Is Yatirim Menkul Degerler — Update 21 February 2017

Is Yatirim Menkul Degerler — Update 21 February 2017

Is Yatirim Menkul Degerler

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Is Yatirim Menkul Degerler

A steady ship

Outlook and FY16 results

Financial services

21 February 2017

Price

TRY1.37

Market cap

TRY486m

TRY4.5820/£

Equity (TRYm) at 31 December 2016

572.6

Shares in issue

355m

Free float

28.2%

Code

ISMEN

Primary exchange

BIST

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.5

21.2

30.5

Rel (local)

3.6

3.5

7.5

52-week high/low

TRY1.4

TRY1.0

Business description

Is Yatirim Menkul Degerler has a core investment banking business offering brokerage, corporate finance, investment advisory and portfolio management services. It also has investments in four subsidiaries whose results it consolidates: a portfolio management company, a non-performing loan manager, a private equity company and an investment trust.

Next events

Investor conference, London

2 March 2017

AGM

24 March 2017

Q117 results

28 April 2017

Analysts

Julian Roberts

+44 (0)20 3077 5748

Andrew Mitchell

+44 (0)20 3681 2500

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

Despite exceptional political events in Turkey during 2016, Is Yatirim’s (ISY) FY16 results showed that its core investment banking business performed well, contributing to strong consolidated net profits, 33% ahead of FY15. Two of its subsidiaries suffered losses but steps have been taken to reduce these in FY17 and other segments performed better than forecast against a challenging backdrop. ISY continues to have a strong balance sheet and is committed to making high distributions to shareholders, so we have maintained our dividend forecast at 10 kuruş.

Year end

Revenue (TRYm)

PBT*
(TRYm)

EPS*
(Kr)

DPS
(Kr)

P/E
(x)

Yield
(%)

12/15

377.5

33.7

11.4

10.0

12.0

7.3

12/16

438.9

41.6

15.2

12.68**

9.0

9.3

12/17e

448.0

104.7

18.7

12.68

7.3

9.3

12/18e

486.8

122.9

22.0

12.68

6.2

9.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **FY16 DPS will be voted on at the AGM.

Good results, especially in the circumstances

Equity and derivative trading in Turkey were broadly flat year-on-year, while ISY’s core investment banking business increased its share of both markets and maintained its market leadership in equity margin trading, asset management and debt issuance, to deliver non-consolidated net profits of TRY87.8m, 82% ahead of FY15 (TRY48.3m). The performance of the subsidiaries was more mixed, with the private equity investments and non-performing loans business facing particularly difficult trading conditions, but asset management and Is Investment Trust delivered higher profits than in 2015. Consolidated net profit of TRY53.9m was ahead of our estimates and the FY15 result. In this outlook note we will give an overview of the whole company and the markets it operates in before examining the FY16 results in more detail.

Estimates modified

While the FY16 results are encouraging and there are tentative signs of a more stable political scene in 2017, we have lowered our forecast revenue and consolidated net profit to account for a possible reduction in FX trading revenues due to a regulation change. Although this reduces our EPS estimates, it does not encroach on our dividend forecast, which assumes that the proposed level of 12.68 kuruş is maintained (above our previous estimate), equating to a yield of 9.3%.

Valuation: Cautious

ISY remains on a lower P/E multiple and higher dividend yield than our selected peer group of major European banks that have investment banking operations. Its price to book value multiple is more closely aligned, at c 0.7x. A ROE/COE approach implies that the market is applying a high country risk premium, as might be expected, leaving room for the valuation to rise if that premium were to fall. An improvement in the political background could be positive for both the required return and the actual return on equity, and therefore positive for the shares.

Investment summary

Company description: Turkey’s leading investment bank

Is Yatirim (ISY), or Is Investment in English, is Turkey’s leading investment bank and part of the İşbank Group, which is the largest private bank in Turkey and owns 71.7% of ISY’s shares. ISY benefits from its parent’s high standing in the investment and business community and large distribution network. ISY was founded in 1996 and has leading market shares in Turkish investment banking activities including equity, bond and derivatives trading, and the issuance of equity and debt. It is also a market leader in asset management as well as having significant private equity interests and a share in Is Investment Trust (whose assets it manages).

