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Think that inflation is ugly here? It ain’t nothing, folks, compared with Turkey, where the annual inflation rate is currently 48.7 per cent. That has humbled the lira, which tumbled 44 per cent in 2021. Talk about shrinking buying power!

In the midst of this, well, September actually, Benj decided to buy Turkcell Iletisim Hizmetleri A.S. (TKC-N) at US$4.41. Given that it now trades at around US$3.40, it has not worked out well. The initial sell target is a beefy US$14.74, far below the US$27 where it traded 15 years ago. Interesting to note is that this is the only company in Turkey dual-listed on the Borsa Istanbul and NYSE, and that while the stock price in New York has dropped substantially, it recently reached a record on the Borsa. That currency exchange thing.

Established in 1993, this Istanbul-based enterprise offers voice, data and video communications. Beyond that, services include television, digital music, and cloud storage. There is more, but you get the drift. Its footprint extends beyond Turkey to Ukraine, Belarus, Azerbaijan, Belarus, Cyprus, Germany, the Netherlands and Ukraine.

The company has been successful, even with a credit rating below investment grade. Revenues have grown quickly, doing better than a double since 2016. The bottom line has remained black every year. The stock trades well below the book value of better than US$5.

Turkcell’s most recent quarter was boffo. Revenues were up 22.3 per cent; EBITDA, or earnings before interest, taxes, depreciation and amortization, was higher by 18.7 per cent and net income set a record, up a hearty 18 per cent. The subscriber base jumped by 1.2 million, the best number since 2007. Success looks like it will beget success, with forward revenue estimated at 20-per-cent growth, up from 18 per cent. But investor beware: If the dramatic fall in the lira is not stayed, it will be difficult to receive a positive return on the NYSE – even if the company does beautifully.

In 2020, the Turkish Wealth Fund became Turkcell’s largest shareholder, buying 26.2 per cent of the shares. The goal of the fund is to invest in strategic sectors, which this certainly is. To guard its position, TWF can elect five of the nine people on the board of directors. Although the risk of financial problems is already low, it feels comforting to have this deep-pocketed investor behind Turkcell.

What is an acceptable strategy when investing in a company that is in a country with high inflation? Well, to some degree, one must remain calm and be prepared for super volatility. For example, on Dec. 7, as the lira plumbed new lows, the Turkish stock market was halted. Twice.

Plus, there are major questions about President Recep Tayyip Erdogan’s strategy. Conventional wisdom is that when inflation is excessively high, interest rates are raised to quell it. The classic example was when Paul Volcker, then chairman of the U.S. Federal Reserve, raised the fed funds rate to 20 per cent in June of 1981. While it worked, the unemployment rate swelled to above 10 per cent. That might not have hurt the mucky mucks so much, but people lower on the food chain were suffering, to be sure. In contrast, the Turkish President recently raised the national minimum wage by 50 per cent to help maintain popular support.

To deal with high inflation, toward the end of last year, Mr. Erdogan lowered interest rates for four straight months. It is hard to find an economist who concurs with this, but Benj is thinking that it might not be so stupid. His feeling is that when interest rates are continually raised, that will naturally increase borrowing costs and the price of many goods as prices must be boosted to cover the additional levy. In addition, labour will demand higher salaries to combat inflation and the higher tariffs. Hey, this isn’t just a Turkish happening, but here in North America, we are facing the same problem on a more nominal level.

Fortunately for investors, Turkcell pays a dividend, recently at 8 US cents. In 2017, one payout touched 27.6 US cents. Yes, it varies dramatically, and often there is no money coming investors’ way. Over all though, this dividend is another reason that Benj feels the stock will ultimately be a good deal.

Another way to receive a benefit from Turkey? With the lira being smashed, travel in the country is becoming cheaper, especially for those people willing to go on the roads less journeyed. A beaten-up currency has often provided Benj with a good reason to visit another country. In this case, he could also check out his investment first-hand.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter

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