Category Archives: Koc Holding

BMPS update & Quick look at Turkey (Koc Holding, Depfa TRY Zero bond)

BMPS

Today I sold my BMPS “special situation” position at 1,80 EUR per share, a small loss compared to my 1,80 EUR entry price when I factor in transaction costs. The subscription rights stopped trading already yesterday. Overall, the case did not work out very well. The stock was volatile only the very first day and didn’t do a lot ever since as the chart shows:

bmps 11 close

It seems to be that the regulator has been quite succesful this time to warn market participants against any kind of option based short squeezes. So no “Italian Job” this time. As I have mentioned in the comments of the last post, I do not consider BMPS as a longer term investment. I do think the risk/reward profile of this special situation was good but it just didn’t work out. For the record, I consider the whole transaction as one trade so I still have one potential transaction open or June 😉

Quick look at Turkey

The Turkish Lira and the stock market got hit hard this week as the ruling party did not get the majority of votes.

Politically, one might say that this was actually good news because it clearly enforced democracy in Turkey. Or how the linked Reuters article said:

Erdogan loses his chance to become Turkey’s Vladimir Putin

Financial markets in the short-term however seem to prefer potential dictators to democracy. Although I really like the FT guys, this video shows clearly the opinion of many “pundits”. Especially the currency got clobbered and is almost back (in EUR levels) to early last year’s levels:

In the long run I do believe that a functioning democracy is positive, both for the country and business despite “uncertainties” due to elections. Especially as a public shareholder it is very important that the institutions in a country are properly working. With Erdogan gaining more and more power, I did have my doubts. I don’t know that many positive examples that stock markets with dictators in charge do really well.

Koc

My Turkish stock investment Koc Holding is still doing well. In EUR Term, I am still up around +50%. This is mostly due to a quite lucky entry point back in February last year. I still could not motivate myself to increase the position as Q1 results haven been operationally good but net income was lower yoy because of one-offs.

For Koc, a weaker Erdogan/AKP should be clearly positive in the long run as it reduces risk.

Depfa “Kebap bond”

My second “Turkish” investment is the 2020 Depfa TRY Zerobond which I bought almost exactly one year ago. Again I was lucky with the purchase timing. Although I bought at a more expensive exchange rate (2,85 TRY/EUR), I made some money on the bond price so that I am only slightly down.

The interesting thing is the following: Relatively speaking, the bond has become more attractive. This is what I wrote back then:

At a current yield of ~13% p.a., the bond trades around 4% p.a. wider than a 2 year longer EIB Zero bond and around 3% wider than similar Turkish Government (coupon) bonds.

Well, one year later, the bond actually trades 4,2% wider than Turkish Govies and 4,3% wider than the EIB bond. I still believe that there is very little credit risk in a senior Depfa Bond and that at around 50% and a yield of 13,8%, the bond is good value at an Exchange rate of 3,10 TRY/EUR. I might increase the position slightly in the next few days.

Emerging market risks, Turkey & Koc Holding

Emerging markets stocks are risky. This is not a very original insight but a pretty well-known fact. Among the obvious risks compared to most “developed” countries are:

– general legal risks (listing, disclosure, property rights)
– volatility of economy
– currency
– general political instability

Following the Sistema story, I would add another significant risk for any Emerging market based company:

– personal disputes between a controlling shareholder and the current government

That this risk is real can be seen very well in Turkey at the moment at Asya Bank. Asya Bank is supposed to be owned or influenced by the major Erdogan enemy, the Gulen movement. What is happening in Turkey, at least from my perspective is pretty unique: The Government is more or less actively trying to bankrupt a private bank because the owner of the bank is opposing the current government:

Investors have dumped stocks and bonds of Istanbul-based Bank Asya as the lender was dragged into a feud between President Recep Tayyip Erdogan and Fethullah Gulen, the Pennsylvania-based Islamic cleric who Erdogan blames for a graft probe that implicated his government in December. The president this week called for Turkey’s banking regulator to take action on Bank Asya, citing deteriorating finances.

It seems to be that Erdogan has become much bolder since he won the election a few weeks ago and seems to care less about any negative short-term impacts on the economy.