Valuation: Risk priced in

As before, we have used a basket of European banks in the absence of any listed local peers. Compared to these, ISY has a substantially higher dividend yield and prospective return on equity and trades at a lower earnings multiple. Our ROE/COE model, explained in more detail on page 10, implies that the market is pricing in considerable country risk. An improvement in the political situation in Turkey could reduce investors’ required return on equity, and therefore increase the value of ISY’s shares, as well as make business conditions better for ISY’s subsidiaries.

Financials: Sensitive to wider economic conditions

ISY’s core investment banking business performed well in 2016, despite considerable headwinds in the form of political unrest and a generally difficult economic climate. Two of the group companies, Is Private Equity and Efes NPL Asset Management were more strongly affected by adverse business conditions, although both are expected to fare better in 2017 as a result of financial and management measures to reduce losses. Is Asset Management and Is Investment Trust both turned in net income above FY15 levels, and those results in such a difficult year may be encouraging for investors, particularly if 2017 brings an improved operating environment. There is some uncertainty around a change to rules governing leverage on FX trading, which could reduce revenues from that activity.

Sensitivities: Geopolitics and the local economy

As stated above and in previous notes, domestic, regional and global political concerns affect ISY, whose fortunes are linked to the performance of the Turkish economy and capital markets, but good results in a difficult year such as 2016 attest to the quality and diversity of ISY’s businesses. Any improvement in conditions should be good for trading and could reduce the country risk premium currently implied. We note the following issues:

Political concerns: The failure of a coup in July and the subsequent consolidation of power by the elected government appears to have resolved any leadership challenges and provided a mandate for the government to make progress in resolving internal and regional security concerns. A rapprochement with Russia also bodes well in that regard and peace talks are taking place between rebels and the Syrian government, brokered by Russia, Turkey and Iran.

Economic concerns: A high current account deficit makes Turkey’s economic growth vulnerable to foreign capital outflows, as has been seen in 2016. This is exacerbated by wider concerns about emerging market growth and the prospect of US interest rate increases presaged by recent comments from members of the Federal Open Market Committee.

Company description: A diversified investment bank

Is Investment was founded in December 1996 as the investment banking arm of İşbank, which is Turkey’s largest private sector bank. ISY was listed in 2007 and retains its leading position in Turkish capital markets with c TRY6.5bn of assets, representing around 30% of the sector and TRY23.2bn of AUM, around 25% of the sector. It is the only Turkish investment house with a corporate governance rating (9.36/10 at the last review) and has a credit rating of AA+(tur) and a stable outlook from Fitch. As well as offices across Turkey, it has a presence in London (Maxis Investments) and Kazakhstan and employs a total of 25 people abroad in addition to c 350 in Turkey. In the rest of this section we will describe the main business segments, the management team and then look at the climate of Turkish capital markets before examining the FY16 results.

Business segments

Exhibit 1 lists ISY’s subsidiaries, its stake in each business and their contributions to net profit in 2016. ISY consolidates the two companies in which it has less than a 50% interest because of the significant influence it has on their activities.

Exhibit 1: ISY group companies 31 December 2016

Activity

Company name (in English)

Ticker

ISY ownership

FY16 net profit (TRYm)

Securities brokerage

Is Yatirim Menkul Degerler (Is Investment)

100.0%

87.8

Foreign-based subsidiaries

Maxis Investments, Is Investment Gulf

(2.7)

Investment Trust

Is Yatirim Ortakligi (Is Investment Trust)

ISYAT

28.9%

5.6

Portfolio management

Is Asset Management

70.0%

11.6

Private Equity

Is Girisim Sermayesi (Is Private Equity)

ISGSY

29.1%

(9.1)

Asset Management

Efes NPL Asset Management

74.0%

(17.7)

Subtotal

75.5

Elimination*

(21.6)

Total

53.9

Source: Is Yatirim data. Note: *Dividend and revenue eliminations between subsidiaries.

Is Yatirim Menkul Degerler (Is Investment, ISMEN)

This is the investment bank itself and the main operating entity of the group. Its market shares for its various activities are described in more detail in the results section on pages 4-6 below, but it is Turkey’s leading investment bank and has considerable standing as the investment banking arm of İşbank, which in turn was founded by Ataturk in 1924 to be Turkey’s national bank. It remains Turkey’s only listed investment bank on the star index and has been the first Turkish investment bank to join the International Securities Market Association (ISMA), to launch a hedge fund and has pioneered various financial products and derivatives in Turkey.

