Digital Disruption And Volatile Costs Will Depress Telecom Revenues

Key Takeaways

• Rapid consumer shift to OTT services and digitalization threatens legacy revenue streams and weakens returns on physical infrastructure investments.
  
• Currency volatility, rising energy costs, and intensifying market competition place significant pressure on margins and profitability.
  
• Strong market position, prudent financial management, and investments in digital infrastructure position the company for sustained growth, profitability, and resilient long-term shareholder value.

Catalysts

Operates as an integrated telecommunication company in Turkey.

• The continued rapid adoption of over-the-top (OTT) services like WhatsApp, Netflix, and YouTube is expected to further erode traditional telecom revenue streams, directly threatening Türk Telekomünikasyon Anonim Sirketi's top-line growth as consumers bypass legacy offerings.
  
• Widespread digitalization and cloud migration by enterprises across Turkey and neighboring regions may allow new entrants to circumvent traditional telecom infrastructure, putting long-term pressure on Türk Telekom's core revenue model while limiting the effectiveness of investments in physical connectivity.
  
• High and persistent volatility in the Turkish lira, exacerbated by local macroeconomic instability and tight monetary policy, is poised to increase the company's debt-servicing costs (given its substantial foreign-currency denominated debt), leading to margin compression and reducing future net profits.
  
• Increased energy costs and the rising impact of environmental regulations on power-intensive network operations are set to drive up operating expenses, risking erosion of both EBITDA and net margins, particularly in a context where competitive pricing and profitability are already pressured.
  
• Intensifying price competition and ongoing market saturation in the Turkish telecom sector is likely to continue driving down Average Revenue Per User (ARPU), offsetting gains from upselling activities and potentially leading to declining earnings despite past successes in subscriber growth.

Türk Telekomünikasyon Anonim Sirketi Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Türk Telekomünikasyon Anonim Sirketi compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Türk Telekomünikasyon Anonim Sirketi's revenue will grow by 30.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.0% today to 9.8% in 3 years time.
• The bearish analysts expect earnings to reach TRY 36.7 billion (and earnings per share of TRY 10.6) by about July 2028, up from TRY 10.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, down from 19.8x today. This future PE is lower than the current PE for the TR Telecom industry at 20.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 27.57%, as per the Simply Wall St company report.

Türk Telekomünikasyon Anonim Sirketi Future Earnings Per Share Growth

Risks

• Sustained double-digit revenue growth, strong ARPU increases, steady net subscriber additions, and expanding postpaid customer base all indicate robust demand and pricing power, suggesting that both top-line and bottom-line growth may persist and support share price appreciation.
  
• The company's fixed line concession agreement is on track for long-term renewal, giving visibility to its dominant infrastructure position in Türkiye for potentially another 20 to 25 years, which would help ensure cash flow stability and underpin long-term earnings.
  
• Management is successfully controlling leverage, with net debt to EBITDA at historical lows and consistent free cash flow generation, which strengthens the balance sheet and could lead to higher dividends and improved shareholder returns.
  
• Recent investments in fiber broadband and preparation for 5G, coupled with rising fiber subscriber penetration and increased sales of higher speed packages, point to the company's ability to benefit from secular trends in digitalization, supporting future revenue and margin growth.
  
• Improved operational leverage, ongoing cost discipline, and the ability to pass through inflation via pricing actions have resulted in expanding EBITDA margins, which, if maintained, can further support profitability and long-term earnings growth.

Valuation

• The assumed bearish price target for Türk Telekomünikasyon Anonim Sirketi is TRY45.2, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Türk Telekomünikasyon Anonim Sirketi's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of TRY96.1, and the most bearish reporting a price target of just TRY45.2.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be TRY373.7 billion, earnings will come to TRY36.7 billion, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 27.6%.
• Given the current share price of TRY56.85, the bearish analyst price target of TRY45.2 is 25.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.