Turkish Industrials: Buying Opportunities

In a recent note, we mentioned that now may be the moment to get in on value in Turkish stocks, particularly in industrial stocks. Following that, Borsa Istanbul Industrials Index (BIST:XUSIN) has bounced back 4.5% in two trading days, beating the banks, but currently see a sell-off (on Tuesday) but outperforming the broader market.

We think that the sell-off after the coup attempt created a buying opportunity. Hereby, we try to draw valid conclusions in a long-term perspective with the help of historical data and fundamental outlook.

First, returns over the past several years are in favor of our idea that industrial stocks should be opted for the upcoming period. Turkish banking stocks has suffered from an earnings recession recently, as well as the regulatory environment has been severe for the industry after late-2008 financial crisis which has weighed on global financial institutions.

Second, in our view, S&P’s ratings decisions typically act as a reserve proxy for Turkish stock market. Provided that the agency just downgraded the country by one notch, Turkish stocks might have entered a bull market. This is partly due to credit ratings persistently lagging behind market.

Turkish Stocks - Banks v Industrials - Reaction to S&P Rate Decisions

Below is list of our Turkish industrial picks.

Turkish Industrial Stocks

And below we provide EV/EBITDA metric for the stock that we analyzed, comparing the current level to the historical average and +2 (-2) standard deviations. Most of the stocks currently look cheap and undervalued across the metric.

Turkish Industrial Stocks EV EBITDA Valuations

Akcansa (BIST:AKCNS), a building materials company and a subsidiary of Sabanci Holding (BIST:SAHOL), in our view, has compelling risk reward profile thanks to its exposure to Istanbul region, its resilience in a potential volatility in cement prices, and its cost outlook taking the pressure off.

Arcelik (BIST:ARCLK), has pulled out a great financial performance in 1H16 owing to a decline in raw material prices, but more importantly to a surge in TV sales ahead Euro 2016 and Summer Olympic Games. The company has now a significant share in European markets and solid growth prospect for the future.

Aygaz (BIST:AYGAZ) enjoyed the strong domestic demand for LPG last year which is not likely to sustain this year, still, the stock is trading at a significant discount from a historical point of view. Thus, we recommend investors to consider it who are willing to build position in Turkish equities with a long-term perspective.

Eregli Demir ve Celik Fabrikalari (BIST:EREGL) has been one of top-traded industrial stocks in Turkey and always offer value to traders who’s looking at this part of the world. As an iron and steel producer, the company faces risks arising out of ups and downs in raw material prices, and always benefits from its structural advantages including not being a vertically integrated producer and hosting ports in its plants.

Ford Otomotiv (BIST:FROTO) has poised for strong EBITDA growth over the next three years as the investments that the company made earlier are starting to pan out. The company hit the gas pedal with the management guiding for almost 100% capacity utilization during this timeframe. Still, the UK remaining in recession longer than expected poses risks for sales as it is the top market for the company. With that being said, the stock is currently trading below its mid-cycle average, creating a big opportunity to get in.

Turkish Industrial Stocks - Emerging Market Peers Multiple Comparison

Kardemir Karabuk Demir Celik (BIST:KRDMD) is trading at 35% discount to its book value and appears like a deep value play.

Tofas Turk Otomobil Fabrikasi (BIST:TOASO) is another company in Turkish autos spectrum that is set for full capacity thanks to newly introduced sedan models which will build a supportive case for our growth story.

Turk Traktor ve Ziraat Makineleri (BIST:TTRAK) received a number of upgrades by the analysts with the help of strong demand boosting the sales in 1H16. Declining interest rates will provide further support for the bottom-line growth.

Tupras Turkiye Petrol Rafinerileri (BIST:TUPRS) has sustained the best-in-class margins, showed operational excellence and proved to be a prominent play in emerging markets E&P universe.

Turkish Stocks: Volatility and Returns

It recently has been with full of ups and downs in almost all financial markets. Dips and spikes certainly should have thrown many investors for a loop. As expected it has been the same in Turkish markets. After hitting the top over 80,000 at the end of August, the benchmark stock index fell by roughly 6%. During this period the index has experienced mini-rallies and some downfalls which has not able to last more than two trading days. This makes being selective unavoidable for investors. At this stage analyzing industrial indicators based on their returns with the consideration of the changes in volatility would be a useful tool to decide where the cash should been poured into.

 Turkish Stocks - Performance of Each Industry in 2014

The chart above presenting the year-to-date returns by industries includes two important eye catchers. First, metals have been considerably profitable investments since the beginning of the year. Second, as of mid-August miners began to see a huge drop in their market caps. Two mentioned industries have gone separate ways while others have performed in line with the market.

As discussed above, the beginning of September was a turnaround in the markets. We saw %8 pick-up in the volatility of the daily returns of Turkish stocks in September compared to previous month. In the meantime some significant industry-specific trends were to show up as seen in the following chart

Turkish Stocks - Returns and Volatility

Due to its horrible track record, miners are not featured on the chart with 0.8% of net change in volatility and -21.5% of return for the  32 trading days starting on September 1 and ending on October 17. Based on the results, only energy, textiles and metals appear to be investments that are in green territory at the end of the period while REITs are the worst performer. On the other hand the deviations in energy stocks that is dramatically larger make the industry not a blanket buy. Additionally, despite its poor performance, we have seen retails stocks drawing a clear picture with lower volatility. Eventually, according to these results, metals, textiles and retails seems to be offering the less risky returns. Below is the list of stocks in mentioned business listed among top 100 companies in Borsa Istanbul.

  • Metals: Borusan Mannesmann Boru Sanayi ve Ticaret AS (BRSAN) Eregli Demir ve Celik Fabrikalari TAS (EREGL), Izmir Demir Celik Sanayi AS (IZMDC), Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS (KRDMD).
  • Textiles: Menderes Tekstil Sanayi ve Ticaret AS (MNDRS).
  • Retails: BIM Birlesik Magazalar AS (BIMAS), Bizim Toptan Satis Magazalari AS (BIZIM), Dogus Otomotiv Servis ve Ticaret AS (DOAS), Tesco Kipa Kitle Pazarlama Ticaret ve Gida Sanayi AS (KIPA), Migros Ticaret AS (MGROS), Teknosa Ic Ve Dis Ticaret AS (TKNSA).