Is Yatirim Ortakligi (Is Investment Trust, ISYAT)

ISYAT was established in 1995 as a closed-ended fund and went public in 1996. Around 95% of its shares are traded on the Borsa Istanbul and its capital is managed by another group company, Is Asset Management. It is the largest investment trust in Turkey, with net assets of TRY235m (£52m) as of 31 December 2016, which mainly comprised fixed income assets (61.9%), with equities, cash and other investments making up 14.9%, 6.7% and 16.4%, respectively. It is benchmarked to a blend of Turkish equity and fixed income indices and has a strategy weighted to corporate debt, but with significant flexibility to invest in government bonds and equities as well.

Is Girisim Sermayesi (Is Private Equity, ISGSY)

Separate coverage of ISGSY is available on our website and includes details of its investee companies. It was established in 2002 to invest in companies from the wide range of mid-sized private enterprises that form the bulk of the Turkish economy. A summary of its investments is below, which had a total NAV of TRY139.3m at 31 December 2016, up from TRY131.9m a year earlier. ISGSY also has current assets of TRY119.4m and liabilities of TRY2.6m, giving equity of TRY256.1m. Is Investment consolidates Is Private Equity’s investee companies and reports their value at historic cost, whereas they are held at fair value in Is Private Equity’s accounts. Although valuations have been affected by difficult trading in recent months, the trust has made 14 exits at an average IRR of 26.5% and at a cash exit multiple of 2.3x in US dollar terms, since inception.

Exhibit 2: ISGSY investee companies

Investee company

Sector

Amount invested (TRY)

% ownership

Value at 31 December (TRY)

Mika Tur

Tourism

11.3m

20.0%

13.7m

Radore

Data centres

17.5m

25.5%

18.3m

Numnum (Istanbul Food and Beverage Group)

Food and drink

37.0m

61.7%

36.2m

Toksöz Sports

Clothing retail

29.4m

55.0%

31.6m

Ortopro

Healthcare

US$14.6m
(TRY53.2m)

83.6%

23.5m

Nevotek

Technology

US$3.0m
(TRY10.9m)

81.2%

16.0m

Total

159.3m

139.3m

Source: Is Girisim, TRY3.65/US$ (as at 14 February 2017)

Is Asset Management

Is Asset Management is 70% owned by ISY and offers both discretionary and non-discretionary services, mainly to mutual and pension funds. The latter in particular have been growing in Turkey (Exhibit 3) as a large population of young people begins to save towards retirement, more women enter the workforce and the population ages. Despite the growth shown below, the private saving to GDP ratio remains under 13%, vs c 20% for other comparable countries,1 and demographic, economic and other indicators point to continued growth in the medium term.

Exhibit 3: Turkish mutual and pension fund AUM development

Source: Is Yatirim, Edison Investment Research

Efes NPL Asset Management

Efes NPL was established in 2011 to buy and sell non-performing loans (NPLs), principally from Turkish banks, at a discount and take on the operational task of loan collection. Turkish regulations mean that the originator of a loan is unable to reduce the interest rate to accommodate a distressed borrower, and provisions they make against doubtful loans are not tax-deductible. On sale, loans’ interest rates can be amended and the crystallised loss is allowable for tax purposes, which motivates banks to sell their NPLs. The recent turbulence experienced in Turkey has inhibited Efes NPL’s ability to collect loans and interest, leading to losses in 2016, although a new general manager has been appointed who is implementing a turnaround plan.

Management and ownership

The nine-member supervisory board is headed by Ilhami Koç, who became chairman in 2013 having previously been CEO. Seven of the nine, including Mr Koç, have held senior management positions at İşbank or ISY and the others include a range of finance professionals and academics with experience of global and Turkish capital markets. The executive board has six members, led by General Manager Riza Kutlusoy. All but one of them have served at ISY or İşbank since at least the 1990s. Brief biographies of Messrs Koç and Kutlusoy are on page 12 and a detailed corporate governance report is available here, which rates ISY at 93.6%.

