Visiting our portfolio companies in Turkey: Quadrupling capacity and crying in meetings

Burton Flynn and Ivan Nechunaev

September 2022

With an unorthodox central banking policy of lowering interest rates when all other countries are raising them and with ensuing 80% inflation and chronic currency depreciation, Turkey has been written off by most foreign investors. However, this year we found several excellent cheap, growing, high-quality businesses in this market, which have already made a positive contribution to our portfolio: two stocks doubled and four others grew over 30% in EUR terms. 

In September, we traveled to Izmir and Istanbul by sea and by air to meet with eight portfolio companies: a $400m granite producer quadrupling capacity; a $60m electrical contractor benefiting from railway infrastructure expansion; a $70m leather goods manufacturer starting a new factory in Italy; a $1.4b investment holding enjoying a windfall due to high power prices; a $250m frozen foods maker expanding market share month after month; a $150m cruise port operator seeing port utilization stretch beyond 100%; a $60m investment banking firm growing its warrants business in partnership with Goldman Sachs; and a $50m venture capital investment firm doubling its net asset value year after year.

We made a research trip to Turkey and met with eight portfolio companies across Izmir and Istanbul

World’s largest granite production facility under one roof

Our first meeting on this trip was with a $400m granite producer located an hour south of Izmir. In our conversation with the CEO in his office at the factory, we learned about his ambitious goals for the business and the flawless execution thereof: before January, the company only had an installed production capacity of 11m tons per year (through two lines capable of producing 5.5m tons each), but thanks to a tremendous capex investment made possible by a recent IPO it is now on track to reach 41m tons of production capacity by December (through four additional lines capable of producing 7.5m tons each, of which two have already been activated and the third is being finalized), meaning that the factory’s output – and earnings potential – will have nearly quadrupled in less than a year! Once completed, this would represent the world's largest granite production capacity under one roof.

Customer demand has been very strong this year and the factory has been running at over 100% capacity utilization, operating 24/7 in three shifts. The CEO mentioned that because of the energy crisis his competitors in Europe whose gas contracts expire at the end of the year are facing increases in energy bills of up to 1,200%, while his company is able to secure much cheaper energy in Turkey and does not have this problem; in fact, some of the competitors in Spain and Italy have already halted production and expressed interest in buying granite directly from this company, simply because the energy prices made production prohibitively expensive for them. We learned that the CEO is very keen on following the best ESG standards: the company plans to install a 130,000 sqm solar-paneled roof on top of the factory, is 40% more energy-efficient than competitors, is in talks with a multilateral development bank to issue a green bond, and is a signatory to the UN Global Compact.

Meeting with the CEO of a $400m granite producer

After the meeting with the CEO, we toured the company’s factory with our eyes wide open – and we were amazed by what we saw (despite having already seen dozens of factories on our previous research trips all across the globe). This facility was massive, measuring one kilometer in length. Each of the four new production lines had a 360-meter-long kiln, the longest of its kind in the world, and the CEO made sure to point out to us also the width of the kiln – 4.6 meters – which is supposed to be equally impressive as it allows for greater production volumes. The factory boasted brand-new high-tech equipment from Germany, Japan, Italy, Turkey, and China – and during our visit we saw representatives of the Chinese supplier working on assembling parts for the sixth kiln. The temperature inside the kiln can reach 1,200 degrees Celsius but the outside walls of the kiln were room-temperature due to advanced thermal insulation which helps both preserve energy and keep working conditions comfortable for the factory’s 1,500 workers. The CEO said that because of local and global inflation since the time the new production lines were purchased the cost to build this factory from scratch today would be higher than the company’s current market capitalization.

CEO showcasing new granite production lines during our factory tour

Booming leather business expands to Italy

Our first meeting in Istanbul the next day was with a $70m leather goods company in which we are substantial shareholders through owning over 5% of its shares. The meeting was at 6:00 am sharp, before sunrise: that day the CEO had to travel to Tuscany, Italy where he opened a production facility just a month ago, and we made sure to catch him at the factory before he left. We were lucky that he happily accommodated our special meeting request – as an IronMan athlete he is highly disciplined and always comes to work before everyone else. Our mood was lightened up early on by our taxi driver telling us on the way to the meeting that he recently bought leather shoes made by this company and so far he has been very happy with the quality (he also told us not to buy Bitcoin, in which he put all his life savings last year at the price of $53k/coin).

Arriving in the dark just before 6am for our first meeting of the day

We learned from the CEO that all business lines are doing extraordinarily well. The retail sales through the company's 60 own branded stores as well as online channels are growing exceptionally and are expected to continue on the upward trajectory for the foreseeable future, boosted by the much-higher-than-expected tourism bookings in Turkey all throughout the upcoming winter as the Europeans are escaping high energy prices while Russians and Ukrainians are escaping the war – we witnessed this ourselves later in the week when doing on-the-ground due diligence and visiting the company’s store in a large mall in Antalya, Turkey’s tourism capital, which was truly overflowing with foreign visitors. 

