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.

Do Turkish Dividend Stocks Outperform in Bear Markets

It is not a secret that dividend-paying stocks often come out ahead during a market sell-off. Because many investors are attracted to the safety appeal of them. As Turkish stock market is hanging around record high levels with foreign capital outflows on the horizon due to expected rate hikes by the US Federal Reserve, it is much closer to enter a bear market this year. Under these conditions one may think that high-yielding Turkish stocks will be seen as a defensive play in bear market in order to protect the value of portfolio, or to surrender a more tolerable loss at least.

This is where we are getting straight to the point. First of all, we determined three bear market periods that averagely last seven months. During these periods Turkish equities benchmark index (known as BIST 100) declined 47.6%, 31.2%, and 41.5%, respectively (see the chart below). Then out of blue-chip Turkish stocks we pick the five highest dividend-yielding stocks for the period of one year to each bear market periods. Ultimately, we compare the returns of the benchmark index and our  picks to see how we would have done in the bear markets with the five dividend stocks using a buy-and-hold approach.

Turkish Stock Market - Bear Market

Our stock picks based on the hold-and-buy the highest dividend-yielding Turkish stocks strategy totally include 11 different stocks and are in accordance with the list which follows: FROTO (Ford Otosan), AKCNS (Akcansa Cimento), CIMSA (Cimsa Cimento), PNSUT (Pinar Sut Mamulleri) BOLUC (Bolu Cimento), TTKOM (Turk Telekom), TUPRS (Tupras Turkiye Petrol Rafinerileri), TTRAK (Turk Traktor), AYGAZ (Aygaz), DOAS (Dogus Otomotiv), NTHOL (Net Holding). In a sectoral breakdown the dominance of industrials and utilities are strikingly clear.

Below shows how our play would result.

Turkish Dividend Paying Stocks Performance

In two of three bear markets, our strategy seems to be beating the market by generating comparatively lower losses. However, in 2008 it generated a negative alpha of 12.1% amid the global financial turmoil. Also in 2011’s bear market the success of the strategy is mostly due to stocks correlating weakly with the overall market return. In additionally the strategy seems to be at its best with an excess return of 20% roughly. Eventually in 2013’s bear market following the Gezi protests and the US Federal Reserve’s first rate hike signal, and continuing with 17 December graft scandal, our stock picks drop by 27.7% averagely while the BIST 100 is down 41.5%.

In conclusion we can say that Turkish dividend stocks may save you in a bear market after reviewing the evidence. Picking safe dividend stocks in a mature bull market where a whiff of change is not that far seems like a considerable strategy to run as well as a further research is absolutely necessary to decide correctly.