Turkcell reported 4Q07 results (February 28) which were close to what we expected and brought no surprise, while the announced payout was slightly lower than we expected (40% of net income vs. our expectation of 50%). However, on the conference call, management expressed awareness of the regulatory pressure on the pricing policy (prohibiting Turkcell from setting on-net calls prices below the interconnect rates). For 2008, the company expects a double-digit TRY-denominated revenue growth rate (anticipating a growth slowdown compared to 2007) and a decline in EBITDA profitability.
We have updated our model to reflect 4Q07 results. We have increased our voice yield outlook for Turkey to reflect the regulatory pressure to raise on-net tariffs, but we also decreased MOUs growth forecast since cheap on-net calls were a key strategy for usage stimulation. Our estimates for Ukraine are almost unchanged. Under our conservative assumptions, we forecast 11.7% TRY revenue growth for 2008, which is at the low-end of the management projection. We still believe that Turkcell is inexpensive on a relative basis and there may well be positive surprises (taxation revision or a change in payout given its US$3.1 bn cash holding) in the medium term, and reiterate our Buy rating on the stock.
Our 12-month, SOTP-based price target for Turkcell is US$30. The stock trades at 2008E EV/EBITDA of 5.7x, a discount to the sector average of 6.8x, supporting our Buy rating.
The main risks to our view and price target are an increase in competition, regulatory changes and macroeconomic deterioration.