Blogginlägg av Guest blogger

It might appear unusual to begin a discussion about the relative attractions of the Russian and Turkish markets in 2011 with the above quotation, which comes from a now infamous letter sent to Richard Branson, the head of Virgin Airways, complaining about the in-flight food. But it is only a short step from this letter to one of the most alluring investment themes in Turkey for next year – strong growth in consumer-related sectors. Barely edible airline food is an unfortunate fact of life for most of us, but we recently visited the management of Do&Co, a catering company for airlines and events, and unearthed a company that has transformed the quality of in-flight food on Turkish Airlines, which is a quickly growing airline with the youngest fleet (and hence most cost effective) in Europe.

Do&Co is benefiting as increasingly wealthy Turks explore the world and curious non-Turks fly to Istanbul to witness the country’s economic transformation first hand. It has kept this ever-rising number of travellers well fed by preparing freshly made food and utilising innovative menus – at the same cost as the bulk airline meal providers. This has boosted the company’s profits. East Capital received the largest allocation of shares in the 10 times oversubscribed initial public offering of the company, which were sold at 4 times earnings before interest, taxation, depreciation and amortisation (EBITDA) and which went up 31 per cent in the first three days of trading.

What’s driving this positive consumer sentiment? The Turkish economy is expected to have grown around 8 per cent in 2010, the fastest in Europe, and is forecast to expand 5.5 per cent 2011, a somewhat slower rate, but still impressive. However, counterintuitive earnings growth will not reflect the strong economic growth. Earnings are expected to grow around 5 per cent due to the high base effect, which is to say that many banks – which represent half of the market – had large one off profits during 2010. The Turkish central bank recently announced an interesting innovative strategy of cutting interest rates but tightening monetary conditions. Again, this is counterintuitive. Usually central banks tighten by increasing interest rates. The Turks want to stem speculative capital inflows due to relatively high interest rates but slow down lending growth.

The tightening part would be achieved by increasing the reserve requirement for banks. Still, lending growth is expected to be strong next year as consumers can, for the first time ever, get a loan at below 10 per cent. In this environment, we believe the mortgage market has room to grow an estimated 40 per cent in 2011, with positive spin off effects on consumer-related sectors such as real estate, construction materials, retail-oriented banks and consumer goods. We shall be actively seeking out such opportunities in 2011. Underlying this positive trend is the strong possibility that Turkey will receive an investment grade credit rating from international credit rating agencies next year, something that can only deepen international investor interest in the country. In short, Turkey may struggle to match its performance over the last two years in terms of earnings growth, but that does not mean there are not attractive sector and company specific opportunities.

If it is strong earnings growth you are after next year, however, then we suggest climbing aboard a Turkish Airlines jet, enjoying a meal prepared by Do&Co, and staying on the plane until you reach Moscow. Whereas earnings growth in Turkey will be a relatively flat 5 per cent, in Russia growth of around 20 per cent is well within reach, and outside the oil and gas sector some 40-50 per cent could be expected. Russia remains one of the least liked post-crisis markets, due mainly to issues such as transparency, corruption and an overreliance on the oil and gas sector. But this is a well worn story that has gone on too long and does not reflect important structural changes that are underway. The facts are that economic growth is expected to remain strong at around 4 per cent, inflation is forecast to remain at a record low of 7.3 per cent and interest rates are also at record lows of under 10 per cent. These are fertile conditions for strong consumer spending led by rises in mortgage lending and feeding into earnings growth at retail banks, property developers, fashion and other consumer-related companies. Propelled by these trends, earnings growth for the largest bank, Sberbank, could easily surpass 100 per cent this year.

These fundamentals could prompt a shift in the attitude of international investors towards Russia in the coming year. The very fact that it is an unfashionable market means it is undervalued, and in time investors will come to realise this. There are a series of potential triggers for such a shift, ranging from an increasingly-likely accession to the World Trade Organisation, reallocation from other emerging markets to Russia, change in the taxation of oil companies leading to production growth, privatisation and not the least the increasing likelihood that Dimitri Medvedev could be re-elected as the next President of Russia. The latter would have a significant positive impact on the market. There has been increased activity from both foreign and local strategic buyers, for example PepsiCo announcing the USD5.4bn proposed takeover of Wimm-Billl-Dann, a juice and dairy producer, at 16 times EBITDA. This resulted in a bid premium of 80 per cent to our shares in the company. We are well placed to benefit from increased interest in the Russian market as well as the high growth sectors for this year.

By: Jacob Grapengiesser