasabank, Bloomberg, Tera Yatirim

Domestic Institutional Assets (US$ bn) Combined equity share

Source :CMB, Tera Yatirim

11
 Equity supply reached a record high of US$4.3bn
• A record-high of 54 companies have been listed on Borsa Istanbul in 2023, raising another record-high US$3.3bn.
Adding secondary offerings of US$1bn, the total equity supply reached US$4.3bn in 2023.
• When the number of retail investors reached 8mn, each IPO has attracted at least 3mn retail investors and posted
remarkable performances afterwards, at least doubling in a matter of days. That said, IPO performance faltered in
Dec-23 when 3 out of 4 posted negative performances after debut.
Some of the Companies in IPO Approval Process
Ahlatçı Yatırım Menkul Değerler
Equity supply in perspective (US$mn) Alnus Yatırım Menkul Değerler
Altınay Savunma Teknolojileri
Batıliman Liman İşletmeleri
4,500 Bin Ulaşım ve Akıllı Şehir Teknolojileri (binbin)
4,000 Birleşim Yesil Enerji
1,030 Cem Zeytin
3,500
Cosmer Kimya San. Ve Tic.
3,000
Dünya Varlık Yönetimi
2,500 218 Enda Enerji Holding
2,000 Ferbis Tarım Tic. Ve San.
774
806 3,251 GFS Holding
1,500 1,605 2,110
2,506 Global Tower - Kule Hizmet ve İşletmecilik
1,000 Golda Gıda San. Ve Tic.
1,368 1,220 Horoz Nakliyat
500 803
763 0
331 3518 487 385 Koray Holding
0 28 150
46 153
Koton
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Penti
Rönesans Gayrimenkul Yatirim A.Ş.
Sümer Varlık Yönetimi
IPOs (USD mn) Block + Private Placement (USD mn) Tavuk Dunyası
Yeşil Global Enerji
Source: CMB,TCMA,CapitalIQ, Tera Yatirim
Zorlu Yenilenebilir Enerji

12
 A hiccup in recent IPO performances

• IPO performance faltered in Dec-23 when 3 out of 4 posted negative performances after debut. That said, IPO
index has risen by 16% in US$ terms over the past one year and 229% in three years. Mid-Small cap and Micro
indices posted strong performances too while large caps posted a subdued performance as foreign investors
continued to reduce their positions.
• As for the valuation, IPO stocks are far more richly valued trading at 13.2x PER and 16.1x EV/EBITDA over their mid
and large cap peers as the concept of valuation is not appreciated or simply ignored.

Price Performances of Large /Mid-Small & Micro Caps BIST Multiples

450 12MT as of 3Q23 EV/EBITDA P/E P/BV
Median
400
BIST30 - Large Caps 7.8 5.3 1.7
350 BIST70 - Mid - Small caps 6.9 7.3 1.9
300 BIST Others* - Micro caps 12.2 9.7 3.4
BIST IPO 16.1 13.2 4.7
250
Source: Rasyonet, Tera Yatirim
200 *main market stocks excluding BIST100 constituents
150
Large/Mid-Small/Micro Cap Price Performance
100
US$ 1Y 3Y 5Y
50 Large -11% 22% 31%
- Mid-Small -8% 30% 146%
02/01/2022

02/03/2022
02/04/2022
02/05/2022
02/06/2022

02/08/2022
02/09/2022

02/11/2022
02/12/2022

02/02/2023
02/03/2023

02/05/2023
02/06/2023
02/07/2023
02/08/2023
02/09/2023
02/10/2023
02/11/2023

02/01/2024
02/02/2022

02/07/2022

02/10/2022

02/01/2023

02/04/2023

02/12/2023

Micro 9% 35% 309%

IPO 16% 229% 1089%
Source: Rasyonet, Tera Yatirim
Large Mid-Small Micro IPO

Source: Rasyonet, Tera Yatirim

13
Central Bank reserves will remain in focus
• The experimental macroeconomic policies led to a sharp erosion in CBT reserves. CBT’s gross reserves dropped to
US$100bn ahead of elections despite swap or deposit agreements with gulf states, Russia, and China. Following
the appointment of the new economy team, gross reserves jumped by US$40bn to US$140bn. FX and gold swaps
remained at record high levels of US$72bn while CBT’s official net reserves rose to US$35bn as of Dec-23. When
we strip out swaps, net reserves stand at a negative US$39bn in Dec-23. Foreign portfolio flows will be critical in
supporting CBT reserves as the new economy team implements rational policies.

CBT Gross reserves vs Swap volume (US$ mn) CBT Net reserves vs adjusted for swaps (US$ mn)
160,000 60,000

140,000 40,000

120,000
20,000

100,000
0

Feb-19

Feb-20

Feb-21

Feb-22

Feb-23
Aug-18

Aug-20

Aug-22
Aug-19

Aug-21

Aug-23
May-18

May-19

May-20

May-22

May-23
Nov-18

Nov-20

May-21

Nov-22
Nov-19

Nov-21

Nov-23
80,000

-20,000
60,000

-40,000
40,000

20,000 -60,000

0 -80,000
Feb-19

Feb-20

Feb-21

Feb-22

Feb-23
Aug-18

Aug-21

Aug-22
Aug-19

Aug-20

Aug-23
May-18

May-19

May-20

May-22
Nov-18

May-21

Nov-21

Nov-22

May-23
Nov-19

Nov-20

Nov-23

Net reserves Adj. net reserves

Gross reserves Swap volume Adj. gross reserves Source: CBT,Tera Yatirim

Source: CBT,Tera Yatirim

14
 A deleveraged private sector
• In 1Q23, Turkey foreign debt dropped by 4ppts to 50% of GDP compared with 2018 thanks to deleveraging
among corporates and rise in US$ based GDP.
• Massive deleveraging among corporates reduced foreign debt. Non-financials’ foreign debt is down by 3ppts
to 16%, banks down by 7ppts to 16% of GDP. Meanwhile, foreign debt of the public sector doubled to 25% of
the GDP thanks to Central Bank swaps, central government and public banks’ borrowing.
• Non-financials’ FX debt dropped by 13 ppts to 27% of GDP. Public sector, primarily the Central Bank assumed
the FX position of the country via swaps and FX protected TL deposits.

Turkey Public & Private Debt

2Q23 compared with 2018
All figures as% of GDP
Turkey Loans from
Foreign Debt Domestic
Domestic banks
50% -4%
Debt Total Public Total Private 45% -12% FX Debt
Debt "Non-Financials" Debt
15% -1%
Foreign
40% 9% 62% -16% Debt 27% -13%
Foreign
Debt
16% -3%
25% 13%

Public + Private Foreign

Foreign Debt Banks Debt
Change '23 vs '18
16% -7%
Source: Treasury, CBT, Tera Yatirim 15
Corporate earnings amid inflation adjustment chaos

• Inflation accounting starts… Turkish companies will be required to publish their inflation adjusted (IA) financials
starting in 4Q23. The final version of the law excluded banks, insurance, leasing, and factoring companies from the
practice as the government did not want to lose the tax revenues generated by financial companies.
• …but a lot of issues remain unresolved… The banking regulatory body asked financial companies not to report
their inflation adjusted figures. But some banks have already been reporting their IA figures in 2023 for
information purposes. It is not clear how the holding companies owning a bank such as Sabanci Holding and Koc
Holding will report their financial subsidiaries’ figures as banks are not supposed to report inflation adjusted
financials.
• Like-for-like comparison from combined earnings’ perspective will not be possible in 2024… Non-financials will
not be allowed to publish nominal financials and banks will not be required to publish inflation adjusted financials.
Therefore, we can only estimate the market’s overall earnings performance for 2024 in comparison with historical
figures.
• 10-week extension to 2023 YE announcement deadline… The Capital Markets Board gave a 10-week additional
time to publish 2023YE financials and 6-week additional time for 1Q24 and 2Q24 financials. Under normal
conditions, the deadline for 2023 YE financials was 29 Feb 2024 for solo and 11 Mar 2024 for consolidated
financials. A 10-week extension would drag the deadlines to 9 May and 20 May 2024, respectively. Similarly, the
deadlines for 1Q24 consolidated financials will be pushed to the third week of June and 2Q24 to the first week of
October.