ISY’s largest shareholder is İşbank and the next three are subsidiaries of the bank: Is leasing, Is Factoring and Camis Yatirim Holding, which own 71.7% of the shares between them. 40.2% of İşbank is owned by its own pension fund and 28.1% by the Republican People’s Party (the main opposition party in the Turkish parliament), with the remainder being free float.

Sensitivities

Economy and geopolitics

Turkey’s economy has recorded strong GDP growth for most of the last 15 years, outperforming the OECD as a whole and initially recovering strongly from the financial crisis. The last five years have seen lower growth, partly as a result of political turbulence in Turkey and its neighbours. The country has historically relied on foreign direct investment to fund growth, which has been difficult to attract with a major war in Syria to the south, slow growth in the EU (a major export market for Turkey) and an attempted coup in July 2016. On the other hand, the recent improvement of relations with Russia is important: Russia is a major trade partner and one of the three countries (along with Iran and Turkey) now organising peace talks between the Syrian government and rebels; Russians are also normally among Turkey’s main tourist nationalities and Russian airlines have now resumed flights there. Although significant political uncertainty remains, a continued stabilisation of the domestic and regional situation would likely be good for the economy, and particularly for Is Private Equity and Efes NPL Asset Management.

Exhibit 4: Turkish and OECD GDP growth, 2002-present

Source: World Bank

Against the background of recent political turmoil, the GDP growth shown in Exhibit 4 has been resilient and the performance of the BIST 100 Index has been strong. In recent months both Turkish equity and bond markets appear to have been affected more by the dollar’s strength since November 2016 than by domestic political events. In equities, that news has been good for domestic investors, with the BIST 100 performing well in lira terms. ISY’s revenues are correlated to financial market activity, for which the performance of the BIST 100 Index is one indicator, and the performance of the investment bank was strong in FY16 (as explained below). For much of the year Turkish government bonds yields fell, before moving back to levels seen in Q1 after November, partly driven by the post-election rise in US government bond yields.

Exhibit 5: BIST 100 Index, January 2016 to present

Exhibit 6: Turkish two-year bond yields

Source: Bloomberg

Source: Bloomberg

Exhibit 5: BIST 100 Index, January 2016 to present

Source: Bloomberg

Exhibit 6: Turkish two-year bond yields

Source: Bloomberg

Inflation has remained high in Turkey, at over 7.5%, which the central bank has tried to control with high interest rates (currently 8%). These are not conducive to economic growth, although we note that commentators expected a 0.5% increase in January 2017 that did not materialise, leading to a rise in the BIST 100 but further Turkish lira weakness. Although the political and economic outlook in 2017 is uncertain, the performance of Turkish markets in 2016, a year in which they faced strong headwinds, provides a measure of comfort.

Regulatory environment

A possible change to rules governing FX trading may reduce permitted leverage from 100:1 to 10:1, and increase initial margin requirements. This may reduce ISY’s revenues from FX business, but it remains to be seen whether professional investor clients will be bound by these rules. We have borne the potential effect in mind in setting our FY17 and FY18 estimates.

Overview of Q4 and FY16 results

Here we discuss ISY’s performance in each area of activity. Performance statistics for Q4 and FY16 are summarised in Exhibit 7 and later charts and tables illustrate longer-term changes.

Exhibit 7: Performance by market area

Performance by market area

Q415

Q416

Y-o-y (%)

FY15

FY16

Y-o-y (%)

Market share (%)

Derivatives trading (TRYbn)

27.0

42.9

58.9

100.0

132.0

32.0

11.4

Equities trading (TRYbn)

43.2

39.3

(9.0)

151.0

160.0

6.0

7.9

FX margin trading (US$bn)

186.0

217.0

16.7

Debt securities issuance (TRYbn)

5.8

4.3

(25.9)

19.5

18.8

(3.6)

20.8

M&A deals closed (number)

4.0

3.0

(25.0)

9.0

8.0

(11.1)

Equity margin trading loans o/s (TRYm)

433.0

273.0

(37.0)

433.0

273.0

(37.0)

22.0

Assets under management (TRY bn)

