Published on December 9, 2021

About six months ago, I introduced the idea of investing in Turkey. Unfortunately, it was not and still is not the ideal home for capital. The perception of politics is foggy, the currency is depreciating, and investor sentiment is lackluster at best.

Today I will share some notes from my recent travels to Istanbul, update the macro ideas we discussed in prior posts (here and here), and introduce two new companies whose only real “blemish” is that they’re Turkish. They are quality multinational businesses with best-in-class partners trading at absolutely cheap valuations. They would be trading much higher and in line with peers if they were based anywhere else.


I was in Istanbul for a little over a week at the end of September and early October for the first time. I wanted to catch up with some contacts on the stock investing side and look at real estate. Blogs that I follow, including The Wandering Investor, have highlighted the value in the Istanbul market and the perks of Turkey’s Citizenship By Investment program. However, I am not a real estate guy, so perhaps I’ll cover that topic in another post someday.

Istanbul left no indications of an economy in crisis while I was there. Except for Turks under 25, this is not a new phenomenon, and there are strategies to mitigate the impacts: dollars, euros, real estate, and gold being the most time-tested. Nevertheless, locals are not happy with the currency’s depreciation, inflation, and the problems they bring. 

Istanbul has terrific transportation, a good mix of cultural attractions, and fantastic food with an affordable price tag. I plan to go back soon and suggest you check it out, too. 

Macro Update

Let’s check in on some of the key indicators I used in prior posts to see where Turkey is in the cycle vs. six months ago.  For a refresh, the items I covered were:

  • Twin deficits
  • FX Reserves
  • PMIs
  • Credit and Money Supply
  • Yield Curve
  • Turkey in Global Context
  • Recent Performance of the Lira and Turkish Stocks

We’ll also look at positioning in government bonds and the equity market.

The macro conclusion from that first piece, along with the second one covering Enka Insaat (BIST: ENKAI, OTC: EXIVF), was a mixed bag. FX performance and reserves suggested the economy remained vulnerable, while neutral PMI’s suggested things could go either way. The broad stock market was rolling over even in Lira terms, meaning that Turkey as a whole had not rounded the corner. The best places to look were interest rates, defensive sectors, and companies insulated from events in Turkey.

My first stock in Turkey, ENKAI, was a derivative of this idea as it has a fortress balance sheet and focuses on markets outside of Turkey. In addition, its only exposure to Turkey is a power utility, making it defensive.

So, where are we now?

Twin Deficits

As discussed in prior posts, one big problem with Turkey is twin deficits. Like the US, its government spends more than it earns. But, unlike nearly every other country, Turkey has kept itself in check during COVID.

Source:  BBVA Garanti 3Q21 Earnings Presentation

However, this relative stability is before the big bump in energy prices in Q3, which should exacerbate the current account deficit. Remember, Turkey needs to import nearly all its oil and natural gas.

FX Reserves

FX reserves have been boosted in Turkey since earlier this year, with reserves nearly doubling since their lows around this time last year. Moreover, the net reserve position has also improved after factoring in short-term FX outflows and the central bank’s short dollar derivative position. 

It’s still bad (see below) but much better than it was this time last year. It’s trending the right way.  

Source: CBRT


While PMI’s globally are goosed due to supply chain issues, there’s been a notable improvement across the other main inputs for PMI’s. They’ve had a solid bounce as the lockdowns imposed earlier this year rolled off. 

Source: Markit IHS and Istanbul Chamber of Industry

However, Turkey manufacturing PMI’s also suggest that we have already had a positive cycle in the last six months and are due for a slowdown. PMI’s are not at an extreme. 

Money Supply and Credit


Perhaps more pronounced now than when we last showed this chart is the relative growth in money supply vs. credit at the start of this year.  We know from the FX section and the central bank’s derivative position that the bank is continuing to suck access dollar deposits from the banking system and is swapping them with commercial banks for Lira.  Perhaps that is a cause for the recent inflation and money supply growth.  

Yield Curve

Turkey’s yield curve is steep, with the long end over 20% and the short end near 15%. In addition, current inflation is running at 20%.  


When we last checked this in May, the curve was just coming off being inverted in April, so the timing of some of the market volatility now (six months later) makes sense. What is tricky is that the CBRT is lowering rates into higher inflation when central banks usually wait for signs of a slow down to take action. This may muddle the predictive nature of the curve.