16
 Corporate earnings in nominal terms
• Nominal vs real growth: We are not in a position to post inflation adjusted earnings estimates yet. Therefore, all
figures presented below are in nominal terms.
• Following an estimated 18% y/y growth in 2023, we expect banking sector earnings to grow by 12%, as lower
growth, weaker security spreads, and lower trading gains will offset the improvement in core spreads and strong
fee income growth.
• When we use Rasyonet consensus estimates for large cap non-financials that are not under our coverage, we
calculate non-financial earnings growth to be 33% in 2024 as steel companies’ earnings should normalize and
aviation sector remaining strong.
• As for 2024, Tera+Rasyonet consensus estimates indicate a 25% y/y earnings growth (+12% banks / +33% by non-
financials). Given the 40% inflation and just below depreciation expectations, there should not be any real term
growth in either front.

Net Earnings Comparison (TL) * Tera + Rasyonet Consensus

% YoY change 2017 2018 2019 2020 2021 2022 2023E 2024E
Financials 32% 3% -15% 23% 70% 395% 18% 12%
Non-financials 72% 12% 14% -8% 184% 191% 37% 33%
Total (TL) 52% 8% 2% 3% 136% 253% 29% 25%
Total (inflation adjusted) 35% -10% -9% -10% 73% 115% -22% -11%
Total (US$) 26% -18% -13% -17% 86% 90% -10% -14%
Source: Company Reports , Tera Yatirim
* Adjusted for one -off gains - banking sector estimates by Tera Yatirim

17
Potential implications of inflation accounting
• There are two aspects of inflation accounting. The first one is from financial reporting perspective, aiming to
provide a more accurate representation of a company’s economic reality in an inflationary environment. The
second one is from tax perspective, determining the amount of tax that companies are required to pay.
• Banks tend to report high earnings in a high inflationary environment and pay accordingly high taxes. Since the
final version of the law excludes banks from the practice they will continue to report high earnings and pay high
taxes. That said, they may use inflation accounting for financial reporting purposes. Non-financials with high fixed
assets and high financial debt will experience an improvement in their capital accounts and earnings but will be
required to pay higher taxes.
• Our simple inflation adjustment analysis suggests that 24E P/E would be lifted by only 7% to 5.0x. We have simply
listed monetary and non monetary assets of companies in our sample and calculated net monetary position of
each company. Afterwards, we estimated the monetary gains or losses affecting each company’s P&L. Based on
nominal earnings, we see that our sample, which is similar to BIST50, currently trading at 4.7x 2024E earnings.
Assuming banks would witness a 40% decline in 2024 inflation adjusted earnings, this would bring their P/E to
5.4x. Non-financials should experience an increase in earnings to the tune of about 14%, bringing their PE down
by 12% to 4.9x.
• Many companies such as Enka, Erdemir, and the aviation companies have functional currencies other than TL. In
addition, large companies such as Arcelik and Sisecam have the majority of their business in countries with a low
inflation environment or based in hard currencies. Their Turkey exposure is only 25-30% of the combined
business; therefore, the impact should be small, if at all.

Inflation adjustment analysis of companies in our sample

2024E Unadjusted P/E Adjusted P/E % chg.
total 4.7 5.0 7%
Financials 3.3 5.5 67%
Non-financials 5.6 4.9 -12%
Source: Rasyonet, Tera Yatırım
18
Dividend yields
• Attractive names include:
₋ Dogus Otomotiv (15.4%), Turk Traktor (12.3%), Tupras (10.3%), Ford Otosan (9.7%), Enerjisa (8.9%),
Yatas (8.9%)

Company Mcap Avg. Vol. Dividend (TL mn) Gross Dividend Yield (%) Ex-Date
Name US$mn US$mn 2023 2024E 2023 2024E 2023
Dogus Otomotiv 1,910 20.6 5,750 8,750 10.2% 15.4% 24-Nov
Turk Traktor 2,345 14.9 2,100 8,615 7.1% 12.3% 10-Mar
Tupras 9,042 144.5 27,000 27,808 8.8% 10.3% 29-Sep
Ford Otosan 9,098 33.3 15,444 26,400 5.4% 9.7% 30-Oct
Enerjisa Enerji 1,876 22.2 2,716 5,000 7.6% 8.9% 12-Apr
Yatas 124 1.8 200 328 3.6% 8.9% 18-Sep
Celebi 714 4.0 1,030 1,350 8.3% 6.3% 17-Apr
Anadolu Hayat Emek. 563 1.2 500 1,040 7.0% 6.2% 28-Mar
Cimsa 913 19.4 400 1,572 3.3% 5.8% 3-Apr
Brisa 861 1.4 1,098 1,375 7.3% 5.4% 29-Mar
Indeks Bilgisayar 161 4.8 189 256 5.1% 5.3% 2-May
Turkcell 4,579 58.6 2,260 7,000 1.9% 5.1% 20-Dec
Tofas Otomobil Fab. 3,694 36.1 3,000 5,600 3.4% 5.1% 21-Mar
Emlak G.M.Y.O. 1,011 60.4 908 1,500 3.4% 5.0% 12-Apr
Yapi Ve Kredi Bankasi 6,229 118.9 7,911 9,212 9.1% 5.0% 20-Mar
Akbank 7,049 107.9 8,996 10,312 10.4% 4.9% 30-Mar
Garanti Bankasi 8,742 62.9 8,776 12,131 7.6% 4.7% 14-Apr
Is Bankasi (C) 8,480 122.4 9,230 10,717 7.6% 4.2% 3-Apr
Anadolu Efes Biracilik 2,586 13.1 1,262 3,200 2.1% 4.1% 18-Sep
Sabanci Holding 4,254 58.9 3,571 4,779 4.6% 3.8% 3-Apr
Mavi Giyim 746 7.3 429 838 4.1% 3.8% 10-May
Bim Birlesik Magazalar 6,492 47.3 3,036 6,878 1.6% 3.6% 20-Dec
Is Yatirim 1,639 14.0 755 1,720 4.6% 3.5% 26-May
T.S.K.B. 694 15.6 0 700 n.a. 3.4% n.a.
Source: Rasyonet, Tera Yatirim estimates

19
 Banks vs Industrials – forward multiples
• The recent jump in equities also lifted valuations from depressed levels.
• Forward P/BV of banks hovers at around 0.77x, trading 59% above its 3-year average of 0.48x.
• Non-financials trade at 5.7x forward PER or at 21% discount to the 3-year average of 7.2x.
• If inflation accounting were to be used in 2023 financials, banks’ equities would have been adjusted upwards
while earnings would have taken a major hit due to net monetary position losses. This would have reduced the
P/BVs but sharply lifted the P/E multiples for banks. As for non-financials, the effect would depend on each
company’s net monetary position.
• In terms of EV/EBITDA, non-financials trade at 3.6x forward EV/EBITDA or at 22% discount to the 3-year average of
4.5x.

Forward multiples of Banks vs Non-financials Forward EV/EBITDA of Non-financials

9.0
14.0 3.50

12.0 3.00 8.0

10.0 2.50
7.0

8.0 2.00
6.0
3-year average 7.2x
6.0 1.50

5.0
4.0 1.00 3-year average 4.5x

2.0 0.50 4.0

3-year average 0.48x

- -
3.0
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23

Non-financials PER (LHS) Bank P/BV (RHS)

Source: Bloomberg, Tera Yatirim
Source: Bloomberg, Tera Yatirim 20
 2024 – a year with two halves – yet again

• Over the past two decades, Turkish equities’ relative performance over MSCI-EM has been volatile.
• The market failed to repeat a strong or weak performance two years in a row up until 2014.
• However, political events and macro blues led to poor performance of Turkish equities over the past seven years.
• In 2022, the experimental macro economic policies helped MSCI-Turkey outperform MSCI- EM by 137%.
• In 2023, the excesses of 2022 was reversed ahead of elections and the market plunged. After elections, Turkish
equities gained the lost ground but closed the year in negative territory (-15%) yet again.

