HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 16 Aug 2019, 10:17 AM


Strategy - A Bitter Turkish Delight

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Turkish Lira (TRY) fell -19% since 9 Aug (YTD: -45%) vs USD following Trump’s doubling of import tariffs on Turkey’s steel and aluminium. Turkey faces high foreign debt (53% of GDP) and runaway inflation (June ‘18: 15.9%). To Malaysia, Turkey is a small trading partner at 1.1% of our exports and 0.2% of imports. Stock wise, the impact of a depreciating TRY is mixed for MAHB (via ISGA), negative for IHH (via Acibadem) and mildly negative for Tenaga (via GAMA). We have BUY ratings on MAHB and Tenaga but a HOLD on IHH.


Lira takes a nosedive. Since last Thurs (9 Aug), the Turkish Lira (TRY) fell -19% against the USD (YTD: -44.5%). Against the ringgit, the TRY has also declined by a similar magnitude of -18.6% since 9 Aug and -44.1% YTD. TRY is the world’s worst performing currency in the past 12 months, losing almost half its value vs the greenback.

Why the recent fall? Last Friday, US President Donald Trump announced that he was doubling import tariffs on Turkish steel and aluminium to 20% and 50% respectively. This move is viewed as retaliation over Turkey’s detention of a US pastor who faces espionage and terrorism allegations following the failed 2016 coup. Turkey is the 6th largest exporter of steel to the US (but minimal for aluminium).

Deeper problems. Apart from the recent tariffs, Turkey’s economy (17th largest globally with GDP of USD858bn) has been facing several challenges. Recently re elected President Recep Tayyip Erdogan’s “growth-at-all-cost” policy has left Turkish companies with high levels of foreign debt, runaway inflation (July 2018: 15.9%) and significant foreign funding in its banking system and public sector borrowings. As of end 2017, Turkey’s gross external debt stood at USD453bn (53% of GDP).


Minimal and contained impact for Malaysia. Malaysia is a net exporter to Turkey with exports totalling RM10.5bn while imports are minimal at RM1.6bn. Turkey constitutes only 1.1% of Malaysia’s total exports and 0.2% of total imports. On the Malaysian equity market, the impact to stocks should be limited to MAHB, IHH and Tenaga which we explain below.

MAHB (BUY, TP: RM10.00). MAHB wholly owns the Istanbul Sabiha Gokcen International Airport (ISGA). The TRY’s depreciation should benefit ISGA as its revenue collection (i.e. passenger fee) is in EUR while cost is in the local currency. As of 1Q18, ISGA was still in the red but we expect it to turn profitable for the full year FY18. The impact on passenger movement is hard to gauge as the expected lower passenger movement from the locals (due to TRY depreciation) may be offset by the expected higher tourist arrivals (cheaper to visit Turkey). On the possible negative side, the weak TRY may deter potential Turkish buyers for part of MAHB’s stake in ISGA, as the price tag is likely to be denominated in EUR. Just last week, Bloomberg reported that Turkish Airlines was bidding to buy an 80% stake in ISGA from MAHB.

IHH (HOLD, TP: RM6.33). ). IHH’s 60% owned subsidiary, Acibadem operates 21 hospitals and 16 medical centres mainly in Turkey. The TRY’s fall would negatively impact Acibadem on 2 fronts: (i) on their non-TRY borrowings (totalling USD125m and EUR330m) as it will cost more to service the interest on those debts and (ii) lower earnings contribution from Acibadem to IHH upon converting proceeds from TRY to ringgit. As at 1Q18 Acibadem contributed 36% to IHH’s revenue and 31% to EBITDA. We take some solace in the TRY’s depreciation, as it is expected to boost medical tourist volumes as healthcare treatment costs in Turkey becomes significantly discounted overnight. This is evident by the fact that Acibadem had recorded a 14.4% growth in revenue and volume of inpatients YoY for 1Q18 despite the forex and political volatility during the earlier part of 2018. Our TRY-MYR assumption for FY18 is 1.10 however, assuming that the exchange remains at 0.60, our sensitivity calculations imply that their FY18-20 earnings would be impacted by 10%-18%. We understand that the group has in place several measures such as delaying capex in Turkey and rationalizing some of Acibadem's non-core assets to reduce the non-TRY borrowings. We believe that the recent volatility will only hasten their resolve.

Tenaga (BUY, TP: RM17.50). Tenaga has a 30% associate stake in Turkey GAMA Enerji which is primarily involved in power generation in Turkey. The TRY’s fall would negatively impact GAMA via its USD denominated loans (although the amount is not disclosed). From Tenaga’s perspective, there is an impairment risk for its stake in GAMA (i.e. investment in associates) which the original investment cost amounts to USD243m (c.RM1bn). However, against Tenaga’s earnings base of >RM8bn, we do not envisage a significant impact from the impairment risk.

Source: Hong Leong Investment Bank Research - 14 Aug 2018

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