IS Yatirim Menkul Degerler Outperforming Developed Market Peers

In what was a challenging period for investment banks around the globe, IS Yatirim Menkul Degerler’s (ISMEN.IS) gross profit declined 52% y-o-y in Q3. A further reduction in equity and fixed income trading volumes was the main cause. Despite this, its record Q1 performance means its nine-month net profit remains ahead 24% y-o-y, which is considerably above most other European investment banks. To reflect the decline in global trading volumes, we have conservatively lowered our FY12e PBT growth rate from 57% to 34%. We continue to favour ISY’s market-leading position in Turkey, strong balance sheet and undemanding valuation and believe it is positioning itself well for a recovery in global markets and domestic interest rates.

Unfavourable market conditions
Similar to developed markets, equity trading volumes in Turkey declined 22% y-o-y, while the size of the equity IPO market was 62% lower. Although fixed income trading volumes are down 32%, debt instrument IPOs continue to grow and have already surpassed 2011 levels due to the low interest rate environment in Turkey. Despite these subdued trading volumes and slowing economic growth, ISY has been able to maintain or grow its market share in many of the segments in which it operates.

Reduced revenue targets
Despite leveraged FX trading revenues holding up well, ISY’s Q312 operating revenue was below expectations due to lower equity and fixed income trading volumes. This has prompted us to lower our FY12e operating revenue forecast by 5.7% to TRY290.3m. This slowdown has been partly mitigated by the successful exit of IS Private Equity from its investment in Havas, which is expected to contribute c TRY5m to consolidated sales revenues. Nevertheless, we forecast FY13e PBT to grow 15% as we favour ISY’s market-leading position and Turkey’s relatively higher economic growth rate.

Valuation: Outperforming developed market peers
ISY’s high beta exposure will no doubt result in increased share price volatility in the near term, as investors are likely to remain cautious until the current European crisis is resolved. But with its diversified revenue streams, strong balance sheet and marketleading position, we believe ISY presents a compelling long-term investment opportunity given its FY13e P/E of 6.0x (European peers: 8.1x). We would not expect a full convergence on its developed market peers given the additional volatility of ISY’s emerging market status.

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