The Central Bank of Turkey and the Turkish securities depository provide high-level data for foreign ownership of local government bonds and shares.  However, as the data below shows, foreign investor participation in Turkey is at multi-decade lows.

Stock Positioning: Local vs. Foreign

Source: VAP

Local Government Bond Positioning

Source: CBRT, Turkish Ministry of Finance Monthly Public Debt Report, November 2021

Turkey in a Global Context

As sentiment suggests, Turkey is not a darling of the market, though it is no longer in the dog house.  In spite of having one of the worst returns on investment over a 1-5year period, Turkey is moving towards the middle of the pack in terms of performance and is clustered with several other markets.

That said, optics remain cloudy as the Lira, geopolitics, and the euphoria in US markets make for a challenging backdrop.

I’ll need to keep on top of it, but Turkey will acutely bear the rise in commodity prices since it imports nearly all its energy and is an intermediate goods producer. So, at some point, maintaining margins will become difficult and impact the economy.  

Lira and Stock Market 

The Lira has seen a sharp depreciation against the USD since May.  To me, it is approaching overdone. Turkey felt cheap while traveling there two months ago, and the recent devaluations have been exceeding local inflation rates.

Having broken 10 on the chart below, it seems we are set for a pause as things have gotten a bit ahead of themselves.


That said, the CBRT’s unorthodox policy of cutting rates into this is also unlikely to strengthen the Lira. Foreigners are not interested in investing in financial assets when real rates are profoundly negative, and locals are not inclined to save in them either. For the Lira to stabilize, Turkey needs to address its citizens’ instinct to save in anything but Lira assets.

The stock market is also a broad mixed bag. It rallied in Lira terms and has outperformed the depreciation over the last 12 months. Performance has been a mixed bag over shorter time periods.


So, what does all the above tell us?

Before the recent devaluation in November, I believed that the economics and certain sectors turning around had marked a bottom in the cycle and signaled that it was time to be more active in the more cyclically-oriented elements of the Turkish economy.

This devaluation will significantly impact things from profit margins to general economic activity.  It’s tough to transact when input/output prices fluctuate 3+% in a day because of the currency.   

I am focusing on finding more companies like ENKAI and companies that are well diversified geographically with a more defensive sector focus within Turkey, which leads me to today’s post.

Two Turkish Blue-Chips to Own for a Multi-Year Period: Coca Cola Icecek and Anadolu Efes

These two companies are consumer staple multinationals in some of the world’s fastest-growing markets. Both have a strong presence in Turkey but derive a significant portion of their cash flow from other more stable markets in Eastern Europe, Central Asia, and the Middle East.  While both will suffer from the recent bout of inflation in Turkey, they have traded at undemanding multiples for such stable businesses. They are relatively cheap to their global peers despite the better long-run tailwinds.

Since Anadolu Efes (BIST: AEFES, OTC: AEBZY) owns half of Coca-Cola Icecek (BIST: CCOLA, OTC:COLZF), I will start with CCOLA and go from there.  

Neither AEFES nor CCOLA appeared on my screeners, but I decided to delve in because of a tweet from @ResGloStocks on Twitter and a video that SumZero did with Monish Pabrai.

CCOLA: The Second-Fastest-Growing Bottler Globally Trading with a Single-Digit FCF-Multiple

Business Description

CCOLA is a licensed bottler of the Coca-Cola Company and has the right to bottle, sell and distribute Coca-Cola products within its agreed-upon markets.  

For CCOLA, that’s the map below.

Source: CCOLA November 2021 Corporate Presentation

This country list is unlikely to make most people’s travel bucket list (though it should!). Most of these countries are developing countries with low penetration of soft drinks, solid economic prospects, and good demographics.

As we can see below, volumes across their markets have been increasing fairly steadily over the last several years. Things slowed due to COVID restrictions but have started rebounding strongly in 2021.

Source: CCOLA November 2021 Corporate Presentation

CCOLA’s production process is a standard manufacturing process. However, drink production is a high volume low margin business, and the key inputs, sugar, aluminum, glass, and PET (for plastic bottles), are dollar-priced commodities that fluctuate. CCOLA can mitigate some volatility through futures and derivatives, but they are generally not suited to the sharp bouts of currency devaluation.

Fortunately, CCOLA is a multinational business with a significant presence outside Turkey, as shown below.

Perhaps, for this reason, CCOLA, on average, earns better EBITDA and income margins than its global peers as it is focuses on smaller countries with less competition.  The comparison tables in the next section highlight this. 