Relative performance MSCI-Turkey vs MSCI- EM MSCI-Turkey MSCI-EM Relative

Year Performance
4.50
2005 52% 30% 16%
1.10 4.00 2006 -9% 29% -30%
2007 70% 36% 25%
3.50
0.90 2008 -64% -55% -20%
3.00 2009 86% 73% 7%
2010 23% 17% 6%
0.70 2.50
2011 -37% -20% -21%
2.00 2012 61% 15% 40%
0.50 2013 -28% -4% -25%
1.50
2014 17% -5% 22%
1.00 2015 -34% -17% -20%
0.30 2016 -11% 9% -18%
0.50 2017 34% 34% 0%
0.10 - 2018 -44% -17% -32%
2019
Mar-03
Mar-04

Mar-06
Mar-07

Mar-10
Mar-11

Mar-14
Mar-15

Mar-17
Mar-18
Mar-19

Mar-21
Mar-22
Mar-23
Mar-01
Mar-02

Mar-05

Mar-08
Mar-09

Mar-12
Mar-13

Mar-16

Mar-20

7% 15% -7%
2020 -10% 16% -22%
2021 -31% -5% -28%
Relative to MSCI-EM (lhs) MSCI-Turkey 2022 84% -22% 137%
Source: Bloomberg
2023 -9% 7% -15%
Source: Bloomberg
21
Taking the rerating cue from CDS
• Experimental macroeconomic policies took its toll on the Turkish economy with inflation soaring amid sharp
deterioration in C/A and budget deficits. With credit agencies downgrading Turkey’s sovereign rating, 5Y CDS hit
historical highs of almost 900bps. High inflation levels lift earnings and lower earnings-based multiples. Lack of
visibility also erodes confidence in financials. Therefore, Turkey’s 1-year forward PER also dropped to 4.0x with
banks trading as low as 2.0x.
• There appears to be a close relationship between Turkey’s 5Y CDS and 1-year forward PER. Between Jan-11 and
Dec-17, when conventional macroeconomic policies are implemented Turkey’s PER averaged at 9.7x compared
with an average CDS of 214bps. Later on, PER average dropped to 6.5x while CDS rose to 381bps during ‘18 and
‘19 elections. With experimental policies’ introduction in Dec-21, things have taken a turn for the worse pushing
PER down to 4.8x amid an average CDS of 567bps.
• 5Y Turkey CDS has recently dropped to below 300bps from a pre-election high of 600bps but PERs have not
responded yet. We believe that re-rating will occur naturally when normalization of Turkish financial markets, i.e.
reopening of swap markets, is completed during 2024.
5Y Turkey CDS vs 1-year forward PER

900.0 14.0
Period average PER (x) 5Y CDS(bps)
800.0
12.0 Jan-11 / Dec-17 9.7 214
700.0
10.0
Jan-18 / Dec-21 6.5 381
600.0 Dec-21 / Dec-23 4.8 567
500.0 8.0 Source: Bloomberg
400.0 6.0

300.0
4.0
200.0
2.0
100.0

- -

CDS (1-month moving average) LHS PER (x) 22

Source:Bloomberg
 Valuation during normalization
• Valuation during the normalization period should depend on the execution of rational policies. The market
appears to be willing to give the benefit of doubt to the new economy team as long as promises are delivered. As
mentioned before, we do not expect new policies to improve companies’ earnings profile but may result in a re-
rating of equities as foreign portfolio inflows may lift valuations.
• Based on Tera + Rasyonet consensus estimates, Turkish equities trade at 4.6x on 1-year forward earnings,
representing a 12% discount to its 5-year historical average and a 56% discount to GEM median. The continuation
of rational policies should ultimately lead to disinflation in 2H24. We believe that the decoupling of CDS and PER is
only temporary. With the reopening of swap markets and declining inflation, foreign portfolio inflows should
continue and lead to BIST100 trading at an undemanding PER of 7.0x, pointing to a BIST100 level of 11,900 with
an upside potential of 52% based on current TL prices. This would correspond to a 27% US$ based return
considering Jun-24 future US$/TL rate of 35.7.

Blended 1Y forward PER - BIST 100 Index vs MSCI-EM

18.00
16.00 Return expectations under different re-rating scenarios
1-year forward PER (x) 4.0 4.8 6.0 7.0 8.0 10.0
14.00
Estimated appr. CDS level (bps) 600 500 400 350 300 200
12.00 Estimated BIST100 level 6,810 8,173 10,216 11,918 13,621 17,026
10.00 Upside Potential (TL) -13% 5% 31% 52% 74% 118%
Source: Bloomberg, Tera Yatirim
8.00
6.00
4.00
2.00
-
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
Jan-24

xu100 index mxef index 5-year avg.

Source : Bloomberg 23
 GEM Valuation multiples
• Turkish equities’ discount to GEM average had gradually GEM Valuation Multiples
PER '23 PER '24 PER '25
declined between 2007 and 2013, narrowing down to 5% EMEA (x) (x) (x)
Hungary 7.0 5.6 5.6
late 2012. Poland 6.9 7.6 8.3
Czech Rep 7.7 8.2 8.3
• The discount has then widened back substantially to Greece 7.0 7.9 8.1
above 50% levels by end-2019. Russia 2.3 1.9 2.5
Egypt 11.4 8.2 6.2
• In 2023, the discount to GEM average narrowed down Saudi Arabia 20.5 20.2 17.6
South Africa 16.5 12.9 9.9
and currently stands at 56%. Turkey 5.9 4.8 3.8
Qatar 10.1 10.5 9.7
UAE 9.1 9.0 9.8
Average 9.5 8.8 8.2
Turkey vs GEM * PER discount to median
Latam
0%
Brazil 8.7 8.7 8.0
Chile 8.4 10.5 10.8
-10%
Colombia 5.2 5.4 5.5
Mexico 17.0 13.9 13.3
-20% Peru 8.3 14.1 12.2
Average 9.5 11.1 10.1
-30%
Asia
-40% China 13.6 11.2 9.8
Taiwan 21.8 19.1 16.1
South Korea 18.6 16.3 10.7
-50%
India 25.1 24.1 20.5
Thailand 19.7 16.9 14.6
-60% Indonesia 17.5 15.6 14.0
Philippines 12.7 12.3 11.3
-70% Malaysia 15.1 14.6 13.0
Average 18.0 16.3 13.8
-80%
GEM Average 12.3 11.6 10.4
GEM Median 10.8 10.9 9.9
-90%
Source: Bloomberg - * Excluding Egypt &Argentina Turkey Discount vs. Average -52% -59% -63%
Turkey Discount vs. Median -45% -56% -61%
Source: Bloomberg, Tera Yatirim

24
 EM Heat Check
• Asian countries’ dominance appear to have risen within MSCI-EM.
• There were three years (‘11, ’15, ’18) over the past decade in which all EM market posted a negative performance.
• Turkey bucked the trend in 2022 being one of only four EM markets in positive territory.
• The picture was mixed in 2023 –EMEA has clearly outperformed the EM average while Asia and particularly China
was an underperformer.

EM Country Comparison
Absolute USD Performance (MSCI-EM)
South MSCI-
Egypt Poland Russia Africa China India Korea Malaysia Philip. Taiwan Thai Brazil Chile Mexico Turkey EM
2010 10% 13% 18% 31% 4% 19% 25% 33% 30% 19% 51% 4% 42% 24% 23% 17%
2011 -49% -32% -21% -16% -20% -37% -13% -3% -3% -23% -6% -25% -22% -12% -37% -20%
2012 47% 34% 10% 15% 18% 23% 19% 9% 43% 13% 31% -4% 5% 26% 61% 15%
2013 4% -3% -3% -9% 1% -4% 4% 6% -4% 7% -17% -18% -23% -1% -28% -4%
2014 26% -17% -49% 3% 5% 22% -13% -13% 24% 7% 13% -17% -15% -10% 17% -5%
2015 -25% -27% 0% -27% -10% -7% -8% -22% -8% -14% -26% -43% -19% -16% -34% -17%
2016 -13% -2% 49% 15% -1% -3% 7% -7% -8% 15% 23% 61% 13% -11% -11% 9%
2017 5% 52% 0% 33% 51% 37% 46% 21% 23% 24% 31% 21% 40% 14% 34% 34%
2018 -16% -15% -5% -27% -20% -9% -23% -9% -17% -12% -8% -4% -21% -17% -44% -17%
2019 39% -8% 41% 7% 21% 6% 10% -5% 9% 32% 7% 22% -19% 8% 7% 15%
2020 -25% -12% -17% -6% 27% 14% 43% 0% -5% 37% -14% -21% -8% -4% -10% 16%
2021 6% 6% 13% 1% -23% 25% -10% -10% -5% 24% -4% -24% -19% 20% -31% -5%
2022 -25% -29% -100% -7% -24% -9% -31% -10% -15% -32% 3% 2% 15% -5% 84% -22%
2023 38% 45% 0% -2% -13% 20% 22% -7% 2% 27% -13% 23% -1% 36% -9% 7%
Source: MSCI, Bloomberg

