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Is Yatirim Menkul Degerler — Update 24 May 2016

Is Yatirim Menkul Degerler — Update 24 May 2016

Is Yatirim Menkul Degerler

Analyst avatar placeholder

Written by

Is Yatirim Menkul Degerler

High yield in Turkish lira

Q116 results

Financial services

24 May 2016

Price

TRY0.96

Market cap

TRY341m

Equity (TRYm) at 31 March 2016

534

Shares in issue

355

Free float

28.2%

Code

ISMEN

Primary exchange

BIST

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4)

(8.6)

(13)

Rel (local)

7.3

(10.1)

(2.8)

52-week high/low

TRY1.1

TRY1.0

Business description

Is Yatirim Menkul Degerler’s core investment banking division (Is Investment) offers brokerage, corporate finance, investment advisory services, advice on IPOs and portfolio management services. It also has investments in four specialist consolidated subsidiaries.

Next event

Q216

August 2016

Analyst

Peter Thorne

+44 (0)20 3077 5765

Is Yatirim Menkul Degerler is a research client of Edison Investment Research Limited

In Q116, Is Yatirim’s (ISY) investment banking operations increased net income by 11% y-o-y to TRY29.5m, but setbacks at certain of its subsidiaries resulted in flat y-o-y consolidated net attributable profit of TRY12.6m. There are many economic and political uncertainties affecting its activities, but ISY remains profitable and offers investors a yield of c 10%, assuming it maintains last year’s dividend. It is modestly rated on a P/E basis compared with some of its European investment bank peers.

Year end

Revenue
(TRYm)

Attributable
profit* (TRYm)

EPS*
(Kr)

DPS
(Kr)

P/E
(x)

Yield
(%)

12/14

372.4

62.9

17.7

13.2

5.4

13.8

12/15

377.5

40.5

11.4

10.0

8.4

10.4

12/16e

401.7

45.8

12.9

10.0

7.4

10.4

12/17e

428.6

53.9

15.2

10.0

6.3

10.4

Note: *Attributable profit and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Q116 financial performance

Emerging markets enjoyed a rebound towards the end of the quarter, which at least provided a positive backdrop to ISY’s investment banking activities, helping its parent organisation post y-o-y growth of 5% in brokerage commissions, according to management. This, together with a rebound in trading and lending to a subsidiary, resulted in an 11% y-o-y rise in divisional net income. However, losses in the private equity subsidiary, whose investee companies are undertaking expensive expansion of their activities, together with losses from its subsidiary investing in bank NPLs, resulted in flat group net profits y-o-y. We have made modest reductions in our FY16 and FY17 forecasts.

Economic and political uncertainties

Turkish financial markets, and banks like ISY whose profits depend on them, face numerous uncertainties and challenges. In addition to the global emerging market concerns of the US interest rates and Chinese growth, Turkey faces armed conflict in its neighbours and domestic political uncertainty. The recent resignation of the prime minister has raised the possibility of further national elections and yet more uncertainty. Such a backdrop is not conducive to financial market activity.

Valuation: Modestly rated

Despite the challenging operating environment, ISY is profitable (ROE 7.7% in Q116) and we expect it to pay a dividend of Kr10 for 2016, which will give it a yield of around 10% in local currency terms. This is much higher than the current yields of European investment banks, but the Turkish lira does have a tendency to weaken against developed world currencies. ISY is a leading participant in the Turkish investment bank sector. In the long term this has good prospects as Turkey’s emerging market economy grows and matures and its population boosts their retirement and other savings, much of which could be invested in local equities and bonds. ISY is well placed to benefit from these long-term demographic and economic trends and in the meantime offers investors a high yield, although international investors will have to consider the possibility of FX losses.

Turkish financial markets in Q116

Along with many other emerging markets, Turkish assets staged a rally in Q116, as we show in the following charts. The rise was likely ignited by expectations of a slower pace of interest rate rises in the US, more QE in Europe and reduced concerns about the slowdown of Chinese economy.

Exhibit 1: The Istanbul Stock Exchange rallied in Q116

Source: Bloomberg

Turkish two-year bond yields declined during the quarter, with the prospect of slower US interest rate rises and more QE in Europe making it relatively more attractive to international investors. Turkish inflation in March fell to 7.5% y-o-y from 9.6% in January. Although this was still above the Central Bank’s 5% target, it was at least heading in the right direction and lessening concerns over the purchasing power of the currency.