Honestly, that made me pretty nervous with regard to my largest EM based investment, Koc Holding. I am not completely sure if everything is well now between Erdogan and the Koc family. There were already several probes against Koc companies, the latest I found was against subsidiary Turpas in July 2014.

The big question is always: Am I getting paid for the risk I am taking ? In Koc’s case, especially after the nice run up in the share price, I am not so sure anymore.

Koc is now trading at around 11 times 2014 profits, which is in line with the overall Turkish stock index. Although I believe that Koc is a far above average quality Turkish company, the individual political risk is much higher than for the general Turkish market.

In my initial post, I wrote the following:

I am clearly no expert here, but the fact that the Koc family, among others, survived 3 military coups, the second world war and hyperinflation, the probability is maybe relatively high that they survive the current episode, but risks are clearly there.

Following the Asya story however, I got much more cautious and in EUR terms, Koc is almost 40% more expensive since I bought them. It could easily be that I am too cautious here, but I am not sure if I get actually paid for this Koc related “relationship” risk when I hold Koc stocks at the current level, especially with a portfolio weight of around 3,5%. If I compare this for instance with MIKO or Hornbach, I can still invest in a nice “Boring” stock at the same level without the very specific and real risks of Koc in Turkey.

As a consequence, I will reduce my stake by more than 2/3 to a 1% level which for the future will be my maximum exposure per position to any single Emerging market based company.

EMERGING MARKETS PART 3: JSFC SISTEMA ADRS (ISIN US48122U2042) – IS A RUSSIAN COMPANY INVESTIBLE (2)?

So this is part 2 of the post about Sistema, the Russian conglomerate, part 1 can be found here…

Sistema offers quite a lot of material for investors on their website, including some nice investor presentations, including a relatively recent one from November 2013. As with Koc Holdings, I found the material surprisingly good for a Russian conglomerate.

Some positive aspects (compared to other Russian companies):

+ clear financial targets in place (Cash flow to HoldCo, ROI above CoC)
+ focus on cash generation and shareholder return
+ compensation of management linked to share price development
+ clear split of corporate center financials esp. debt. Again, this is more transparent than for instance with the Belgian HoldCos I have been looking at

Interestingly they seem to follow a little bit the “Koc playbook” by teaming up with foreign companies and listing their subsidiaries. They do claim that the Sistema Holding company acts as a “private equity” investor, although some of their “Monetization strategies” (dividends) are not really private equity style. Also they can show some significant disposals, such as the Power Generation business last year or their insurance company in 2007, so “empire building” is clearly not their highest priority.

Major businesses:

Sistema has two major businesses which are both listed:

Bashneft, one of the larger Russian oil explorers and refiners active in Bashkortostan (west of the Ural, European part of Russia) & & the Arctic region.

MTS is a large Russian mobile phone company with more than 100 mn clients in Russia and neighbouring countries.

Bashneft is owned 75% by Sistema, MTS 53,4%. Now comes the interesting part: The value of the two stakes (MTS 5,5 bn EUR, Bashneft 5,4 bn EUR) is already significantly higher than Sistemas Market cap plus holding debt. With Holding debt of around 0.6 bn EUR, total Holding EV is 7,7 bn EUR vs 10,9 bn EUR market cap of those two holdings.

Their other participations include Rail cars, a toy retailer, a local power grid, a hospital chain, a retail bank, farmland,and finally a struggling Indian mobile operator. Most of the other stuff made losses at least in the first 6 months in 2013, but even if we attach zero value on that, Sistema trades at a significant discount to its sum of parts.

Most of the other businesses are relatively new, for instance the Rail car business has just been bought and combined in 2013. A very interesting subsidiary is the toy retailer Detsky Mir which seemed to have just more than doubled profits from 14,7 mn USD to 36 mn USD. This proves to a certain extent that they are able to grwo new bussinesses and create value. Assuming a 10X P/E multiple for a fast growing retailer, this would add another 250 mn EUR or so to the valuation. They initially planned to IPO Detsky Mir in March 2014, but I am not sure if they might postpone it for the time being.

The Bashneft acquisition in 2009

The EPS development of Sistema clearly correlates to a large extent with Bashneft and MTS plus any realized gains from disposals. If we look a the last couple of years, we can see that the overall increase in Sistema’s earnings per share correlates mostly with the significant increase in earnings at Bashneft. Bashneft has grown very quickly over the last years with a significant increase in output.

