Turkcell Iletisim Hizmetleri A.S. (TKC) missed our estimates in terms of revenue and earnings for first quarter of 2008 although we were delighted to see operating expenses being much lower than our estimates.

The stock is trading at 8.3x our newly-lowered 2008 EPADS estimate and 6.4x our new 2009 EPADS estimate, which represents a hefty discount to the average of European wireless carriers. While the company’s growth prospects are solid, more so due to award of 3G license to its 100% subsidiary Kibris Mobile Telekomunikasyon Ltd. Sti (KKTCell) and we have adjusted our 2008 revenue estimates slightly downwards along with our earnings estimates.

The company’s expansion in other regions has led to an increased debt level. However, the economic stability in Turkey has become more uncertain as the country is in skirmishes with the Iraqi border, upsetting the US and Europe and the expected high level of inflation in 2008. We were encouraged by the strong growth in revenues and earnings during the first quarter at its affiliates, although some of this growth has to do with the weakness in the US Dollar against all major currencies since the companies report in US dollars while earning in respective local currencies.

We also have concerns that the 3G license grants in Turkey may increase debt levels further, which may put our estimates at risk in the near term. We, therefore, continue to rate shares of TKC a Hold at this time as most of the positive developments are offset by the negative effects of a weakening dollar.

We have fixed our target price at $18.25 based on the company selling at 8.65x our new 2008 EPADS estimate as the company’s expansion in Syria and the recent outlook upgrade from Moody’s bodes well for the future while high churn rate and its 3G build out should keep its margins in check.

Udayan Mukherjee contributed to the report.

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“TKC” Free Stock Analysis: Buy? Sell? Hold?
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