Exhibit 2: Turkish two-year government bond yields

Source: Bloomberg

The emerging market rally may prove a false dawn and investor sentiment remains fragile. Investors are also concerned about the domestic political situation in Turkey, as well as the geopolitical instability in the region. More favourable sentiment towards emerging markets resulted in the Turkish lira stabilising against the US dollar for most of Q116 and actually strengthening towards the end of the quarter.

Exhibit 3: Turkish lira vs US$

Source: Bloomberg

Q116 results

Published results for Q1 by segment are shown in Exhibit 4 below. Consolidated net profit was flat y-o-y, but the main operating entity, Is Investment, posted an 11% improvement despite the challenging financial markets as mentioned above.

Exhibit 4: Is Investment profits in Q116

TRYm

Q115

Q116

Y-o-y change (%)

Is Investment* (100%)

26.6

29.5

11

Is Investment Trust (28.9%)

0.3

1.8

Is Private Equity (29.1%)

(0.2)

(1.9)

Is Asset Management (70%)

2.1

2.7

32

Efes NPL Asset Management (74%)

3.0

(0.4)

Elimination Adjustments

(19.5)

(19.0)

Consolidated net profits

12.3

12.6

2

Source: Is Investment. Note: *Parent company only. Figures in brackets are ISY ownership at 31 March 2016.

Is Investment’s detailed profit and loss account is given in Exhibit 5 below.

Exhibit 5: Is Investment (parent only)

TRYm

Q115

Q116

% change

Commissions

37.3

35.3

(5)

Interest and trading income

17.8

27.0

52

Other items

2.1

2.5

Total operating revenues

57.2

64.9

13

Expenses

(44.8)

(52.5)

17

Operating profit

12.4

12.4

0

Finance income (net)

18.3

22.5

23

Pre-tax profit

30.6

34.9

14

Taxation

(4.1)

(5.4)

Profit after tax

26.6

29.5

11

Cost/income ratio

78%

81%

Tax rate

13%

16%

Source: Is Investment, Edison Investment Research

Commission income fell 5% y-o-y. Brokerage commissions, which account for around c 80% of the total, actually rose 5% and saw particularly strong growth in derivatives commissions as a result of high levels of client trading activity. However, the rise in brokerage commission was offset by declines in corporate finance, due to lower activity, and asset management, which incurred some losses on corporate bond mandates that were booked against commission income. Interest and trading income revenues rose by 52% to TRY27m. There was turnaround in equity prop trading from a loss of TRY3.1m in Q115 to a profit of TRY1.9m in Q116 and a strong rise in equity margin trading where revenues by 42% to TRY15.1m. Together, commission and interest and trading income produced a 13% rise in operating revenues, but expenses increased by 17% in Q116 y-o-y so that operating profits were flat. The 17% increase in expenses was higher than the 7.5% y-o-y increase in inflation in Q116. Personnel costs increased by just 1% y-o-y, but there were a number of significant other costs such as increased marketing and communications, which boosted the figure. They arose from increased investment expenditure plus the effects of translating costs incurred in foreign currencies, such as data feeds, into TRY.

Finance income (net) rose 23% y-o-y in Q116. The increase was the result of favourable foreign exchange movements and led to a 14% increase in pre-tax profit and an 11% rise in profit after tax.

Is Investment Trust invests mainly in bonds and deposits (c 80% of its investment portfolio at the start of the period) and in Q116 benefited from the fall in Turkish interest rates. It is 28.9% owned by Is Investment.

The results of Is Private Equity (29.1% owned) are fully consolidated in the accounts of Is Investment as it is deemed to control the company. In Q116 it reported a sharp decline in the profits of its investee companies, which are in an investment phase with revenues not yet having increased to cover their higher cost base.

Is Asset Management (70% owned) increased profits by 32% with assets under management rising 14% y-o-y to TRY21.5bn.

Efes NPL Asset Management (74% owned) invests in NPLs from the bank sector. It has been a strong performer in the last couple of years, but in Q116 suffered a loss brought about by lower valuation for its acquired assets than it had expected. The current lowered prices likely reflect the economic and political uncertainty in Turkey.

Estimates revision

We have made downward revisions to our 2016 and 2017 forecasts mainly as a result of lowered expectations for Is Private Equity activities. Detailed forecasts are given in Exhibit 8.