Much more interesting is the timing and the price paid. Sistema acquired the majority in Bashneft in March 2009 for 2,5 bn USD. Remember, this was the time when the Russian Index had lost 2/3 of his value within 15 months or so. In their 2009 annual report, one can clearly see that the transaction was a “bargain” purchase at around 50% of “tangible” book. If we look at Bashnefts financials, we can see that the timing was really good. According to the 2010 Bashneft presentation, Bashneft made around 420 mn USD profit in 2009, so Sistema was buying it around 6x P/E. Already a year later net income was around 1.4 bn, a nice 240% increase, and despite the rouble losses, Bashneft will again earn more than 1 bn USD in 2013. So clearly, this 2.5 bn USD investment has more than paid off for Sistema so far.

One interesting aspect about Bashneft: The reserve replacement ratio, which shows if an oil company is discovering more new oil than it takes out of the ground, is around 800-900% for Bashneft. To put this in perspective: Most major Oil companies have ratios slightly above 100%, BP’s for instance went down to 77% two years ago. So overall, Bashneft seems to be a pretty attractive asset for Sistema. Even Lukoil for instance, another big & cheap Russian oil company has a replacement ratio of only slightly above 100%.

Bashneft got the rights to 2 very promising oil fields in the region in 2010. According to this article, this might be part of a strategy not to allowing any Russian oil company becoming too big.

Although there are clearly risks as well. There seemed to be a rumour, that state controlled Rosneft was “interested” in Bashneft but this was denied by Sistema.

Bashneft itself last year paid significant divdends. The 220 rubles per share would be a dividend yield of more than 12% at current prices. This seems to be a confirmation of Sistema’s strategy to upstream cash into the holding. Unfortunately, Bashneft is only traded very illiquid outside Russia on the German stock exchange, with bid/ask spreads of around 10%. Otherwise, Bashneft would be a very interesting additional investment as well.

Rusneft transaction

Another example for a succesful “private Equity” style transaction ist a smaller Russian oil company, Rusneft. In 2010, Sistema bought 49% of the highly indebted company for 100 mn USD. 3 Years later in June 2013, Sistema sold the very same stake for 1,1 bn USD. An 11-bagger in three years, not that bad. One could consider this as a “proof of concept” regarding their private equity business model.

Comparison Sistema with Koc:

After investing in Koc Holding from Turkey, I think it makes sense to make a quick comparison:

Negatives:
– Sistema doesn’t have the same long-term track record as Koc (20 years against 3 generations)
– the Russian market is clearly even “more dangerous”
– Sistema is less diversified than Koc, mostly Oil and Telco
– until now no proof that they are a “value adding” HoldCo

Positives:
+ they do not have a political problem with the current local leadership
+ no fx issues (oil revenues are in USD anyway), only small exposure to financials
+ Sistema is much much cheaper, both compared to sum of parts and P/E etc.
+ from a true contrarian perspective, Russia is even more interesting than Turkey
+ they seem to be able to pull off really lucrative deals like Rusneft and Bashneft with “eye watering” ROIs

Is a Russian stock really “investible”

This is a big question for me. A couple of months ago, I wrote a post why I would not invest in Greek stocks (mistake !) or German-Chinese companies (score).

Honestly, a Russian stock is clearly in general much more a “speculation” than a German or French one. Compared to Italian stocks however, I am not so sure anymore, as the EMAK and ASTM example clearly showed that Corporate Governance for instance in Italy is not that much developed.

The two most relevant questions in my opinion are:

a) Are the managers fraudsters or thieves ?
b) Can someone else easily interfere and take away assets etc. ?

In the case of Sistema, I do not have the impression that management are explicit fraudsters or thieves. I have certainly no prove for that, but the effort they make with con-calls etc. indicates a certain interest in shareholders and a higher share price. Ron Sommer, the former CEO of Deutsche Telekom is actually the boss of the supervisory board of MTS. They never sold any new shares to the market since the IPO, so the motivation behind the German-Chinese frauds seems not to be relevant here.

