Turkish Telecoms: The Next Great Investment?

• Analysts at JP Morgan are bullish on Turkish telecom providers.
• Shares of TURK TELEKOMUNIKASYO TRKNF was upgraded to Overweight while shares of Turkcell Iletisim Hizmetleri A.S. (ADR) TKC were maintained at Overweight.
• Both investments are expected to yield a 25 percent return based on their respective price targets.

In a report published Thursday, JP Morgan analyst Ranjan Sharma upgraded shares of Istanbul-listed Turk Telekom to Overweight from Neutral with a price target lowered to TL7.30 from a previous TL7.80, while shares of Istanbul-listed Turkcell were maintained at Overweight with a price target lowered to TL13.50 from a previous TL14.50.

Investors can gain exposure to Turkish telecoms through the U.S. equity market. Turk Telekom trades on the OTC Market under the ticker TRKNF while Turkcell's ADR trades under the ticker TKC on the NYSE.

Turk Telecom

According to Sharma, Turk Telekom is now in a position to gain a "structural" competitive advantage with its fixed network, TV content, mobile services, and a potential Wi-Fi strategy that supports bundling of services and cross/up-selling. The analyst expanded that the company's unique positioning stems from the launch of a satellite platform in the second quarter and its exclusive rights to now broadcast UEFA Champions League and Europa League matches.

Sharma said Turk Telekom's recent acquisition of Avea could provide it with revenue and cost synergies. The analyst estimated that the company's use of tax losses and tax shield on spectrum amortization would result in an expected 2017 earnings per share accretion of 17 percent (for a merger in the respective year).

Meanwhile, Turkcell is the largest spectrum bank and continued investments in networks are "supportive" of increasing network leadership that could drive gains in the high-value mobile customers. Sharma is expecting the company's revenue and EBITDA to grow at a three-year compounded annual growth rate of around 8 percent.

However, Sharma pointed out that an ongoing shareholder dispute within Turkcell puts its dividend at risk. The analyst is forecasting the company's 2015 dividends will only be paid in 2017. At the same time, the analyst is expecting Turk Telekom's 2015 dividend yield to total 4 percent and increase to 9 percent next year.