Exhibit 6: Edison ISY forecast revisions

 

Revenue (TRYm)

Attributable profit (TRYm)

EPS (Kr)

DPS (Kr)

 

Old

New

% chg

Old

New

% chg

Old*

New

% chg

Old*

New

% chg

12/16e

415.9

401.7

(3)

49.0

45.8

(6)

13.8

12.9

(6)

10.0

10.0

0

12/17e

444.4

428.6

(4)

56.7

53.9

(5)

16.0

15.2

(5)

10.0

10.0

0

Source: Edison Investment Research. Note: *DPS forecasts adjusted from Kr13.2 for 2016 and 2017 after dividend announcement of Kr10 per share for 2015 at AGM on 23 March 2016.

Valuation

There are no large investment banks in Europe or Turkey with which to compare ISY, but we believe that some guidance on the appropriate valuation of ISY can be obtained by considering the market multiples of the European banks with significant investment banking activities, as shown in Exhibit 7 below. The average P/E for ISY for the current and following year is on c 70% of that for the European banks, but ISY offers investors a yield that is considerably higher, assuming the payout is maintained of course. ISY’s P/BV for the current and following year is comparable to that of our European sample, yet its ROE is on average more than 160% higher. Normally, a higher ROE would merit a higher P/BV, suggesting that ISY is good value compared with its European counterparts. However, investors should be aware of potential FX risks.

Exhibit 7: Peer valuation

P/E
(x)

P/BV
(x)

Dividend yield (%)

Return on equity (%)

Return on assets (%)

2016e

2017e

2016e

2017e

2016e

2017e

2016e

2017e

2016e

2017e

Is Yatirim

7.4

6.3

0.6

0.6

10.4

10.4

8.1

9.2

0.8

0.9

Average

12.1

8.0

0.6

0.6

3.9

4.7

4.4

6.6

0.2

0.4

BNP Paribas

7.7

7.2

0.6

0.6

5.9

6.3

7.9

8.2

0.4

0.4

UBS

11.6

9.7

1.0

1.0

4.6

5.8

7.6

9.7

0.4

0.6

Credit Suisse Group

19.0

9.5

0.6

0.6

5.2

5.1

1.2

5.5

0.1

0.3

Societe Generale

8.3

7.6

0.5

0.5

5.8

6.3

6.0

6.4

0.2

0.2

Barclays

10.7

7.4

0.5

0.5

1.8

1.9

3.7

6.1

0.2

0.4

Deutsche Bank

15.4

6.8

0.3

0.3

0.0

3.0

0.0

3.8

0.0

0.2

Source: ISY, Bloomberg. Note: Prices at close of business on 11 May 2016.

Another valuation metric we can use to assess the value of ISY is to estimate the cost of equity that investors are using in their valuation of ISY and compare it with the other banks. The cost of equity can be estimated by rearranging the well-known Gordon’s growth model for the banks to give the following formula:

Cost of equity= ROE - growth rateP/BV+growth rate

Using a 5% long-term growth rate, the cost of equity for the broader bank group in Exhibit 7 above, based on an 2017e ROE of 6.6% and P/BV of 0.6x, is 7.9%. This compares with an estimated cost of equity for ISY of 12.1%, a difference of 4 percentage points. While this additional risk premium could be considered high bearing in mind that ISY is mostly operating in a long-term growth market, it should be noted that the difference between Turkish and US government 10-year bond yields is 8%, so the market seems to be applying a lower risk premium to ISY than it does to Turkish bonds.

Exhibit 8: Financial summary

TRYm

2012

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

311.9

344.7

372.4

377.5

401.7

428.6

Operating expenses

(188.2)

(251.5)

(268.6)

(-23.0)

(339.9)

(351.3)

Operating profit

 

123.7

93.2

103.8

54.6

61.7

77.3

Other income

5.4

4.3

(-0.3)

(-0.7)

(5.9)

(6.0)

Net financials

20.5

39.7

(-3.0)

(-0.1)

(11.4)

(11.3)

Exceptionals

4.2

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

149.6

137.2

100.5

33.7

44.5

60.0

Profit Before Tax (FRS)

 

153.8

137.2

100.5

33.7

44.5

60.0

Tax

(16.5)

(11.8)

(-.9)

(-1.3)

(9.0)

(13.0)

Profit After Tax (norm)

 

133.2

125.3

92.6

22.4

35.4

47.0

Profit After Tax (FRS)

 