The majority owner Vladimir Yevtushenkov is clearly a typical “Russian Oligarch” (but he looks like Bill Gates 😉

However, he seems to be among the more “moderate” Oligarchs, as for instance this NYT article describes.

Another factor “pro” Sisteam is the fact, that both major subsidiaries are listed as well with separate, audited statements which increases transparency a lot and makes it easier to validate the “sum of parts” valuation. On the other hand one could argue: Why don’t they pay higher dividends ? They do have a dividend policy, however they promise to pay out only a minimum of 10% of what they can stream up to the HoldCo. According to this research from Gazprombank, rising dividends can be expected, but still we are talking only about 4-5% if this turns out to be correct. Not much for a company in a country with interest rates above 10%. On the other hand, if they are able to to investments like Bashneft and Rosneft, it doesn’t make a lot of sense to pay out huge dividends but rather to reinvest the money in such “multi baggers”.

The second point is harder to answer. It looks like that Sistema is at least on neutral to good terms with Putin. In the case of the Indian Mobile subsidiary for instance, Putin put the problems of Sistema on the table when he visited India in 2012. From the NYT article linked above, I think this quote from Sistema’s owner is revealing:

And business can only prosper, he added, if the size of business is commensurate with the owner’s political influence. “We didn’t understand it” at first, he said. “Many businessmen grew their portfolios very fast but didn’t understand that one must invest time in connections, human relations, invest in human capital.”

Mr. Evtushenkov is not alone in operating along Western lines. One Russian billionaire who also did was Mikhail Khodorkovsky, the oil tycoon arrested in 2003 who has been in jail ever since.

As Mr. Evtushenkov told the Russian Web television station Dozhd recently, he knew Mr. Khodorkovsky when the latter was a young man and worked for him at a Moscow plastics factory. “He was terribly hyper, ambitious,” Mr. Evtushenkov said — and thus, he implied, forgot the rule about operating commensurate with political influence.

This sounds like a guy who knows how to maneuver (so far) within the harsh Russian political and business climate. So the risk should be a lot lower than for instance for Pharmstandard, but clearly, a dispute with government (see Rosneft/Bashneft) or a more powerful oligarch could change this real quickly.

Does Value Investing and investing in countries like Russia contradict each other ?

I want to make one thing clear here: This is no Warren BuffetT “great investment”. It is maybe an “above average” or even “quality” company in a really tough country.

On a pure stand-alone basis, there is clearly no Margin of Safety. As discussed above, certain things outside the perimeter of the company could happen which could impair the value of the stock severely. On the other hand, Value Investing is not only about Warren BuffetT style concentrated portfolio of great companies. There is another style with a more diversified “deep value” approach. I think Sistema clearly fits the “Deep Value” bucket. With this approach however it would be stupid to invest a large portion of the portfolio into a single company. The “Margin of Safety” in those cases comes from investing in a “Bucket” of extremely cheap companies where you can afford that 20-30% will actually turn out worthless, 50-60% are doing Ok and the remaining 10-30% will turn out spectacular.

Sistema in my opinion is a potential stock with a low weight for such a contrarian Emerging Market “bucket”. Yes, a lot of things can happen, but the stock is so cheap that if things turn out positive, the stock could easily tripple or quadruple.

I do have sometimes the impression that especially in the last few years the “BuffetT & Munger” approach is hailed as the ONLY way of value investing. But there are a lot of other succesful investors you had very similar track records with radically different approaches. Among them for instance were John Templeton and Mark Moebius. This ise an excerpt of the 16 investing rules from Sir John Templeton:

3. Remain flexible and open-minded about types of investment.
4. Buy low.
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook.
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers.

This is quite different to “buy concentrated and only what you know best”. Just out of interest I have looked into the Templeton Emerging Markets funds. Mark Moebius only owns two Russian stock, Sberbank with a weight of around 3% (7th largest position) and Lukoil (2,7%). Interestingly, Mark Moebius even seems to have a blog with a recent comment to Ukraine. Personally, I would not invest in Sberbank as this could be one of the easier targets for sanctions.

Timing and other considerations

Looking at the 5 year chart one could think that Sistema would have a lot of space to fall further:

But one should not forget that from 2009 to current, Sistema turned a 2.5 bn USD investment in Bashneft into a stake currently worth 7,5 bn USD….Clearly the risk is real that I am much too early.