So, CCOLA has better margins, a bit more volatility, and reasonable growth prospects. One can acquire CCOLA shares for a mid-single-digit FCF multiple based on a USD basis.  

That is an astoundingly cheap multiple compared to global peers like Coca-Cola, HBC for Coca-Cola, FEMSA and others.

Note: Swire Pacific is an industrial conglomerate so not apples to apples.

What needs to happen?

I think there are three avenues to rerating this business. All three can happen, but only one is needed to unlock serious value.

1. Inflation needs to stabilize and decelerate.

Although Turkey is less than 40% of EBITDA, it is still significant, and the accelerating inflation we’ve seen lately is a headwind for the business. Prices can only be raised so quickly while inputs increase in real-time. A moderation and stabilization in price changes would reverse that.  I am not saying Turkey needs sub 5% inflation, but even a stable low teens inflation would be sufficient to rerate. Margins would stabilize, and investors would pay up for that stability in the business.

2. Some form of rapprochement in Turkey’s foreign policy with the West.

Again, I am not asking for Erdogan to come onsides with whatever the US or Europe asks, but some form of stability in relations would go a long way. As I noted in the first section, foreign ownership in Turkish companies is the lowest since they started recording the information in 2005. If foreign investors come back, CCOLA would be a logical investment from passive and active managers based on the current market cap, sustainability criteria, and valuation.  

This understanding could come from settling migrant issues, military issues, or even just the West acknowledging that their foreign policy objectives implicitly require a robust Turkish presence in their sphere of influence.  

3. Re-domicile, re-listing, or dual listing.

CCOLA could take a page out of the EM playbook and redomicile and/or simply move its listing or dual-list outside Turkey. Turkey is out of favor with the investing community, and CCOLA is a multinational business based in Turkey.  

A parallel that Turkish people will not want to hear (but makes sense) is the transformation of Coca-Cola HBC (ATHEX: EEE, LSE: CCH, OTC: CCHGY), another of the large EM-focused bottlers. CCH started in Greece and expanded into Eastern Europe. It eventually redomiciled to Switzerland for the holding company and dual-listed onto the LSE in 2013 (in the middle of the Greek crisis).  

This option is generally a company’s last choice, and CCOLA has a smaller float and is probably less incentivized for such a move.  Also, it is a bit of a pain and an upfront SG&A expense. That said, it’s straightforward, and I would suspect you’d see an immediate impact on valuations.  

What Else Could Go Wrong?

There are two main threats to this thesis.  I covered one in the last section, and the other is interrelated.

1. Inflation is not tamed.

I covered this point in the section above, which is the most pernicious issue given the current monetary policy in Turkey.

2. FX Rate.

Turkey is subject to FX depreciation passing through into the local economy via inflation with its negative current account. I suspect that stabilizing inflation in Turkey will also address the FX issue, but the tandem makes it unlikely that the two are not solved simultaneously.

A tangential issue to the FX rate itself would be some form of capital controls coming from Turkey. I do not rule it out, particularly for residents and corporations. Fortunately for CCOLA, it generates its FX through other markets and baring draconian measures should be able to access hard currency for its crucial commodity inputs.

Fortunately for investors, I think a lot of the risk of these issues not being fixed is already in the share price, at least relative to other companies.   


The usefulness of the chart is questionable given the FX moves. That said, CCOLA has been less responsive to the changes in FX rates vs. ENKAI or AEFES below. It is close to its ATH’s in Lira terms, and a breakout above 100 would be a step in the right direction.


Over a 1 year + timeframe, CCOLA comfortably outperformed the Lira’s depreciation but has lagged by 20+% over the last three months. This creates a potential opportunity.


Now on to the next name.

AEFES:  A Holdco Play on CCOLA with a Regional Beer Business at a Mid-Single-Digit Multiple 

Business Description

AEFES is one of the largest brewers of beer in the world. It has operations in Turkey, Russia, Eastern Europe, and Central Asia.  The images below provide a good summary of these operations.

The demographic tailwinds in these markets are analogous to CCOLA but perhaps a bit more muted given the concentration in Russia and Ukraine, which have weaker demographics. Moreover, as we’ll discuss below, Russia is also run as a JV with AB Inbev, so investors need to factor that shared ownership in the financial calculations.  

Volume growth has been more muted but has rebounded recently as well.  

In terms of margins and profitability, AEFES exhibits the general issues faced by CCOLA with a couple of added wrinkles. For example, in addition to the inputs sourced by CCOLA, AEFES must also source grains for malts.  