 

The sales through the company's 90 Samsonite franchise stores are equally strong; in fact, they are the strongest among all Samsonite businesses in Europe, and as a consequence of the successful and longstanding relationship with Samsonite as well as its own production expertise the company might start producing the Samsonite brand locally in Turkey in the next few years. The recession-resilient luxury segment also keeps expanding, and with the new factory in Italy the company will be able to produce leather goods for the most iconic Italian luxury brands with an important label "Made in Italy'' so much sought-after by the world's wealthiest. The recent start of sales in Europe through Zalando will further help the business reach wider international brand recognition. It certainly helps that the quality of the product is of a very high standard: the leather is sustainably sourced, mostly from Norway, the entire supply chain with the names of individuals responsible for their parts of the process can be traced through a mere barcode, and the company obtained a gold-level leather certification which even their luxurious Italian clients haven't achieved yet. 


The CEO shared with us that Turkish investors have been asking him about us: who are these Finnish investors and how did they manage to discover his company before any locals did? We smiled – that’s just who we are and what we do: Emerging markets investors traveling the world in search of hidden gems.

Emerging markets investors traveling the world in search of hidden gems are meeting with the CEO and CFO of a $70m leather goods company

We left the meeting determined to buy high-quality business bags made by this company to carry to our company visits going forward – and we did just that a few days later at the company's branded store in Antalya. We showed up unannounced like regular tourists in sneakers and shorts and were very much impressed by the customer service and friendliness of the store's sales assistants who hadn't known about our connection to the company and were simply doing their job. A week later, we took our new bags to executive meetings in Helsinki and enjoyed receiving numerous compliments on their design and quality.

Outside our office in Helsinki, happy with the new business bags made by our portfolio company

The ships are finally sailing

Our next meeting was with a $150m investment holding whose largest business is operating cruise ports (in fact, one of us due-diligenced this company's assets by arriving in Turkey via its own Kusadasi port and enjoying a seamless docking experience). We have very special memories about this company: to this day, we vividly remember our previous meeting with the CEO in March 2020 on the terrace of his office in Istanbul’s port overlooking the dark, gloomy, boiling Bosphorus waters under the similarly dark, gloomy, low skies – this was one of our very last in-person meetings before the pandemic completely shut down travel. Back then, when we asked how the business was doing, the CEO responded through severe pain: “Business? What business? There is no business...

The CEO told us that the last two years have indeed been very painful for the company and him personally as the founder and major shareholder, given that all the ports and ships stood idle while the significant debt still had to continue being paid off. Earnings literally dried up, like the pandemic-era cruise ships. However, the business managed to pull itself together out of this maelstrom by IPOing a gas asset and selling one of the ports – and thus made all debt payments on time, avoiding bankruptcy and debt restructuring and keeping a clean record with the banks (which were actually telling the CEO during the pandemic that his company wouldn’t survive).

View over Bosphorus from a portfolio company’s office in Istanbul

This time, the Bosphorus was calmer, the sun was shining, and the CEO was much happier: EBITDA is growing rapidly as tourism has roared back above 2019 levels by August, and as a result many cruise ships are overbooked and ports are occupied over 100% capacity. All other businesses of the holding (gas, real estate, asset management) are also doing better than expected, and so the group’s cash flow is very strong; the company even plans to repay most if not all of its debt by the end of next year – from an 12x net-debt-to-EBITDA ratio in 2021 this would be a remarkable progress. We expect the company to achieve triple-digit earnings growth this and next year. 

 

We appreciated the sentimental CEO saying: “Thank you for believing in us.” His integrity and commitment in running his business were very clear to us, same as his care for his team: he said that his colleagues are his family, and making sure that they feel well is his main priority. In fact, when telling us about the past medical problems of one employee in the meeting, he got tearful and even had to leave the room for a moment.

Meeting with the CEO of a $150m investment holding

Windfalls, innovative pizza toasts and Turkish startups

Five other portfolio companies we met on this trip also impressed us with their business momentum.

Helping Istanbul move underground

 

On our first night in Istanbul, we were invited to a dinner at a storied 140-year-old private club with a fascinating view over the Sea of Marmara by the CEO of a $60m electrical contracting company which our fund has known and invested in for over eight years. We learned that the firm’s order book is strongly benefiting from the Istanbul metro infrastructure expansion supported by the local government. The company is also developing a new data center business working with a major telecom provider in the environment of limited competition, and is planning a strong push into solar energy services given that Turkey has abundant renewable energy capabilities, all while improving the cost-to-profit ratio and getting an additional tailwind from lower copper prices. We have been observing this management team at work for a long time and believe they are among the very best in the entire emerging markets universe for their ability to consistently deliver top results for their clients and shareholders. 