To give an example: In February 2010 I wrote in my home forum that Public Power Co., the Greek utility looked like a good risk/return situation at around 12 EUR per share (and a P/E of <5). I even said that it looks like that the stock is bottoming out. This is the stock chart:

Although the stock is now back at that level, the stock bottomed out -90% lower at around 1 EUR per share. Luckily I got out pretty soon before disaster struck, but this should be clearly reminder that it can always get worse.

Where is my “edge” ?

Cleary, I do not have any direct “edge” with regard to Russian stocks. I do not speak Russian, I have never been there and I have only access to published reports and research. I am as far from being an insider as one can possibly be. On the other hand, I do have one valuable advantage (as any private invetsor): I do not need to explain this to clients or bosses. I do not have to fear to loose my bonus or even my job if anything goes wrong. Ok, the readers of my blog might think of me as a gambler and my portfolio will suffer but that’s about it.

The biggest risk

A final remark on risk. I have gone through many of the risks related to a Russian stock and I am sure I obly scratched the surface. Nevertheless, I think the biggest risk is not an escalation in the Ukraine. This would be rather a buying opportunity. The biggest risk in my opinion is a hard landing in China. Russia is completely dependent on their natural resources exports. Lower prices for Oil, natural gas etc. will kill the investment case for Sistema. So this is to watch out for.

Summary and what to do

The main attraction of Sistema is clearly the valuation, comparably transparent reporting, professional management and (for a Russian company) shareholder oriented approach. The downside is, on the other hand, that Russia is dangerous for investors which explains the low valuations along the curent political turmoil.

Koc from Turkey is clearly the better company, but Sistema is only half as expensive. In building up my “basket”, I think Sistema has a place, although with a relatively small weight.

Additonally and most important to me, Sistema has shown in the past that they are able to pull of ridicoulusly succesfull deals in tough times as Bashneft and esp. Russneft have shown. So the possibility is high that Sistema again might be actually a winner from the current Russian crisis if they are able to close some more deals at “rock bottom” valuation levels.

The only thing which is really annoying to me is the fact that the spread between the GDRs and the Russian shares has now reached ~13%, a lot higher than a few weeks ago. Still, I am prepared to get my feet wet and will therefore invest into a 1% position for the portfolio as part of my “Emerging Market” basket along Ashmore and Koc holding. The low percentage reflects the (much) higher risk for Russia.

Emerging Markets series part 2: Koc Holding ADRs (US49989A1097) – the best of Turkey in one stock ?

As this is a long post, a short summary in the beginning:

– despite the bad headline news, for me Turkey is one of the more attractive Emerging Markets, as valuations are moderate and most problems are clearly visible
Koc Holding, the holding company of the KOC family offers an interesting opportunity to invest in a portfolio of Turkish companies with dominant market positions
– further, Koc Holding seems to be a professionally managed company with good capital allocation and very good long-term track record
– nevertheless, stand-alone the investment is clearly very risky at least in the short-term and should be part of a broader EM strategy

Turkey background: Lots of problems

Turkey is clearly the Emerging market country with the most obvious issues at the moment. The decline of the Lira triggered a massive interest increase by the Turkish National Bank, which clearly is not really a tailwind for the local economy. When people now speak about emerging markets, they usually distinguish between those who are still OK like China, Mexico and the Philippines and those who have problems (Turkey, Indonesia, India etc.).

Personally, in my experience in such situations, this distinction is most often wrong. Like in the beginning of the Euro crisis, when people for instance thought that Spain is OK, usually all countries in such a “bucket” have problems and the only difference is that the problems surface quicker in some countries than in the other.

That’s why I somehow like Turkey, the current problems are clearly on the table:

– Declining Turkish Lira
– Political issues with Erdogan/Gülen
– Protests and fights in Istanbul
– current account deficit
– war/conflicts in neighbouring countries
– Kurdish minority
– FX loans from companies

Expectations are low, you hardly find anyone who is positive, the consensus view is: “It will get much worse before it gets any better”.

Honestly, I do not have a magic crystal ball to look into the future, but experience shows that once the problems are on the table, the possibility of those issues already being priced in into the stock market are quite high.