Also, alcohol sales are a regulated market in most countries and are taxed. Alcohol taxes have been a particular issue in Turkey, where such duties have increased rapidly over the last few years, hurting sales. The Turkish government has only recently kept such taxes unchanged to reduce inflation. In general, relatively fewer people in Turkey consume alcohol, so the tax is a more politically palatable way to raise revenue.

Beer is also most often consumed outside of the home at restaurants and other gatherings, making it more susceptible to COVID-related restrictions.  

CCOLA’s business is a relatively stable duopoly in brands and competition. On the other hand, AEFES faces more fragmented beer markets and higher competition, which have impeded margins and volumes.  

So, AEFES has a more challenging set of circumstances at the moment than CCOLA.

However, AEFES owns 50% of CCOLA. The management teams are separate, and the main financial flows from CCOLA to AEFES are just dividends.


To gain some sense of the value of AEFES, I like to stripe out the value for CCOLA and see what I am getting for the beer business. As we’ve noted in the CCOLA section, I think those shares are cheap and should take care of themselves.  

AEFES fully consolidates CCOLA in its numbers, so let’s strip out CCOLA.


AEFES 14.79 14.57 9.34

CCOLA (-) 12.43* 6.37 4.63

Beer Biz (=) 2.36 8.2 4.71

(*) Note: 50% of CCOLA market capitalization to reflect AEFES actual ownership.

The beer business had an LTM (as of 3Q21) EBITDA of 2.1 bln TRY and FCF of 520mm. As I mentioned, about 75% of the EBITDA comes from international (vs. Turkey operations), the largest being Russia (by far), where they have a 50% stake. So, we need to reduce the FCF by 195mm (520 x 75% x 50%) to come up with a guesstimate on cash flow factoring minority interest.

Still, at 325mm TRY, the beer business is trading at less than 7.25x LTM FCF. The beer business has more leverage, and the debt is concentrated in the Turkish operations/holding company. If you look at the company figures, you’ll also note that they include working capital releases in their FCF calculation. I am going to be conservative and not include them in these flows.

So, with AEFES, you are getting a reasonably priced CCOLA majority stake and a beer business with discounted multiples compared to peers, as shown below.


What needs to happen?

Put simply, the same things as CCOLA. They are both depressed for essentially the same reasons.  

What else could go wrong?

The reasons are similar to CCOLA, but I will add two more:

1. Leverage at holding company.

The Turkish beer operations have much more leverage than the international ones, and the stress in the Turkish system can create operational complications. Consolidated cash flows within the group can comfortably cover obligations, but capital controls, FX changes, and more can complicate actual execution.  

The higher leverage at AEFES is a risk to bear in mind. I think they are sufficiently asset-rich to navigate such issues, but it could be a negative narrative. 

2. Competition in Russia.

From the latest conference calls, it is clear that there has been stable competition within the Russian market, which is the primary driver of absolute cash flow for AEFES. If that breaks down, it could complicate things.


Only in the last week, has AEFES shot to new all-time highs in Lira terms.


It has still underperformed CCOLA and the Lira over the last year but has started playing catch up over the last three months.


The recent trend suggests other investors have woken up to the value here.

Which do I buy?

I own both in equal proportions, but that is because I don’t know which will perform better sooner. CCOLA is more of a blue-chip and will likely be the first thing foreigners buy back into in Turkey. It ticks more ESG boxes, is not a “vice” product, and is a bigger brand.  

That said, AEFES in a bull market could provide more absolute upside, as you are probably getting CCOLA at a Holdco discount plus a beer business that is attractive on valuation and fundamentals. I have, however, lost a fair amount of money betting on closing Holdco discounts. I own both to hedge that and still participate in what happens with CCOLA directly.  

Turkey is volatile right now, so I am acting incrementally as both the FX and share prices are moving intraday in such ways that create both pitfalls and opportunities. I should have been smaller in my sizing to date, but the transaction costs for the share accounts I hold necessitate large sizes to justify the investment. 


EM is a wide opportunity set, and there can be more going on than the broad index suggests.  This Turkey is still likely in the eye of the storm, and some excellent companies are caught in the malaise despite being multinational operators with solid brands. Patient investors have an opportunity to pick up these companies at steep discounts to their global peers.

The Castaway Capitalist

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IMPORTANT DISCLOSURE: As of the date of publication, the Castaway Capitalist owns ENKAI, AEFES and CCOLA shares.

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