AI-Driven Cloud Expansion And Paycell's Growth Will Boost Earnings And Enhance Margins

Key Takeaways

• Expansion in data center, cloud services, and Techfin segment, especially through Paycell, is expected to boost revenue and earnings growth.
  
• Strategic investments in renewable energy and effective pricing strategies are projected to enhance net margins and revenue consistency.
  
• Aggressive competition, inflation, and CapEx pressures may hinder Turkcell's revenue growth and profitability amid challenging market conditions.

Catalysts

Provides digital services in Turkey, Belarus, Turkish Republic of Northern Cyprus, and the Netherlands.

• Turkcell's strategic focus on expanding data center and cloud services, driven by increasing demand and AI developments, is expected to bolster revenue growth significantly in the future.
  
• The company's planned investments in renewable energy, aiming to cover 65% of Turkcell's total electricity consumption with green energy by 2026, are projected to enhance net margins by reducing energy costs.
  
• The growth of Turkcell's Techfin segment, particularly through Paycell's expansion, is poised to contribute robustly to earnings, with transaction volumes and commissions expected to continue rising.
  
• With the proceeds from the sale of Ukraine assets, Turkcell's stronger FX position and reduced leverage could facilitate future strategic investments and potentially lead to increased earnings.
  
• Effective pricing strategies and focus on high-value postpaid and fiber customers are anticipated to drive ARPU growth, improving revenue consistency and earnings stability.

Turkcell Iletisim Hizmetleri Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Turkcell Iletisim Hizmetleri's revenue will grow by 45.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.0% today to 15.8% in 3 years time.
• Analysts expect earnings to reach TRY 55.1 billion (and earnings per share of TRY 25.64) by about January 2028, up from TRY 26.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 9.1x.
• Analysts expect the number of shares outstanding to decline by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 28.54%, as per the Simply Wall St company report.

Turkcell Iletisim Hizmetleri Future Earnings Per Share Growth

Risks

• Aggressive pricing strategies by competitors may increase market share loss or further price adjustments, impacting revenue growth.
  
• Churn rates are at 2.2%, indicating that customer retention could be pressured by market conditions, affecting overall subscriber base and potentially revenue.
  
• Inflation continues to exceed expectations, which may necessitate further price adjustments and could squeeze margins if costs rise faster than revenue.
  
• An increase in CapEx, particularly for 5G rollout and data centers, may pressure free cash flow and net earnings if revenue growth does not match increased expenditures.
  
• Slowing demand in the consumer electronics segment and macroeconomic headwinds impacting hardware sales may adversely affect revenue from digital business services.

Valuation

• The analysts have a consensus price target of TRY145.09 for Turkcell Iletisim Hizmetleri based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of TRY192.0, and the most bearish reporting a price target of just TRY98.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be TRY347.5 billion, earnings will come to TRY55.1 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 28.5%.
• Given the current share price of TRY108.0, the analyst's price target of TRY145.09 is 25.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.