137.4

125.3

92.6

22.4

35.4

47.0

Minority interest

68.6

54.5

29.7

(-8.1)

(-0.4)

(-6.8)

Net income (norm)

 

64.5

70.8

62.9

40.5

45.8

53.9

Net income (FRS)

 

68.7

70.8

62.9

40.5

45.8

53.9

Average Number of Shares Outstanding (m)

355

355

355.0

355.0

355

355

EPS - normalised fully diluted (kr)

 

18.2

19.9

17.7

11.4

12.9

15.2

EPS - IFRS (kr)

 

19.4

19.9

17.7

11.4

12.9

15.2

Dividend per share (Kr)

 

5.9

6.9

13.24

10.00

10.00

10.00

By Operating entity

 

 

 

 

 

 

 

IS Investment Only

51.0

59.0

44.7

48.3

44.8

50.0

IS Investment Trust (28.9%)

13.4

1.3

7.6

1.7

6.6

6.5

IS Private Equity (29.1%)

14.5

20.0

2.2

(7.3)

(7.7)

(6.0)

IS Asset Management (70.0%)

6.7

7.3

7.9

9.2

15.3

15.4

Efes NPL Asset Management (74%)

(3.6)

1.4

16.6

12.9

4.2

5.5

Elimination Adjustments (B)

(13.3)

(18.2)

(15.5)

(18.6)

(17.3)

(17.6)

Foreign based subsidiaries

(0.6)

(5.7)

0.0

0.0

Net income

 

68.7

70.8

62.9

40.5

45.8

53.9

BALANCE SHEET

Fixed Assets

 

148.8

150.7

168.8

194.8

195.0

195.0

Intangible Assets

72.4

66.2

61.2

61.4

61.0

61.0

Tangible Assets

53.1

29.2

34.8

32.8

33.0

33.0

Other

23.3

25.9

72.7

100.6

101.0

101.0

Current Assets

 

4,017.7

4,784.6

5,186.4

5,586.4

5,620.0

5,620.0

Investments

658.6

588.2

708.6

768.4

750.0

750.0

Trade receivables

1,004.4

1,296.0

1,380.8

1,815.0

1,850.0

1,850.0

Cash and equivalents

2,218.5

2,665.6

2,907.0

2,733.8

2,750.0

2,750.0

Other

136.2

234.8

189.9

269.2

270.0

270.0

Total Assets

 

4,166.5

4,935.3

5,355.1

5,781.2

5,815.0

5,815.0

Current Liabilities

 

(3,240.5)

(3,907.8)

(4,295.0)

(4,697.5)

(4,730.9)

(4,719.3)

Short term borrowings

(2,319.6)

(2,753.8)

(3,140.1)

(3,177.6)

(3,200.0)

(3,200.0)

Trade payables

(829.3)

(979.4)

(981.2)

(1,337.3)

(1,350.0)

(1,350.0)

Other

(91.6)

(174.6)

(173.7)

(182.7)

(180.9)

(169.3)

Long Term Liabilities

 

(72.2)

(110.1)

(102.2)

(175.5)

(176.0)

(176.0)

Long term borrowings

(58.3)

(95.0)

(90.1)

(140.6)

(141.0)

(141.0)

Other long term liabilities

(13.9)

(15.1)

(12.1)

(34.9)

(35.0)

(35.0)

Total Liabilities

 

(3,312.7)

(4,017.9)

(4,397.2)

(4,873.0)

(4,906.9)

(4,895.3)

Equity attributable to ordinary shareholders

 

460.0

518.5

557.3

558.2

568.5

586.9

Minority interest

 

393.8

398.9

400.6

350.0

339.6

332.8

Total shareholders' equity

 

853.8

917.4

958.0

908.2

908.1

919.7

Number of shares at year end (m)

 

355

355

355

355

355

355

NAV per share

 

1.30

1.46

1.57

1.57

1.60

1.65

ROE

 

14.0%

13.7%

11.3%

7.2%

8.1%

9.2%

ROA

1.5%

1.4%

1.2%

0.7%

0.8%

0.9%

Cost/income ratio

60.3%

73.0%

72.1%

85.6%

84.6%

82.0%

Tangible Equity/Assets

19%

17%

17%

15%

15%

15%

Tax

11%

9%

8%

34%

20%

22%

Source: ISY, Edison Investment Research

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DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Is Yatirim Menkul Degerler and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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10167, New York

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