From my point of view there are also a lot of positives for Turkey

– strategic well positioned between Europe and Middle East
– no resource course, people have to work in order to get richer
– young, growing population
– main beneficiary if political situation in neighbouring countries improves
– a depreciating currency automatically improves the competitive position. During the Euro crisis, almost everyone said it would be much easier for the “club Med” if they were not in the Euro.

Just as a reminder the map of Turkey and its “friendly neighbours”:

How to invest

There are clearly several aspects to consider. Corporate governance and shareholder rights in Turkey for sure are not at levels as in Anglo-Saxon or Northern European markets. Without a local account in Turkey, it is hard to trade Turkish stocks. So either one invests into a Turkey ETF, which has the disadvantage of a rather high banking exposure (~40 percent of the main indices) or one needs to focus on the stocks traded outside Turkey. To my knowledge, only 3 stocks are traded more or less liquid outside Turkey which are:

– Turkcell (largest Mobile operator)
– Anadolou Efes (Beer)
– KOC Holding, a conglomerate

As I am not so bullish on mobile carriers (see Whatsapp), and Anadolou Efes looked a little bit too hard for me after some merger activities, I looked a little bit more into Koc Holding.

Koc Holding

Koc Holding is the Holding company of the Koc Family of various subsidiaries mostly operating in Turkey. The Koc family directly and indirectly controls ~78% of the shares, leaving a free float of only 22%.

The company looks relatively cheap, but we should not forget that interest rates in Turkey are at around 10% (at 8,10 TRY per share):

P/E 7,7
P/B 1.1
Div. Yield 2.3%
Market Cap ~ 7 bn EUR

The interesting thing about Koc is that almost all subsidiaries are listed subsidiaries. For some reason, a lot of the Koc companies are JVs with foreign companies where Koc “only” owns around 40%. I tried to compile the list of listed subsidiaries. Additionally, I added net cash at holding level and the non-listed companies at book in order to come up with a “sum of part” calculation:

Company Percentage Koc MV EUR mn P/E
Arcelik 40,5% 1.048,0 13,2
Tofas 37,6% 645,5 12,1
Turk Traktor 37,5% 366,7 10,6
aygaz 40,7% 334,6 12,2
Otokar 44,7% 173,4 12,3
Tat gida 43,7% 41,6 106,9
Marmaris 36,8% 7,7 62,0
Altinyunus 30,0% 6,8 282,8
Ford Oto 41,0% 912,7 10,6
Tupras 51,0% 1.623,6 8,1
Yapi Kredi Bank 41,4% 1.536,8 6,1
Yapi Koray 10,7% 1,5 #N/A N/A
Yapi Tipi 4,5% 1,4 #N/A N/A
       
Sum unlisted   602,56  
Net cash Holding   580,00  
       
Sum of part   7.882,81  
Market Cap Koc Holding   6.718,39  
“Discount”   14,8%

We can see, that around 86% of the total value is invested in observable, listed companies. Additionally, we can see that the “discount” is currently ~15% to the sum of part. This is not much compared to other holding companies, but we come to this later. Another important point is that financials (Yapi Bank) are only 20% of the overall value, so a lot less than in the Turkish stock index. The overall low P/E of Koc is clearly driven by Yapi Kredit and Tupras, also something which one should be aware of.

The major businesses:

Tupras is basically a refinery. Normally not a very attractive business, unless you are the ONLY refinery in a country. Tofas and Ford Oto are both car manufacturing JVs, Tofas with Fiat and Ford Oto of course with Ford. Together, they have around 20% market share in Turkey, but much more interesting, around 50% of the production is being exported. So they should make up a lot of lower domestic demand by exporting more.

Arcelik is a “white goods” household manufacturer (among others with the Beko brand) which has also significant export business. Turk tractor has 50% market share in tractors in Turkey plus a 50% export share. Yapi Kredi finally is Turkey’s 4th largest bank and a JV with Unicredit. It has average profitability compared to its peers.

All in all, Koc claims to generate 10% of Turkey’s GDP, which at least in my opinion is the highest concentration I am aware of in any country for a single Group.

So at a first glance, Koc Holding seems to be a very good way to invest into the Turkish economy with an underweight in financials and an overweight in market leading companies with a significant export share.