20.6

27.6

34.0

20.6

27.6

34.0

Of which: Mutual funds

8.7

11.3

29.9

8.7

11.3

29.9

23.0

Pension funds

8.7

11.2

28.7

8.7

11.2

28.7

19.0

Other funds

3.2

5.1

59.4

3.2

5.1

59.4

Source: Is Yatirim, Edison Investment Research

Areas with strong performance included derivatives trading, where a 2% growth in the overall market in Turkey was magnified by ISY’s greater market share (rising from 8.8% to 11.4%, Exhibit 8). Equity trading had a slightly weaker fourth quarter but still performed well in FY16 as a whole because of a strong first nine months. The size of the market shrank 1.2%, but again ISY captured a larger portion of it (7.9% vs 7.4% in FY15) and increased its trading activity by 6% year-on-year.

Exhibit 8: ISY Securities trading volume and market share

Source: Is Yatirim data, Edison Investment Research

ISY remained the leading investment bank for debt security issuance with 21% market share, a decline on 2015 (24%). The split between debt security IPOs and private placements conducted by ISY has continued to move in favour of placements, as has the wider market.

Exhibit 9: Turkey’s debt securities issuance market

Exhibit 10: Is Investment debt securities issuance

Source: Is Yatirim data, Edison Investment Research

Source: Is Yatirim data, Edison Investment Research

Exhibit 9: Turkey’s debt securities issuance market

Source: Is Yatirim data, Edison Investment Research

Exhibit 10: Is Investment debt securities issuance

Source: Is Yatirim data, Edison Investment Research

Equity margin trading was more challenging, with both a fall in the size of the market and a reduction in ISY’s market share, from 29% to 22%. FX margin trading has now reached sufficient scale and persistence to be reported as a separate indicator, a successful diversification of the group’s income streams. Arbitrage is among other areas it is exploring for further diversification.

Exhibit 11: Equity margin trading volume

Exhibit 12:ISY FX margin trading volume

Source: Is Yatirim data, Edison Investment Research

Source: Is Yatirim data, Edison Investment Research

Exhibit 11: Equity margin trading volume

Source: Is Yatirim data, Edison Investment Research

Exhibit 12:ISY FX margin trading volume

Source: Is Yatirim data, Edison Investment Research

Is Asset Management grew net profits by 27% in FY16 and management expects to be able to maintain momentum because assets under management have continued to rise faster than the growing mutual and pension fund market, increasing market shares slightly to 19% and 23% of pension and mutual fund assets, respectively. Consolidated AUM, which includes the assets of Is Investment Trust, reached TRY27.6bn. Is Investment Trust’s shares were up 4.35% over 2016, as well as paying a dividend of 13 kuruş (a 13% yield on the cum-dividend price). Unsurprisingly, the share price reacted to the attempted coup in July, falling from TRY0.86 to TRY0.80, but it recovered to TRY0.99 by the year-end.

Exhibit 13: Development of assets under management since 2007

Source: Is Yatirim data. Note: AUM denominated in Turkish lira.

The analysis of revenues in Exhibit 14 shows FY16 interest and trading income flat year-on-year, partly as a result of the reduction in interest rates in September. This was more than offset by the growth of commission revenues where brokerage and corporate finance both had increases of over 40% vs FY15. As we wrote in our last note, ISY offers derivative trading outside Turkey, which is a significant differentiator from most of its domestic competitors. The M&A market was slower than in 2015, mainly due to the political situation in Turkey, but Is Investment advised on three deals that closed in Q4, bringing the total for the year to eight. Equity IPO activity was muted and we understand that ISY has not budgeted for participation in any IPOs in 2017. Asset management also delivered a solid contribution.

Exhibit 14: Revenue analysis

TRYm

Q415

Q416

Y-o-y (%)

FY15

FY16

Y-o-y (%)

Interest and trading income

61.4

55.0

(10.5)

211.0

212.5

0.7

Commission revenues

51.6

62.2

20.6

166.6

226.5

36.0

of which:

Brokerage

36.2

42.1

16.4

108.5

160.2

47.7

Corporate finance

4.8

9.0

86.8

17.9

25.2

40.9

Asset management

9.9

10.5

6.4

37.8

38.4

1.6

Other commissions

0.7

0.6

(14.4)

2.5

2.8

10.5

Total revenue

113.0

117.2

3.7

377.5

438.9

16.3

Source: Is Yatirim data, Edison Investment Research

Annual cost growth of 13% year-on-year was driven in part by the decline in the Turkish lira (down 17.3% vs the US dollar over 2016), which made costs denominated in foreign currencies higher, and by higher transaction volumes. The reduction of the cost ratio to 81% from 83% despite the FX headwind is encouraging.

