Is Yatirim Menkul Degerler: Regulation Change Creating Opportunities

IS Yatirim Mekul Degerler (ISY) recorded its strongest-ever results in 2012 due to record returns from underlying subsidiaries. Supported by strong performance in Q1 and Q4, operating revenues increased 35% to TRY312m (Edison: TRY290m) while non-consolidated net profit grew 14% to TRY51m. ISY’s market-leading position in Turkey and strong balance sheet means it is well positioned to benefit from the changing regulatory environment in Turkey and capitalise on any recovery in global markets. While an undemanding valuation (FY13e P/E 5.5x vs peers: 8.6x; P/B 0.9x vs peers: 0.8x) presents a compelling long-term investment opportunity.

Record results
ISY’s 2012 results were ahead of our expectations due to the strong performance of the underlying subsidiaries, which helped increase consolidated net profit after tax 31% to TRY69m. IS Private Equity and IS Investment Trust were the primary contributors, as they benefited from an increase in realisations and rising Turkish equity markets respectively. Despite slowing economic growth and subdued trading volumes, ISY was able to increase its non-consolidated net profit by 14% to TRY51m due to good performance from the core business and a reduction in the cost income ratio to 62% (2011: 66%).

New regulation likely to drive sector consolidation
Faced with falling profitability and pending new regulation, Turkey’s investment banking sector is likely to undergo a similar level of consolidation to that seen in Europe. There are currently around 90 brokers operating in Turkey, but ISY expects this to fall at least 20% if new regulation is imposed. Supported by the increased investment in the business, ISY has been able to gain market share over recent years. With its robust capital position (FY12 equity TRY465m), ISY is in a very strong position to capitalise on this sector consolidation and to increase this market share even further.

Small upgrade to future estimates
We have upgraded our FY13e PBT by 4% to TRY159m. The market remains cautious about financial stocks, particularly investment banks, reflecting their inherently volatile earnings, balance sheet risks and regulatory threats. ISY is on an undemanding rating vs European peers (FY13e P/E 5.5x vs 8.6x; P/B 0.9x vs 0.8x) despite generating an above-average ROE (FY13e 17.7% vs peers: 8.9%). 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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