25
Current macroeconomic themes
• Economic activity losing momentum
✓ Turkey’s GDP has been recovering since 2Q20, thanks to a historic credit impulse and deeply negative real
interest rates. Leading indicators show a gradual slowdown to low single-digit levels, as loan demand and
supply are being constrained by rate hikes and quantitative tightening, in order to fight with the soaring
inflation, deteriorated C/A deficit, and control TL’s depreciation.
• External balances to continue improving
✓ Combination of the sharply-risen energy and commodity prices, robust economic activity, and a resurgence
of gold imports led the increase in the C/A deficit towards 6% of GDP by mid-2023. A gradual decline
towards 2.5% should be expected by end-2024, thanks to slower economic activity, downward
normalization in commodity prices, lower net gold imports, and rising tourism income.
• Inflation to peak in May’24 before decreasing gradually
✓ Inflation had surged after the CBT started an easing cycle in Sep’21. Deteriorated pricing behavior, wage
adjustments, administrative price and tax hikes, and unfavorable base should lead to a peak in annual CPI
inflation in May 2024. Combination of the slowdown in demand, measured TL depreciation, and favorable
base should help kick off a disinflation trend afterwards, so that CPI inflation drops to 40% by end-2024.
• Budget deficit to widen but remain manageable
✓ Budget has been performing well as revenues were supported by high inflation and strong economic activity.
However, a deterioration will ensue from the slowdown in economic activity, civil wage increases, cost of
new pensioners and other contingent liabilities, and rise in interest expenses. Accordingly, the budget deficit
should re-widen towards 5.0% of GDP in full-year 2024.
• Central Bank to remain put until 4Q24
✓ CBT has strengthened its rate-hike cycle after the changes in MPC, having delivered underwhelming hikes in
the first two meetings post the elections, while also continuing to utilize macroprudential measures to
further facilitate a pick-up in TL deposit costs. The Bank will stop after a final hike in January and we expect
it to remain put until 4Q24 when it can finish the year with some 750bps rate cuts. 26
 GDP growth is gradually slowing down
Turkey’s GDP growth is slowing down as monetary policy has been tightened… Turkey’s GDP has been recovering
sharply from the Covid-induced slump in 2Q20, thanks to a historic credit impulse, world-leading negative real
interest rates, and an unconventional macroprudential policy set pulling forward consumer demand as well as
encouraging production and exports. Accordingly, the seasonally and calendar adjusted GDP in 3Q23 reached 23%
above the pre-Covid level in 4Q19. Following the changes in the economy team in the aftermath of the elections,
there have been rate hikes as well as quantitative tightening limiting loan growth, which are gradually taking their toll
on economic activity. As such, we would expect a sequential pull-back in the GDP in 4Q23 and 1Q24 and a gradual
recovery thereafter following the peak in inflation. Accordingly, we forecast Turkey’s GDP growth to drop from a
projected 4.5% in 2023 towards 2.0% in 2024. We would expect a new rate-cut cycle to be kicked off as of 4Q24, so
that the GDP growth momentum rises back towards 4.6% in 2025.
Components of GDP growth (4QMA)
18%
15%
12%
9%
6%
3%
0%
-3%
-6%
-9%
-12%

2Q24E
4Q24E

4Q25E
4Q23E

2Q25E
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
2Q17
4Q17
2Q18
4Q18
2Q19
4Q19
2Q20
4Q20
2Q21
4Q21
2Q22
4Q22
2Q23
Private Consumption Public Consumption Investment
Changes in stock Net exports GDP growth
Source: Turkstat, Tera Yatirim estimates

27
 Retail sales still strong despite weak confidence
Retail sales growth still remains strong but consumer confidence collapsed… Consumption makes up some 60% of
Turkey’s GDP, i.e. retail sales is the main driver of growth. Retail sales, which had decreased by some 19% y/y in the
peak Covid-19 months of April and May 2020, have been recovering sharply since, on ample loan availability and
deeply negative real interest rates. On the other hand, consumer confidence which has been steadily falling until mid-
2022 had rebounded sharply supported by the combination of above inflation wage adjustments, early retirement
possibility, extremely cheap financing, and a very stable currency. Elections proved to be an inflection point, as
consumer loan rates have been raised significantly since and currency allowed to depreciate sharply, leading to a
collapse in consumer confidence. This is yet to be fully reflected to the retail sales figures, mainly driven by pulled-
forward demand, as a further slowdown is inevitable. As such, private consumption is likely to drop to and remain at
low-single-digit levels over the next one-year period.
Retail sales index, 3MMA, y-o-y % change Official Consumer Confidence
30% 100
25% 95
20% 90
15%
85
10%
80
5%
75
0%
-5% 70

-10% 65
-15% 60
Nov-17
Nov-12

Nov-22
Sep-13

Feb-19

Sep-23
Feb-14

Sep-18

May-20
May-15

Oct-20
Oct-15

Nov-12

Nov-17

Nov-22
Aug-16

Aug-21

Sep-13

Feb-19
Feb-14

May-15

Sep-18

May-20

Sep-23
Oct-15

Oct-20
Aug-16

Aug-21
Jun-17

Jun-22
Jun-12

Jul-14

Jul-19
Apr-13

Apr-23
Apr-18
Mar-16

Mar-21

Jun-12

Jun-17
Dec-14

Jun-22
Dec-19

Mar-16

Mar-21
Jul-14

Jul-19
Jan-12

Jan-22

Apr-18
Jan-17

Apr-13

Dec-14

Dec-19

Apr-23
Jan-22
Jan-12

Jan-17
Source: Turkstat, Tera Yatirim

28
 Real sector momentum still relatively weak
Real sector activity has improved slightly but is still slow… Investments make up some 20% of Turkey’s GDP, i.e. IP
and PMI are good indicators for growth. Following the 25% y/y collapse in industrial production in the peak Covid-19
months of April and May 2020, there has been a strong rebound, supported by a historic credit growth as well as
robust export momentum. A gradual loss of momentum has been observed in sequential data since early-2022, as
the PMI also remained below the 50 mark for most of 2022. Industrial production and PMI have indeed diverged in
2023, with the former weakening in the run-up to the elections and recovering slightly afterwards, and the latter
showing the reverse trend. The new economy team is trying to re-gear credit growth back to the real sector away
from consumers but cost of funding continues to increase meaningfully and certain sectors also feel the heat of rising
personnel costs and a currency that may appreciate slightly in real terms. As such, growth in the real sector is also
likely to remain in low single-digit levels over the next one-year period.
PMI vs. industrial production, 3MMA, y-o-y % change Real Sector Confidence Index (SA)
60 20% 120
55 13% 110
50 6% 100
45 -1%
90
40 -8%
80
35 -15%
70
30 -22%
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
Sep 20
Sep 21
Sep 22
Sep 23
Mar 20
Mar 21
Mar 22
Mar 23
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Mar 19

60

Oct-13

Oct-16
Oct-07

Oct-10

Oct-19

Oct-22
Jul-08

Jul-17

Jul-20
Jul-11

Jul-14

Jul-23
Apr-09

Apr-12

Apr-21
Apr-15

Apr-18
Jan-13

Jan-22
Jan-07

Jan-10

Jan-16

Jan-19
PMI Industrial production (RHS)
Source: Istanbul Chamber of Industry, Turkstat, Tera Yatirim Source: CBT, Tera Yatirim

29
 C/A deficit to continue to gradually decline
C/A balance to continue improving gradually... Turkey’s C/A deficit has been widening sharply since end-2021 on a
combination of factors including a wider goods deficit due to higher imports on ample loan availability and highly
elevated commodity prices, as well as massive net gold imports on a shift in savings preferences, given the sharply
negative real interest rates in TL savings instruments. We estimate that the C/A deficit has peaked at around 6% of
GDP in May 2023. We forecast that the gradually tightening monetary policy and a depreciated TL following a period
of extreme stability should normalize the demand for imported goods as well as bring down the abnormally-high gold
demand. These, along with some normalization in commodity prices and the steady growth in tourism &
transportation income, should allow for a gradual decline in the C/A deficit towards 4% of GDP by end-2023 and
towards the 2.5% mark by end-2024. Meanwhile, especially if the local energy explorations come to fruition, Turkey’s
C/A deficit could decrease to negligible levels in the longer term.
3MMA Y/Y growth of exports and imports # of tourists and revenues (12M-rolling, US$mn)
80 50 50,000
45 45,000
60
40 40,000
40
35 35,000
20 30 30,000
25 25,000
0
20 20,000
-20
15 15,000
-40 10 10,000
5 5,000
-60

Nov-16

Nov-21
Sep-17

Sep-22
Feb-18

Feb-23
May-14

May-19
Oct-14

Oct-19
Aug-15

Aug-20
Jun-16

Jul-18

Jun-21

Jul-23
Mar-15

Mar-20
Dec-13

Dec-18
Apr-17

Apr-22
Jan-16

Jan-21
Jul-05

Jul-07

Jul-09

Jul-11

Jul-13

Jul-15

Jul-17

Jul-19

Jul-21

Jul-23
Mar-10

Mar-12

Mar-14
Mar-04

Mar-06

Mar-08

Mar-16

Mar-18

Mar-20

Mar-22
Nov-04

Nov-06

Nov-14

Nov-16

Nov-18
Nov-08

Nov-10

Nov-12

Nov-20

Nov-22

Exports Imports # of tourists (mn) Revenues (US$mn, RHS)