Exhibit 15: Cost analysis

TRYm

Q415

Q416

Y-o-y (%)

FY15

FY16

Y-o-y (%)

Marketing sales and distribution

28.4

35.7

25.7

84.0

117.0

39.3

General administration

62.6

59.2

(5.5)

226.7

235.5

3.9

Other operating expenses

1.0

1.0

1.4

3.9

3.3

(13.7)

Total costs

92.1

95.9

4.2

314.5

355.8

13.1

% of revenue

81

82

83

81

Source: Is Yatirim data, Edison Investment Research

Finally we look at net profit by business segment (Exhibit 16), which sums to a consolidated net profit of TRY53.9m, slightly exceeding our forecast of TRY53.5m, with some variation among the underlying segments. Both Is Private Equity and Efes NPL Asset Management had difficult years, affected by the political situation in Turkey and the region. Efes in particular has faced challenges: it has been difficult to make collections and losses have mounted through the year. The business now has a new manager and a new strategy has been adopted, which is expected to reduce losses in FY17. The performances of Is Private Equity’s investee companies are expected to improve as well: they have had rights issues that will enable them to reduce interest costs and better performance is expected in FY17. The contribution to Is Yatirim’s consolidated net profit was TRY5.6m, vs TRY1.7m in FY15. Is Investment, the main operating entity in the group, saw the best performance of any segment compared with FY15. This was helped by generally resilient markets as described above, enabling it to report a return on equity (ROE) of 15.5% for the year.

Exhibit 16: Net profit analysis

TRYm

Q415

Q416

Y-o-y (%)

FY15

FY16

Y-o-y (%)

Is Investment only

7.3

20.0

174%

48.3

87.8

82%

Foreign-based subsidiaries

-1.6

-1.0

-38%

-5.7

-2.7

Is Investment Trust

1.5

1.5

0%

1.7

5.6

Is Private Equity

-3.8

-3.4

-11%

-7.3

-9.1

(25%)

Is Asset Management

2.2

3.2

45%

9.1

11.6

27%

Efes NPL Asset Man.

7.2

-3.9

n.a.

12.9

-17.7

N/A

Elimination Adjustments

0.2

-2.8

n.a.

-18.5

-21.6

(17%)

Consolidated Net Profit

13.0

13.6

5%

40.5

53.9

33%

Source: Is Yatirim data, Edison Investment Research

Changes to estimates

We have adjusted our FY17 estimates and introduced forecasts for FY18. Although FY16 results were strong, we have taken a conservative approach to the possible impact of the FX leverage restriction and reduced our revenue estimate for ISY by assuming that revenues at the investment bank are flat from FY16 to FY17. This feeds through to lower net profit for the main operating entity than previously forecast and reduces EPS similarly. It does not affect our forecast dividends, which we estimate will be covered 1.9x by earnings in FY17. We expect losses at Is Private Equity and Efes NPL to be reduced and that other segments will continue to perform well. On 20 February the board of directors resolved to propose a dividend of 12.68 kuruş per share at the AGM in April, a 91% payout ratio equivalent to a 9.3% yield on the current share price of TRY1.36.

Exhibit 17: Estimate changes and comparison with actual FY16 results

Revenue (TRYm)

Attributable profit (TRYm)

EPS (Kr)

DPS (Kr)