Qualitative assessment / other considerations:

When I looked into the 2012 annual report and also into the available investor information , I was genuinely surprised how good the material is.

Koc 2012 annual report is a must read for anyone interested in the Turkish economy although Koc clearly is subjectively maybe more optimistic. At the time of writing, Koc just issued their preliminary 2013 earnings and the results look surprisingly robust (+15% including gain on Insurance co sale, unchanged excluding)

In my opinion, Koc has many aspects which are lacking even in most developed markets companies:

– Clear targets: Grow above Turkish GDP and create shareholder value, IRR hurdle of 15%
– clear dividend policy (20% of Earnings)
– Some businesses profit from Lira weakness (50% of cars and tractors are exported, Beko white goods etc.)

I also liked how they explained their strategy: Expand into other sectors only in the home market, expand internationally only in sectors where they have significant experience int he home market

What kind of Holding company is Koc ?

I do think that Koc is actually a value adding Holdco. I make this subjective assessment on 3 major observations based on their excellent, regularly updated investor information :

First, they are not shying away from selling subsidiaries if the consider them as not good enough, such as the very well-timed sale of their insurance subsidiary at the peak in 2013 and several other subsidiaries in the last years

Secondly, especially for a Turkish company, I was very surprised how clearly they formulate their strategy. They have clear IRR target and also a clear strategy where and when to invest.

And thirdly, their track record is surprisingly good. Over the last 20 years, total return for Koc Holding was 33.8% p.a. in local currency. This translates into 7.9% p.a. in EUR or 8.6% in USD. It is slightly lower than the S&P 500 (9.5% USD) and DAX (8,4% EUR), but we need to consider that:

– Koc is currently trading 50% below their peak valuation in June 2013 (whereas both, DAX and S&P trade at all-time-highs
– in the last 20 years, Koc had to withstand, among other issues a hyperinflationary environment which culminated in a new currency in 2005 which had exactly 6 zeros less than the old one

For me, this is a quite convincing track record in generating and maintaining shareholder value in the long run. much better than anything I have seen in other “Club Med” countries.

Koc and Erdogan:

Following the protests in Istanbul, there were some stories that the Koc family took position against Erdogan. As a kind of revenge, then Erdogan sent special tax auditors to Tupras. However, as this very nuanced article points out, this could have been it already.

I am clearly no expert here, but the fact that the Koc family, among others, survived 3 military coups, the second world war and hyperinflation, the probability is maybe relatively high that they survive the current episode, but risks are clearly there.

Stock Price

Looking at the stock price, one has to look at the stock price in hard currency:

We are clearly not at the lowest level but still around -50% off the peak from June last year. Funny, how optimistic people seem to have been only 8 months ago…..

Valuation:

Koc currently trades at an P/E of around 7,7x 2013 earnings. Without the insurance sale, this would rather be like 9 times but still cheap.

In my opinion, under normal circumstances, a company like Koc with a lot of market leading subsidiaries and a great track record could trade easily at 10-15 times P/E. If we assume that the Lira will make back at least some of its decline (maybe 10-15%), we could see a potential upside without assuming any growth over 3 years 35%-100%. If we assume some growth, Koc could be more than a double, especially compared to current valuations elsewhere in Southern Europe.

Summary:

In total, I think KoC Holding is clearly a risky but interesting stock in an interesting market. The combination of a good long term track record and a diversified group of well positiioned local companies reduces the individual risk to a certain extent, although the political issues between the Koc family and Erdogan have to be kept in mind.

At the current valuation, the upside is large enough so I do not need to try to time the market and will establish a 2.5% position in KOC Holding ADRs at current prices (USD 18,20 per ADR) for the portfolio.

Short term, the stock price could (and most likely will) go lower than the current level, when “risk off” mentality returns to the market.

A final warning: This stock is clearly more volatile than my average stock picks and should be seen as part of a more diversified “excursion” into Emerging markets. I plan to invest at least into 4-6 different EM companies with a total portfolio weight of 10-15%, the start was already made with a first Ashmore position earlier this week.

In parallel, I am also selling down most of my last Italian positions in order to derisk this part of the portfolio, as the valuations (and risk return relationships) for Italian stocks have become mediocre at best as people have become very optimistic.