Source: CBT, Commerce Ministry, Tera Yatirim Source: Tourism Ministry, CBT, Tera Yatirim estimates

30
 Improvement of the capital account a priority
Improvement of financing picture of C/A deficit is a priority... Net errors & omissions, reserve losses, and funding
obtained by the Central Bank via bilateral deals have been the main funding sources of the C/A deficit in 2022, while
portfolio investments, FDI other than real estate purchases, and credit have been mostly absent. Attracting foreign
capital seems to be one of the priorities of the new economy management, which has initially led to the repatriation
of local funds left ahead of elections, while the drop in Turkey’s CDS levels have also improved the foreign funding
conditions. Accordingly, private sector’s external debt rollover exceeded 100% in 2H23, while portfolio flows into both
bonds and equities have also started. Meanwhile, Abu Dhabi Wealth Fund is expected to finance up to US$8.5bn of
earthquake relief bonds and provide US$3bn to Turkey’s Export Credit Bank. We would expect the opening of the
swap markets to take some time, with the improvement of the deeply negative net reserve position of the CBT being
a prerequisite. An eventual normalization in the swap markets in 2H24 could lead to much stronger capital flows.
Composition of C/A deficit financing (US$bn)
100 -10.0%

75 -8.0%

50 -6.0%

25 -4.0%

0 -2.0%

-25 0.0%

-50 2.0%
Nov-06

Nov-21
Nov-11

Nov-16
Sep-07

Feb-13

Feb-18

Sep-22
Feb-08

May-09

Sep-12

May-14

Sep-17

Feb-23
May-04

May-19
Oct-04

Oct-09

Oct-19
Oct-14
Aug-05

Aug-10

Aug-15

Aug-20
Jul-08

Jul-13

Jul-23
Jul-18
Jun-11
Jun-06

Mar-15

Jun-16

Mar-20

Jun-21
Mar-05

Mar-10
Dec-03

Dec-18
Dec-08

Dec-13
Apr-12

Apr-17
Apr-07

Apr-22
Jan-16

Jan-21
Jan-06

Jan-11

Net FDI Net Portfolio flow Loans Net deposits Reserves Net other C/A deficit to GDP (RHS)

Source: CBT, Turkstat, Tera Yatirim estimates

31
 FX reserves situation has started to improve
Swap-adjusted net reserves have started to improve... The gradual closure of the swap market to foreigners in the
aftermath of the sharp TL depreciation in August 2018 had necessitated the Central Bank to sell in excess of
US$120bn over the course of 2019 and 2020, meeting the demand of both international and domestic investors,
which has been on a pause & repeat trend since as necessary, with public pressure, FX-protected deposit scheme,
receivables from rediscount loans and exporters, bilateral deals, etc. contributing to the volatility. We estimate that
the Central Bank remains as the largest player in the FX market, constantly recycling FX with exporters while forcing
banks to achieve de-dollarization via punitive macroprudential measures. Additionally, the increase in foreign capital
inflows has also started to help the CBT start building some net reserves, especially in the aftermath of its higher-
than-expected rate hike in November. Accordingly, we estimate that the Bank was able to increase its swap-adjusted
net reserves by US$25bn since early-June and by US$19bn since mid-November.
CBT reserves (US$bn)
120
105
90
75
60
45
30
15
0
-15
-30
-45
-60
-75
Sep-07

Sep-10

Sep-11

Sep-13

Sep-14

Sep-16

Sep-17

Sep-20
May-07

May-08
Sep-08

May-09
Sep-09

May-10

May-12
Sep-12

May-13

Sep-15

May-16

Sep-18

May-19
Sep-19

Sep-21

May-22
Sep-22

May-23
Sep-23
May-11

May-14

May-15

May-17

May-18

May-20

May-21
Jan-07

Jan-08

Jan-10

Jan-11

Jan-13

Jan-14

Jan-17

Jan-23
Jan-09

Jan-12

Jan-15

Jan-16

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22
Gold reserve Ex-gold gross reserve Net reserve Swap-adjusted net reserve
Source: CBT, Rasyonet, Tera Yatirim

32
 Budget deficit still seems manageable
Budget deficit set to increase but should remain manageable… Budget balances have been deteriorating over the
five-year election cycle from 2015 to 2019, with the main deterioration having happened in 2019 as budget spending
was required to support the weak economic activity. Afterwards came the Covid-19 supports in 1H20, leading to a
peak in the headline deficit at 4.3% of GDP in July 2020. However, this was followed by a surge in revenues on the
combination of the recovery in economic activity, gradual collection of deferred payments, introduction of new
restructurings, as well as the runaway inflation and TL depreciation. As such, headline deficit hit a low of 0.6% in May
2022, accompanied by a primary surplus of 1.7%. However, some deterioration will be inevitable driven by the
slowdown in economic activity, cost of the new pensioner scheme and other contingent liabilities, and an expected
surge in interest expenses as CPI-linkers will be gradually redeeming. Accordingly, the budget deficit should re-widen
towards 5%, going forward, but the primary deficit should be contained at around 2% of GDP.
Budget and primary balance to GDP (12-month rolling)
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%

Aug-24E

Aug-25E
Aug-08

Aug-09

Aug-11

Aug-13

Aug-14

Aug-16

Aug-18

Aug-19

Aug-21

Aug-23
Aug-10

Aug-12

Aug-15

Aug-17

Aug-20

Aug-22

Apr-25E
Apr-24E

Dec-25E
Dec-23E

Dec-24E
Apr-10

Apr-12

Apr-15

Apr-17

Apr-20

Apr-22
Apr-08

Apr-09

Apr-11

Apr-13

Apr-14

Apr-16

Apr-18

Apr-19

Apr-21

Apr-23
Dec-07

Dec-10

Dec-12

Dec-15

Dec-17

Dec-20

Dec-22
Dec-08

Dec-09

Dec-11

Dec-13

Dec-14

Dec-16

Dec-18

Dec-19

Dec-21
Budget balance Primary balance IMF-def budget balance IMF-def primary balance
Source: Ministry of Finance, Turkstat, Tera Yatirim estimates

33
 TL seems to be fairly valued
REER indices for TL appear around fair levels... TL has been continuously depreciating since 2010 on the combination
of chronically high C/A deficit and inflation, along with excessive loan growth, rising budget deficit, and surging risk
premia exacerbated by geopolitical issues. Supported by the FX-protected TL deposit scheme and sales from reserves,
TL had been allowed to appreciate significantly ahead of the elections and depreciate sharply in the immediate
aftermath. TL will seemingly remain a managed float in the near future, as the increase in foreign portfolio flows,
robust tourism revenues, gradually improving trade deficit, and some de-dollarization given the sharply raised TL
interest rates all make it easy for the CBT to control the nominal depreciation. Indeed, given the need to rebuild
reserves, commitment to achieve disinflation, and not wishing to deteriorate exporters’ competitiveness too greatly,
we would expect the CBT to allow for a nominal depreciation of TL slightly below the monthly inflation figures.
Accordingly, we project TL to close 2024 at 40.00 against the US$ and at 47.82 by end-2025.
Real effective exchange rate indices (2003=100)
130
120
110
100
90
80
70
60
50
40
Jul-94
Jul-95
Jul-96
Jul-97
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jul-21
Jul-22
Jul-23
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11

CPI based PPI based

Source: CBT, Tera Yatirim

34
 Inflation to peak in May 2024
Annual inflation to remain elevated until May-2024... After years of revolving around the 8% mark within a relatively
tight range, breadth of volatility and the peaks of inflation surged as TL’s depreciation gained pace, budget deficits
started to widen, and consumption picked un on a historic credit impulse once the CBT had started an easing cycle in
September 2021 as the economy management clearly prioritized growth. As such, CPI inflation exceeded 85% while
PPI inflation exceeded 155% by September 2022. The favorable base effect and contained TL helped facilitate a drop
to just below 40% around the elections in 2023. However, the normalization in TL, sizeable wage adjustments, new
pensioner scheme, rollback of major energy price subsidies, new taxes, and chronic problems in the food supply
chains have started to push annual inflation higher which is set to peak in May 2024. Thereafter, combination of the
slowdown in economic activity, slight real appreciation of TL, and the base effect should lead to a drop in annual CPI
inflation towards 40% by end-2024 and towards 25% by end-2025.
Turkey annual inflation
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%