Estimate

Actual

% difference

Estimate

Actual

% difference

Estimate

Actual

% difference

Estimate

Actual

% difference

2016

425.4

438.9

3.2%

53.5

53.9

0.7%

15.1

15.2

0.5%

10.0

12.68

26.8%

Old

New

% change

Old

New

% change

Old

New

% change

Old

New

% change

2017e

457.1

448.0

-2.0%

75.2

66.5

-11.6%

21.2

18.7

-11.7%

10.0

12.68

26.8%

2018e

486.8

78.1

22.0

10.0

12.68

26.8%

Source: Is Yatirim data, Edison Investment Research

Valuation

As we have noted in the past, there are no other quoted investment banks with the same regional presence or business mix as ISY and we therefore compare it to a basket of European banks with substantial investment banking operations. These comparators’ share prices have recovered in H216 from fears of a global economic slowdown, the expectation of US interest rates remaining low for longer and poor performance at the end of FY15. ISY’s shares have performed similarly well in H216, but did not fall as much in the first half, rising 25% in 2016 as a whole, while the peers fell 12% on average over the year. Despite this, ISY still has a considerably higher prospective dividend yield (provided the payout is maintained) and return on equity and trades at a lower P/E multiple than peers. It is more closely aligned with the group on a price to book value (P/BV) basis.

Exhibit 18: Peer valuation

P/E (x)

P/BV (x)

Dividend yield (%)

Return on equity (%)

Return on assets (%)

2017e

2018e

2017e

2018e

2017e

2018e

2017e

2018e

2017e

2018e

Is Yatirim Menkul Degerler

7.3

6.2

0.8

0.8

9.3

9.3

11.2

12.8

1.0

1.2

Average

13.1

9.8

0.7

0.7

3.4

3.8

5.6

7.0

0.3

0.4

BNP Paribas

9.4

8.6

0.7

0.7

5.0

5.4

8.2

8.4

0.4

0.4

UBS

12.7

11.0

1.1

1.0

4.1

4.8

8.0

9.4

0.4

0.5

Credit Suisse Group

16.5

10.7

0.7

0.7

4.5

4.6

4.4

7.0

0.2

0.4

Société Générale

9.5

8.7

0.6

0.6

5.2

5.7

6.7

7.0

0.3

0.3

Barclays

17.1

11.4

0.7

0.7

1.3

1.3

3.9

5.7

0.3

0.4

Deutsche Bank

13.3

8.6

0.4

0.4

0.3

1.3

2.1

4.3

0.2

0.4

Source: Bloomberg, Edison Investment Research. Note: Prices at close of business on 20 February 2017.

We also use an ROE/COE approach to value ISY: a long-term growth rate of 4% and the group average estimated ROE for the peers of 7% gives a derived cost of equity for them of 8.2%. The same calculation using our estimated FY18 ROE of 12.5% and a 5% growth rate for ISY implies a cost of equity of 16.9%. This is above the Bloomberg-calculated figure of 14.2% and both, for the moment, are above the return on equity. However, this level of return on equity appears strong given the challenging trading environment. A more favourable geopolitical background could be positive for both the return on equity and the required return.

We note that the ROE/COE valuation is sensitive to the ROE input used: a change of 50bp to the ROE makes a c 500bp difference to the implied multiple of book value.

Exhibit 19: Financial summary

TRYm

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

372.4

377.5

438.9

448.0

486.8

Operating expenses

(266.5)

(314.5)

(355.8)

(346.2)

(370.3)

Other income/expense (net)

(2.1)

(8.5)

(24.5)

(6.0)

(6.0)

Operating profit

 

 

103.8

54.6

58.6

95.8

110.5

Share of profit of equity accounted investees

(.3)

(.7)

(4.0)

(4.0)

(4.0)

Net financials

(3.0)

(20.1)

(13.0)

12.9

16.3

Exceptionals

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

100.5

33.7

41.6

104.7

122.9

Profit Before Tax (FRS)

 

 

100.5

33.7

41.6

104.7

122.9

Tax

(7.9)

(11.3)

(20.8)

(23.5)

(26.7)

Profit After Tax (norm)

 

 

92.6

22.4

20.8

81.2

96.2

Profit After Tax (FRS)

 

 

92.6

22.4

20.8

81.2

96.2

Minority interest

29.7

(18.1)

(33.1)

14.7

18.1

Net income (norm)

 

 

62.9

40.5

53.9

66.5

78.1

Net income (FRS)

 

 

62.9

40.5

53.9

66.5

78.1

Average Number of Shares Outstanding (m)

355.0

355.0

355

355

355

EPS - normalised fully diluted (Kr)

 

 

17.7

11.4

15.2

18.7

22.0

EPS - IFRS (Kr)

 

 

17.7

11.4

15.2

18.7

22.0

Dividend per share (Kr)

