Let's talk Turkey

"THE characteristic feature of the loser is to bemoan, in general terms, mankind's flaws, biases, contradictions and irrationality — without exploiting them for fun and profit." Nassim Nicholas Taleb
 
My earliest associations with Turkey include cheap holidays and the 1978 Alan Parker movie Midnight Express, a graphic depiction of an American tourist who lands up in a Turkish jail. The subsequent regrets expressed by the producers about the blatantly negative portrayal of the Turks came many years later, after strong prejudices grew deep roots.

When Turkey is mentioned in the context of investing, the first question is usually about political uncertainty, and there is generally a negative perception. In some ways Turkey can be described as the South Africa of its region – it has issues, but has taken structural steps in the right direction.

Ironically, one could also say that Turkey is on firmer footing as far as EU membership is concerned (negotiations to join started in 2005) than its neighbour, Greece. One wonders whether the country should continue pursuing this.

Economically, Turkey emerged from a quasi statist approach up to the 1980s, veering more to a private sector model that should be more investor friendly.

The ride has been rocky though, with several sharp recessions which have affirmed sceptics. Gross domestic product growth was around 4% up to the early 2000s.

The banking sector was weak, public sector deficits high, corruption abounded and inflation was high. (Some of these sound a lot like characteristics of "low risk" developed countries that have come to the fore over the past few years, yet many investors still feel safer not investing in Turkey.)

However, the past decade saw falling inflation, lower unemployment and increased foreign investment. Growth picked up and the economy is becoming more dependent on industry in major cities, mostly concentrated in the western provinces of the country, and less on agriculture.

Traditional agriculture is still a major pillar to the Turkish economy, providing 27% of employment. There are 72 million people in Turkey, with two-thirds aged between 15 to 64, and only 7% older than that – a very different profile to other European countries.

They have a literacy rate of 88% (similar to the estimate in South Africa, and much higher than India, which stands at 66%).  Education is free and compulsory from ages 6 to 15.  

The Turkish stock market is volatile, and also retreated sharply during the credit crisis. However - and I'm aware of the folly of starting points - the past decade and even further back has seen dollar returns far in excess of the overall global equity market.

Not John Deere - but gaining traction

For example, the dollar return for Turkey over the past 10 years is around 80% compared to almost zero for the MSCI World Index. To be fair, investors have discovered Turkey despite the persistent biases, but there are still shares that offer value, both in the banking and industrial sectors of the market.

Turk Traktor is the largest and only listed manufacturer in the Turkish farm tractor sector. It dominates the market with a 46% market share, a good local name and excellent distribution.

It has been successful as an exporter as well, which provides a buffer against domestic market fluctuations, although local sales are more profitable for them. Tractor density is low in Turkey (five tractors per 100 hectares) compared to the European average (12 tractors per hectare).  

Turk Traktor has a track record as a good dividend payer - always a good antidote to concerns about governance and disclosure - and after lowering the dividend following the crisis, it is likely to yield over 7% next year. No substantial investments are planned with the cash generated, another positive for investors.

The share is not without risk, as domestic demand can be volatile (those concerns are not entirely baseless) and fragmented farmland means demand for the more profitable larger tractors is still quite low.

Even if one applies a discount, given the volatile environment Turk Traktor operates in its valuation is well below the likes of John Deere on a price earnings, dividend yield and price to book basis.

Investing in Turkey is not without risk, but should be done without bias. Turk Traktor's share price is up 60% in dollars this year to date, compared to a 5% decline in the global equity market.

 - Fin24.com

Ahern is with SIM Global, a division of Sanlam Investments which travels the world researching listed companies with potential unlocked value.