Jun-24E
Dec-24E
Jun-25E
Dec-25E
Jun-13

Jun-14

Jun-15

Jun-16

Jun-20

Jun-21

Jun-22

Jun-23
Jun-09

Jun-10

Jun-11

Jun-12

Jun-17

Jun-18

Jun-19
Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-16

Dec-17

Dec-18

Dec-19

Dec-23
Dec-13

Dec-14

Dec-15

Dec-20

Dec-21

Dec-22
Annual CPI inflation Core CPI (C) inflation Domestic PPI
Source: Turkstat, Tera Yatirim estimates

35
 CBT to remain tight in the foreseeable future
CBT to finalize its rate hike cycle in January... Immediately following the elections, President Erdogan has replaced
the Central Bank Governor and the CBT has kicked off the rate-hike cycle, which initially remained slow with lower-
than-expected hikes in the first two meetings. Following the overhaul of the entire MPC, the CBT stepped up the pace
of rate hikes while raising reserve requirements to mop of extra TL liquidity and at the same time has been gradually
simplifying and improving the macroprudential policy set, in order to achieve de-dollarization and a reallocation of
loans from consumers to businesses. Following a larger-than-expected hike in November, the Bank has indicated that
it is likely to finalize the rate hike cycle with a couple more moves at around 45.00%, also confirmed by its action and
communication in December. As importantly, the CBT has also ruled out premature rate cuts for the time being,
before a sustained price stability is ensured. As such, we currently expect the Bank to deliver its first rate cut in
October and cut a total 750bps in 4Q24 before continuing with some 16ppts of rate cuts in 2025.
CBT's average cost of funding & real rates
50.0% 15.0%
45.0% 9.0%
40.0% 3.0%
35.0% -3.0%
30.0% -9.0%
25.0% -15.0%
20.0% -21.0%
15.0% -27.0%
10.0% -33.0%
5.0% -39.0%
0.0% -45.0%
Sep-18

Sep-20

Sep-22
Sep-16

Sep-17

Sep-19

Sep-21

Sep-23

Jun-25E
Jun-24E
Jun-17

Jun-19

Jun-21

Jun-23
Jun-16

Jun-18

Jun-20

Jun-22

Mar-25E
Mar-24E

Dec-24E

Dec-25E
Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22

Dec-23

Sep-24E

Sep-25E
CBT's average cost of funding (LHS) Ex-post real rate Ex-ante real rate
Source: CBT, Tera Yatirim estimates

36
 Unemployment to pick up from multi-year lows
Unemployment rate to increase slightly in the near future... Relatively slower economic growth with boom-bust
cycles, low levels of confidence, lack of investments, and a flurry of unregistered refugee employment have been
pushing up unemployment ratio since mid-2012, despite the Government’s ongoing employment supports. Having
peaked at just above 14% in September 2019, seasonally adjusted unemployment reached a new high of 23% in the
peak months of Covid restrictions, once we adjust for the sharp drop in the participation rate to 47% from 53%
previously. A year after, once the Covid scare got tamed, employment started to pick up strongly, supported by the
sharp recovery in tourism, while companies were encouraged to increase employment via loans linked to such
targets. As such, number of employed returned back to its trend growth in 2010s, with the seasonally adjusted
unemployment rate decreasing to an 11-year low of 8.5% as of October 2023. We forecast that the slowdown in
economic activity and export markets should stall these employment gains in the near future.
Unemployment Rate in Turkey (%) Participation & number of employed
16 55 33
15 54 32
14 53 31
52 30
13
51 29
12
50 28
11
49 27
10 48 26
9 47 25
8 46 24
Sep-16

Sep-17

Sep-20

Sep-21

Sep-22

Sep-14

Sep-15

Sep-19

Sep-20

Sep-21
Sep-14

Sep-15

Sep-18

Sep-19

Sep-23

Sep-16

Sep-17

Sep-18

Sep-22

Sep-23
May-14

May-15

May-18

May-19

May-22

May-23

May-14

May-17

May-18

May-19

May-23
May-16

May-17

May-20

May-21

May-15

May-16

May-20

May-21

May-22
Jan-15

Jan-16

Jan-20

Jan-21

Jan-16

Jan-17

Jan-18

Jan-22

Jan-23
Jan-14

Jan-17

Jan-18

Jan-19

Jan-22

Jan-23

Jan-14

Jan-15

Jan-19

Jan-20

Jan-21
Unemployment rate Unemployment rate (SA) SA participation rate SA # of employed (mn, rhs)
Source: Turkstat, Tera Yatirim

37
MACRO FORECASTS

Macro Forecasts 2020 2021 2022 2023F 2024F 2025F

1-Week Repo Rate (year-end, %) 17.00 14.00 9.00 42.50 37.50 21.50
Effective Funding Rate of CBT (average, %) 10.50 17.78 12.96 18.31 43.96 27.96
Benchmark Bond Yield (year-end, %) 14.85 22.09 9.80 38.12 34.38 20.94
Benchmark Bond Yield (average, %) 11.85 18.05 19.85 20.07 37.92 27.10
USD/TRY Rate (year-end) 7.34 13.33 18.70 29.44 40.00 47.82
USD/TRY Rate (average) 7.01 8.85 16.56 23.76 34.56 43.79
EUR/TRY Rate (year-end) 9.01 15.09 19.93 32.57 44.26 52.92
EUR/TRY Rate (average) 8.02 10.44 17.38 25.71 38.24 48.46
Exchange Basket (EUR+USD) (year-end) 8.17 14.21 19.32 31.01 42.13 50.37
GDP Growth (real % change) 1.9 11.4 5.5 4.5 2.0 4.6
CPI Inflation (y-o-y % change) 14.6 36.1 64.3 64.8 40.3 25.0
Average Brent oil price (average, US$) 43 70 98 82 82 83
Current Account Balance (annual, US$ bn) -32 -7 -49 -44 -29 -25
C/A Balance as % of GDP (annual) -4.4 -0.9 -5.5 -4.1 -2.5 -2.0
Budget Balance as % of GDP (annual) -3.5 -2.8 -0.9 -2.9 -5.0 -3.8
Primary Balance as % of GDP (annual) -0.8 -0.3 1.1 -0.3 -1.8 -1.7
Unemployment Rate (average, %) 13.1 12.0 10.5 9.4 9.4 9.0
Source: CBT, Treasury, Turkstat, Matriks, Rasyonet, Tera Yatirim estimates

38
TOP PICKS

Tera Yatirim Top Picks List

Mcap Avg. Vol Price 12M TP Upside '24 P/E '24 EV/EBITDA
Company Name Ticker (US$mn) (US$mn) (TL/shr) (TL/shr) Potential* (x) '24 P/B (banks)
Bim Birlesik Magazalar BIMAS 6,482 47.3 319.00 452.00 45% 10.0 5.9

Coca Cola Icecek CCOLA 4,273 7.5 502.00 746.50 52% 7.9 3.9

Mavi Giyim MAVI 745 7.3 112.10 193.00 76% 4.4 2.9

Sabanci Holding SAHOL 4,247 58.9 62.20 111.90 84% 2.2 1.0

T.S.K.B. TSKB 692 15.6 7.39 12.30 70% 2.3 0.7

Turkiye Sigorta TURSG 1,800 7.1 46.30 63.58 40% 4.7 2.2

Yapi Ve Kredi Bankasi YKBNK 6,219 118.9 22.00 31.00 46% 2.8 0.8

39
BIMAS
We revise up our 12M target price for BIM to TL452 and keep it in our top picks due to solid
Price Data
outlook… Current Price (TL) 319.50
Current Mcap (TLmn) 153,136
12-mth Target Price (TL/share) 452.00
• BIM is the largest hard-discounter in Turkey operating with 12,046 stores (11,040 in 12-mth Target Mcap (TLmn) 274,454
12-mth Return Potential 41%
Turkey & 1,006 in overseas markets). As of September, BIM is the market leader in Dividend yield 1%
organized food retail market with TL229bn revenues (LTM) through increasing Financials (TL mn) 2021 2022 2023E 2024E
popularity of private label and staple products as consumers are trading down in the Revenues 70,699 147,716 269,653 420,080
% ch y/y 27 109 83 56
high inflationary environment. EBITDA 6,576 11,867 20,171 32,554
% ch y/y 30 80 70 61
• Apart from its market leadership, BIM has a solid LFL revenue growth, achieving 69.4% Net Income 2,932 8,157 11,463 19,385
y/y LFL revenue growth in 9M23, overshooting the inflation. LFL basket growth was 69% % ch y/y 12 178 41 69
Margins (%) 2021 2022 2023E 2024E
while LFL consumer traffic was 0.3% y/y in 9M23. EBITDA Margin 9.3 8.0 7.5 7.7