Meeting with the CEO and CFO of a $60m electrical contractor

Empowered by power prices

 

The CEO of a $1.4b diversified investment holding whose power division is generating not only electricity but also major windfall profits this year expects the power prices to remain elevated for a considerable time given the ongoing energy crisis and supply chain limitations with getting the fuel to power plants across the globe as demand outstrips supply and fuel has to be shipped by sea from Colombia or Australia. The company was able to secure its fuel supplies early and is now reaping the harvest of this prudent decision. The enormous cash proceeds are expected to be reinvested in new business ventures in agriculture, biotech, food processing, retail and e-commerce. The company has already upgraded earnings guidance several times, and we expect further upgrades this year as long as the spot power prices are strongly elevated; as such, we expect H2 earnings to grow over 300% year-on-year.

Meeting with the CEO of a $1.4b investment holding

Bringing innovation to frozen foods

 

In our meeting with a $250m frozen foods producer we learned from the CFO that the company enjoys 100% brand awareness in Turkey and has no significant competition in the local market. Sales of frozen foods have almost doubled year-on-year, and the company’s market share (currently at 45%) keeps increasing every month since January. We were told that the total consumption of frozen foods in Turkey while growing still stands at only 6-8 kg per person per year – in comparison, in more developed countries it can get closer to 35 kg, so the market has a lot of room to grow. Similarly to the leather goods company’s sentiment, this business also sees benefits from uncharacteristically strong tourism bookings for the fall/winter season. In addition to dominating the Turkish market, the company is quickly expanding its export business. Despite operating in a seemingly simple industry, this company always stays innovative: for example, the CFO was proud to tell us about the “pizza toast”, a new product which significantly boosted sales, and more innovations are coming out in the near future.

Meeting with the CFO of a $250m frozen foods business

Goldman’s partner in Turkey

 

When we entered the building for our next company meeting, we said: “This really feels like an investment bank!” And in fact it was one. This $60m financial services firm which IPOed less than a year ago runs a variety of businesses including M&A and IPO advisory, wealth management, brokerage, and non-performing loan services. Led by a US-MBA-educated CEO, the company is experiencing solid growth in all of its segments, is developing a new warrants business in partnership with Goldman Sachs, has invested in a special new trading app which will go live soon and generate additional profits, and has been upgrading earnings guidance every quarter this year. While its stock price has been nearly flat since the IPO, its earnings have been growing significantly; as such the P/E ratio dropped from 12x to 7x. We like cases like this where it’s only a matter of time when rerating occurs. Ironically, the company has applied for a full investment banking license over a year ago but has not yet been approved due to delays by the regulators; getting this approval could be a strong price catalyst, in our view.

Meeting with the CEO and CFO of a $60m financial services firm

Turkish unicorns in the making

 

Our last meeting on this trip was with a $50m venture capital investment group in which we are substantial shareholders through owning over 5% of its shares. It counts 52 potentially promising Turkish startups among its investments and recently started having major exits but most investors either still think it’s a computer peripherals business (which it was many years ago – in fact, we had to change the company’s Bloomberg description to reflect its current business nature) or struggle to track valuations of its high-potential startups. Valuing this company can indeed be tricky: its total portfolio gets valued by auditors only once a year, so “lazy” investors would have to make their decision whether to invest in this company by only having a once-a-year data point. However, if one studies its top startups well and tracks their valuations through media announcements about fundraising rounds, it becomes clear that this company is on track to keep doubling its NAV year after year, fully in line with what its CEO explained to us in the meeting. A couple of IPOs of this group’s subsidiaries in the next year or two could unlock additional shareholder value.

Meeting with the CEO of a $50m venture capital investment firm

See you in Ankara!

 

The only portfolio company in Turkey which we haven’t seen on this trip is a $35m regional hospital operator with headquarters in Ankara (another one in which we are substantial shareholders through owning over 5% of its shares), which has been expanding earnings highly consistently over the last few years and with a couple of recent acquisitions is well-positioned to turbocharge the already stellar growth. We look forward to visiting Turkey’s capital city soon to visit its management team (and maybe also the Turkish central bank for some questions).

"What do you think about Turkey?"

During our trip, everyone seemed to ask the same question: “What do you think about Turkey?” Our response was characteristically boring: we agree that the economy has its issues, but that’s the case for most emerging markets, and we are bottom-up investors, we select cheap, growing, high-quality stocks. If these stocks happen to be in Turkey, we have exposure to Turkey, but not the other way around: we would not invest in a country simply because its macro parameters look good if we can’t find compelling cheap, growing, high-quality investments.  

 

Our meetings on this trip reinforced our conviction in our stock picks in Turkey. These companies operate in different industries, yet have two things in common: all trade at very cheap valuations between 4-10x LTM P/E, and all are on track to grow earnings over 100% this year. Their stock price performance since we bought them earlier this year has been stellar: two – the power holding and the leather goods business – have already grown over 100%, and four others increased over 30% (all in EUR terms), helping our fund weather the ongoing market storm relatively well. Given that the Turkish lira is well-known to depreciate over time, we made sure to hedge our currency exposure when investing in these gems.

Aesthetically pleasing views on a walk near our hotel in Ortakoy district of Istanbul