13.24

10.00

12.68

12.68

12.68

BALANCE SHEET

Fixed Assets

 

 

168.8

194.8

190.3

195.0

195.0

Intangible Assets

61.2

61.4

57.1

57.1

57.1

Tangible Assets

34.8

32.8

34.2

34.2

34.2

Other

72.7

100.6

99.0

103.7

103.7

Current Assets

 

 

5,186.4

5,586.4

6,327.6

6,187.3

6,195.4

Investments

708.6

768.4

400.9

400.9

400.9

Trade receivables

1,380.8

1,815.0

1,737.5

1,737.5

1,737.5

Cash and equivalents

2,907.0

2,733.8

3,939.3

3,939.3

3,939.3

Other

189.9

269.2

249.8

109.5

117.6

Total Assets

 

 

5,355.1

5,781.2

6,517.9

6,382.3

6,390.4

Current Liabilities

 

 

(4,295.0)

(4,697.5)

(5,427.8)

(5,246.9)

(5,221.8)

Short term borrowings

(3,140.1)

(3,177.6)

(3,821.6)

(3,821.6)

(3,821.6)

Trade payables

(981.2)

(1,337.3)

(1,421.4)

(1,421.4)

(1,421.4)

Other

(173.7)

(182.7)

(184.8)

(3.9)

21.1

Long Term Liabilities

 

 

(102.2)

(175.5)

(209.8)

(210.0)

(210.0)

Long term borrowings

(90.1)

(140.6)

(171.0)

(171.0)

(171.0)

Other long term liabilities

(12.1)

(34.9)

(38.8)

(39.0)

(39.0)

Total Liabilities

 

 

(4,397.2)

(4,873.0)

(5,637.6)

(5,456.9)

(5,431.8)

Equity attributable to ordinary shareholders

 

 

557.3

558.2

563.4

593.8

608.8

Minority interest

 

 

400.6

350.0

316.9

331.6

349.7

Total shareholders’ equity

 

 

958.0

908.2

880.3

925.4

958.6

Number of shares at year end (m)

 

 

355

355

355

355

355

NAV per share (TRY)

 

 

1.57

1.57

1.59

1.67

1.72

Source: Is Yatirim Menkul Degerler data, Edison Investment Research

Contact details

Revenue by geography

İş Kuleler
Kule-2 Kat:2
34330,4.Levent,
Istanbul
Turkey
+90 (212) 350 22 22
www.isyatirim.com.tr

N/A

Contact details

İş Kuleler
Kule-2 Kat:2
34330,4.Levent,
Istanbul
Turkey
+90 (212) 350 22 22
www.isyatirim.com.tr

Revenue by geography

N/A

Management team

Chairman: Ilhami Koç

General Manager: Riza Kutusloy

Mr Koç graduated from Ankara University with a degree in political science in 1986 and joined Isbank the same year. In 1994 he became assistant manager of the Securities division before moving to head Asset Management and International Capital Markets at Is Yatirim in 1997. He was promoted to deputy CEO in 1999, before becoming CEO of Is Private Equity in 2001, and took up the position of CEO of Is Yatirim a year later. He left the executive board and become chairman in January 2013.

Mr Kutusloy graduated from the Middle East Technical University with a degree in Business Administration in 1988 and began work at Isbank. He was appointed to lead the securities division in 1996 and became a unit manager in 1998. He became a branch head in 2006, then led risk management from 2008 before becoming Assistant General Manager in 2011. He was appointed to the board in March 2016 and became General Manager in May.

Principal shareholders

(%)

İşbank

65.65

Is Factoring (İşbank subsidiary)

2.43

Is Leasing (İşbank subsidiary)

2.43

Camis Yatirim Holding (İşbank subsidiary)

0.17

Management team

Companies named in this report

İşbank (ISATR), Is Investment Trust (ISYAT), Is Private Equity (ISGSY), Barclays (BARC), BNP Paribas (BNP), Credit Suisse (CS), Deutsche Bank (DB), Société Générale (GLE), UBS (UBS).

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney , NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney , NSW 2000

Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney , NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney , NSW 2000

Australia

Green Dragon Gas — Update 20 February 2017

Green Dragon Gas

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