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TSC Ratings Update: Buy Turkcell

We rate Turkcell Iletisim Hizmet (TKC) a buy. Our recommendation is based on the company's impressive revenue growth, improved earnings, and notable return on assets and equity. These positives are further supported by increasing subscriber base, improving average revenue per user, and higher average monthly minutes of usage per subscriber.

However, deteriorating margins, rising debt and slowdown in the Turkish GSM market are the downside risks to our buy rating.

Here are the earnings highlights:

The company's top-line growth is healthy. Turkcell's third-quarter revenue soared 19.6% to $2.06 billion from $1.72 billion, on a 7.5% appreciation of Turkish Lira (TRY) against the dollar, a 4.3% growth in subscriber base, and higher average monthly minutes of usage per subscriber. Revenue from the Fintur's operations rose 21.7% to $500.00 million, while revenue from the Astelit operations soared 68.2% to $127.80 million from $76.00 million.

Earnings have improved. The company's third-quarter earnings surged 50.5% to $603.79 million, or 69 cents per share, from $401.19 million, or 46 cents per share in the third-quarter 2007. As a result, return on assets expanded 389 basis points to 20.06% from 16.17%, while return on equity widened 575 basis points to 28.87% from 23.12%.

The company has a strong cash position and lower leverage levels. During the quarter under review, the company's cash position improved as reflected by a 21.0% increase in cash and cash equivalents and a quick ratio of 1.95. Moreover, a 24.4% rise in shareholders' equity outpaced 10.9% increases in the total debt, thereby improving the debt-to-equity ratio to 0.12 from 0.14.

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