• ~3% CAPEX / Sales ratio, ~75% y/y EBITDA growth (in 9M23), and favorable net working Net Margin
Gross Dividend Yield
4.1
4
5.5
1
4.3
4
4.6
8
capital management led BIM to generate solid FCF in 9M23. We expect BIM to keep its Ratios 2021 2022 2023E 2024E
FCF generation momentum going forward thanks to its strong business model. P/E (TL, x) 52.2 18.8 13.4 7.9
EV/EBITDA (TL, x) 9.94 5.72 8.21 5.13
• BIM guides ~80% y/y revenue growth with 7.5% - 8.0% EBITDA margin and 3.2% CAPEX / Net Debt/EBITDA (TL, x) 0.78 0.65 0.61 0.42
ROE (TL,%) 38.6 32.4 34.5 42.4
revenues for 2023. BIM’s 2023 strategy is i) expansion in # of SKUs, ii) further improve Stock Data
quality of private label products, iii) kickoff biscuit and chocolate production in 4Q23, iv) Ticker BIMAS.IS BIMAS TI
Sector Food Retail
further expansion of BIM mini stores. We welcome its guidance and strategy of BIM # of Shares (mn) 607
management for 2023E. BIM already achieved 79% y/y revenue growth in 9M23 with an 3M Av. Trd. Vol. (mn) US$49.2
EBITDA margin of 7.7%. Yet, BIM did not release its 2024 guidance, we expect another Price Chart

solid year for BIM particularly in the first half of 2024 where inflation could be TL BIMAS BIST-100 Relative (indexed, RHS)
375.0 190
supportive. We believe BIM’s expansion plans to continue particularly in its domestic 330.0 170
285.0 150
operations. 240.0 130
195.0 110
150.0 90
• Risks… Key risks to our valuation could be sharp decline in food inflation and 105.0 70
60.0 50
deterioration in expansion plans. D-22 F-23 M-23 M-23 J-23 A-23 S-23 N-23 D-23

Price Performance 1M 3M YTD YoY

TL Absolute 0% 10% 139% 20%
BIST-100 Relative 3% 20% 70% 29%

40
COCA-COLA ICECEK
Overweight with ex-dividend target price stands at TL734.0/share, pointing to a 12-month
return of 46%.
• Reasons for our recommendation are: i) Solid net sales and EBITDA growth in 2024T, ii)
tight cost management, iii) ample headroom for new investments. CCI is trading at 2024E
EV/EBITDA and P/E multiples of 4.0x and 8.2x, respectively.
• Solid net sales and EBITDA growth in 2024E... Thanks to significant price increases and
sales volume growth, we expect 65% net sales growth in 2024E. There does not appear to
be any deterioration in the growth dynamics on the international side; hence, we expect
9.0% y/y sales volume growth in international operations, led by Pakistan, Kazakhstan,
and Uzbekistan. For CCI’s domestic business, we expect a 5% y/y growth in 2024E.
Additionally, increasing demand for sugar-free products and small-package products
improved the product mix and supported margins.
• Dynamic hedging & long-term visibility... The company was able to manage cost
fluctuations in 2022 with tight OPEX management and price adjustments. CCI’s 2023 costs
consisted of 30% concentrate, 30% packaging, 20% sugar, and 20% overhead costs. With
its proactive risk policy, the company hedged 55% for sugar(90%, in markets where
financial hedge is available), 70% for aluminum, and 70% for resin. We believe hedged
packaging costs and ability to reflect cost increases on prices should moderate cost
pressures in 2024E. As such, we expect 100bps y/y increase in EBITDA margin to 21.2% in
2024E.
• Possible acquisition of Coca-Cola Bangladesh Beverages… CCI had a net debt position of
TL10,362mn as at end-3Q23, pointing to a net debt/EBITDA multiple of 0.6x. We expect
the decline in net debt/EBITDA to continue in 2024. These low multiples provide an
opportunity to achieve inorganic growth by adding new countries to the portfolio. Coca-
Cola Icecek continuously evaluates inorganic growth opportunities in the geographies in
which it operates, and in this context, preliminary discussions have been initiated with
TCCC regarding the potential acquisition of CCBB. If Bangladesh(169.8mn), which has the
8th largest population in the world, is acquired, it will be the country with the 2nd largest
population among the countries where CCOLA operates. Considering the potential growth
of the Bangladesh market, we believe that the possible acquisition poses an upside risk to
our valuation
Risks…
• Decline in sales volumes due to a slowdown in demand
• Increase in raw material and energy costs beyond expectations 41
• Devaluation of local currencies in operating countries.
MAVI
We revise 12M TP for Mavi to TL193/sh and add to our top pick list…
Price Data
Current Price 114.40
Current Mcap (TLmn) 22,723
• We like Mavi’s business model due to its strong brand strategy, dynamic product mix, 12-mth Target Price (TL/share) 193.00
favourable customer targeting, price planning and cost control mechanism. 12-mth Target Mcap (TLmn) 38,335
12-mth Return Potential 69%
• We expect Mavi to increase its revenues by 78% y/y in 2023E reaching TL18.8bn Dividend yield 4%
Financials (TL mn) 2021 2022 2023E 2024E
revenues. We foresee ~45% internal inflation & ~30% volume growth in 2023E. We
Revenues 4,619 10,592 20,243 32,185
believe that its domestic revenues will grow by 85% y/y and correspond to 87% of % ch y/y 92 129 91 59
consolidated revenues vs. historic average of 82%. We incorporate 5 net new store EBITDA 1,016 2,481 4,912 7,723
% ch y/y 164 144 98 57
rollouts with 7 store expansions in Turkey, while we calculate Mavi to reach ~170k sqm Net Income 400 1,439 2,793 5,045
gross selling space in 2023E. During our valuation period, we anticipate 34% CAGR % ch y/y 8638 259 94 81
Margins (%) 2021 2022 2023E 2024E
revenue growth and 18.4% average EBITDA margin (exc. IFRS 16 impact)
EBITDA Margin 22.0 23.4 24.3 24.0
• During the beginning of 2023, Mavi management revised up its 2023 guidance three Net Margin
Gross Dividend Yield
8.7
4
13.6
2
13.8
4
15.7
7
times. The latest guidance indicates that i) consolidated revenue growth +85% revenue Ratios 2021 2022 2023E 2024E
growth, ii) domestic retail stores 8 net openings & 7 store expansions, iii) 19.5%-20.5% P/E (TL, x) 7.2 4.2 8.1 4.5
EV/EBITDA (TL, x) 2.8 2.1 4.2 2.3
EBITDA margin (exc. IFRS16) 23.0%-24.0% inc. IFRS16, iv) net cash position maintained Net Debt/EBITDA (TL, x) -0.1 -0.5 -0.5 -0.7
and v) capex to sales: 3%. After 3Q23, Mavi management shared that the revenues ROE (TL,%) 35.9 55.5 56.4 55.1
Stock Data
generated from domestic retail segment was up by 104% y/y in November 2023, while
Ticker MAVI.IS MAVI TI
online sales in Turkey rose by 102% y/y in November 2023. These could be strong signals Sector Apparel
for 4Q expected financials. # of Shares (mn) 199
3M Av. Trd. Vol. (mn) US$7.4
• One of Mavi’s key pillars is solid free cash flow generation, driven by notable EBITDA Price Chart

margin generation with working capital and capex under control. In our calculations, we TL MAVI BIST-100 Relative (indexed, RHS)
150.0 155
foresee an average FCF margin of ~11% during our valuation period. In addition, Mavi is
135
sitting on a net cash of TL2.2bn corresponding to ~10 % of its Mcap. 100.0
115
50.0
• Risks… i) increasing competition particularly in Turkey, ii) sharp rise in cost base could be 95
0.0 75
the key risks for our valuation. D-22 F-23 M-23 M-23 J-23 A-23 S-23 N-23 D-23

Price Performance 1M 3M YTD YoY

TL Absolute 3% 2% 80% -4%
BIST-100 Relative 5% 12% 28% 3%

42
 SABANCI HOLDING
Overweight rating with ex-dividend target price at TL112/share, implying an 80% upside potential…
• We set our 12M TP at TL111.9/share, assuming an NAV discount of 25%, implying a 80% upside
potential. SAHOL is trading at 2024E P/E of 2.2x. Sabancı Holding trades at a 39.5% discount to its
current NAV (vs. the 2-yr average discount of 29.2%) and at a 58.3% discount to our target NAV.
• Beneficiary of the normalization in macroeconomic policies… Finance segment (AKBNK, AGESA,
AKGRT) currently has the highest share in Sabancı Holding’s NAV at 37.5%. We believe that the
holding is more geared to the ongoing normalization in macroeconomic policies and the resulting
gradual decrease in Turkey’s risk premium, because of the higher share of financial intermediaries
in its portfolio. As such, we believe that Sabancı Holding is one of the companies that may see the
strongest re-rating associated with the drop in Turkey’s risk premium.
• Cheaper, more liquid exposure to desirable sectors… We believe that Sabancı Holding provides a
cheaper and more liquid alternative to obtain exposure to desirable sectors such as cement and
energy, also relative to its subsidiaries. We also think that the holding may trade at a tighter
discount to its NAV, as the ongoing energy investments in both domestic and international markets
in the short to medium term are digested by the market. Similarly, crystallization of value may be
facilitated if an IPO of the holding’s energy generation asset takes place.
• Wind Power Plant expansion plans… With the inclusion of investments in Mugla and Balıkesir,
each being 250 MW projects, the size of Enerjisa Uretim YEKA-2 projects reached 1,000 MW.
Sabancı Holding generated 14.6TWh electricity in 2022 with 23 power plants of 3.7GW capacity
while YEKA-2 WPPs will be fully operational by 4Q25. Sabancı Holding expects Enerjisa Uretim to
reach an installed capacity of more than 5.0 GW with M&A when completed by 2026. SAHOL will
receive guaranteed US$ income from here for 15 years, as the share of renewable energy in
installed power will rise to 60% from 45% as of 3Q23.
• Renewable investments abroad… Under the umbrella of Sabancı Climate Technologies, Sabancı
Renewables has completed the project license acquisition for the establishment of a 272 MW solar
power plant in the USA. The project is expected to be completed in 2Q24. Sabancı Climate
Technologies has also formed a long-term strategic partnership with Safar Partners and initial
investments were made in funds and start-ups seeking to provide clean and sustainable energy
solutions. In addition, after the acquisition of Oriana Solar LLC, Sabancı Holding’s production
capacity in the USA will reach 500 MW with the Oriana Solar Power Plant, with the contribution of
232 MW Solar Energy Facility Project and 60 MW Battery Storage.
Risks…
• Unfavorable regulatory changes that could negatively impact profitability in energy, banking, and
insurance segments, in particular, and possible stock sales by family members are the main risk
factors.
43
TSKB
Maintaining Overweight rating with a 12M TP of TL12.30/share…
• We think that TSKB’s earnings stability and visibility is higher compared to its deposit bank peers,
especially in light of the upward normalization in interest rates, lasting negative impact of
macroprudential measures, and slowdown in economic activity.
• As such, we estimate that TSKB’s earnings will increase by 73% in 2023E and 31% in 2024E, better
than its private deposit bank peers’ respective average EPS growths of 21% and 8%, driven by a
stable core spread, continuation of strong fee income growth, and a drop in CoR given that the
bank has significantly boosted its loan loss provisions over the past two years.
• Accordingly, we forecast that TSKB’s ROE will materialize at a peer-highs 42% in 2023E and 37% in
2024E, indicating that the stock is indeed trading at a discount vs. its peers at very undemanding
multiples of 2.1x 2024E P/E and 0.64x 2024E P/B with a 4% dividend yield.
Steady business model with more growth prospects in the upcoming period...
• TSKB continues to boast one of the strongest profitability profiles among peers, mainly due to a
resilient margin structure that is less sensitive to TL funding rates thanks to the FX-heavy balance
sheet and limited utilization of CBT funding. Additionally, TSKB runs a very low-cost operation,
working with well-below-peers cost-to-income ratio.
• Having been suffering from loan book contraction in FX-adjusted terms over the past five years,
we expect TSKB to achieve positive growth in the upcoming period, as the bank will be active in
financing the transition to low-carbon and circular economies. TSKB is also in the process to
establish a green venture capital investment fund to provide capital investment to companies in
the green transformation process. The bank has already signed the US$155mn loan agreement
with IBRD to be as seed capital for the fund, which is projected to reach a total size of US$405mn
via raising additional capital from the private sector.
• At 7.3% of total loans as at end-3Q23, TSKB has by far the highest provision coverage among
peers, as the bank took advantage of the strong revenues to boost its provisioning levels in 2022
and 2023. Meanwhile, the bank also has a proven track record of limited NPL formation.
• Similarly, TSKB has also improved its capital ratios over the past two years, with its pre-BRSA
forbearance Tier-I ratio increasing from 8.9% as at end-4Q21 to a peer-high 16.4% as at end-
3Q23, thanks to strong profitability, despite the sharp TL depreciation suffered.
Risks…
• The bank is prone to macroeconomic risks such as higher rates, TL depreciation, and slower
growth. 44
TÜRKİYE SİGORTA
Maintaining Overweight rating with a 12M TP of TL63.58/share…
• We maintain our Overweight rating for Türkiye Sigorta, with our 12M TP of TL63.58/share,
offering a 40% total return potential, including a 3% dividend yield. We expect Türkiye Sigorta to
benefit from 1) its market leader position and distribution network with exclusive bancassurance
agreements with the three state banks, 2) business mix change and higher penetration potential
in profitable segments, 3) strong loss management capacity and scale advantage, 4) higher
investment income potential on rising interest rates, and 5) peer-best capital position.
Market leader with a unique distribution network…
• Türkiye Sigorta is the market leader in an underpenetrated market. The company has a well-
diversified portfolio with strong market shares in profitable segments, such as agriculture, fire &
natural disaster, and accident, taking advantage of its bank-heavy distribution network and
bancassurance agreements, as well as sector-best reinsurance coverages. Türkiye Sigorta benefits
from economies of scale, allowing for strong loss management capacity and coverage of big
engineering projects.
Further mix change and penetration potential to support growth and profitability…
• Türkiye Sigorta targets to reduce its market share in the traffic segment and shift mix towards
MOD and health segments. At the same time, the agency channel will continue to be optimized
both in terms of number and business mix with new targets being provided. These, combined
with the potential to increase penetration in the bancassurance channel, should help both keep
growth intact even if banking sector loan growth slows down and also lower the combined ratio.
Investment income to remain strong on higher AuM and interest rates…
• Türkiye Sigorta’s investment income should remain strong, at least until 4Q24, thanks to
increasing assets under management and elevated level of interest rates. The company also
carries a net long FX position, providing a hedge against a TL depreciation.
Peer-best capital position and dividend payment capacity…
• Türkiye Sigorta’s CAR stood at a peer-best 172% as at end-2Q23, which should allow the company
to be able to continue distributing dividends.
Risks…
• Türkiye Sigorta is prone to macroeconomic risks such as higher interest rates, TL depreciation,
and high minimum wage increases, as well as regulatory and catastrophic event risks. We believe
that the company is partially hedged against these risks.
45
YAPI KREDI BANK
Successfully reshaped business model…
• Yapi Kredi Bank continues to successfully deliver on the strategic plan the bank had laid out back
in 2018, as the management continues to focus on 1) intelligent growth with an optimization of
market share & profitability, increased focus on demand deposits, and transactional banking; 2)
continuation of below-inflation cost growth via digital and service-channel transformations; and
3) reduction in CoR thanks to betterment of underwriting policies, collection efforts, and stock
management.
• The bank has been delivering on all fronts, raising its ROE to peer-high levels, as the management
has also been proactively managing the balance sheet and positioning the bank in the ever-
changing Turkish regulatory environment, keeping a healthy balance between short-term and
long-term profitability.
• All in all, thanks to stronger-than-peers margins, liquidity & capital ratios, loan loss provision
coverage levels, and fee collection capacity, along with well-managed running costs, lower share
of low-yielding securities, market share gains in lucrative products, and steady franchise build-up,
YKB should continue delivering returns above inflation in the medium- to long-term.
Earnings growth will be limited in 2024 before surging in 2025...
• YKB’s earnings is likely to increase to a limited extent in 2024, driven by some NIM contraction
mainly on lower spreads on cash & securities and a slight pick-up in CoR on slower economic
activity.
• On the other hand, 2025 should see a significant recovery in earnings as a rate-cutting cycle may
be kicked off from 4Q24 on, assuming that the economic policy normalization will bear fruit in
taming inflation, while YKB also has room to increase leverage.
Undemanding multiples...
• YKB is trading at 0.72x 2024E P/B and 2.5x 2024E P/E with a ROTE of 34%. Our 12M TP of
TL31.00/share offers a 60% total return potential, including a 5% dividend yield.
• There could be a potential upside from a Turkey re-rating if the new economy team’s policies
prove to be successful, leading to increased levels of foreign portfolio inflows and further drop in
Turkey’s CDS levels.
Risks…
• The bank is prone to macroeconomic risks such as higher rates, TL depreciation, and slower
growth.
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