Foreigners Aren't Buying Turkish Defense Firm's Vault to the Top

(Bloomberg) -- Defense electronics maker Aselsan has local investors to credit for making it Turkey’s largest company by market capitalization. Foreigners haven’t been buying it -- literally.

The ratio of foreign ownership in the producer of weapons systems, communications equipment and avionics dropped to 33 percent of tradable shares as of Nov. 14, down from 58 percent at the end of last year. That’s the lowest level in six years, according to data from Istanbul-based brokerage Is Investment, and it’s about half the foreign ownership ratio on the Istanbul exchange as a whole.

The declining interest from foreign investors means they’ve largely missed out on one of the most profitable investments in Turkey -- Aselsan’s share price surged 256 percent this year, on course for its sixth consecutive year of gains. On Tuesday, the company became Turkey’s largest by market capitalization, surpassing Turkiye Garanti Bankasi AS, the country’s biggest private bank, and Koc Holding AS, a conglomerate with interests in everything from energy to car production.

Aselsan’s surge to the top of the national value chart has been driven largely by belief in a government-backed push to make Turkey a major producer of defense products, reducing its reliance on purchases it currently makes mostly from the U.S. and other NATO partners. The ruling Ak Party’s “2023 Vision” includes promises that Turkey will soon be producing its own national helicopters, tanks, planes and warships.

New Contracts

“It’s a great company with a strong backlog that will be materializing in the coming two to five years, and local players may be pricing new contracts early, so the run is reflection of that,” said Anastasia Levashova, a fund manager at Blackfriars Asset Management in London, who holds Aselsan in her portfolio. “The stock might have run a bit over itself, given the valuation,” she said, but “if you are long-term holder, it is probably one of the best stories in Turkey.”

Expectations for the company’s future share performance are lukewarm at best. The company has just one buy recommendation among analysts on Bloomberg, compared with 9 holds and 2 sells. Not one of the 13 analysts sees the 12-month share price exceeding its current price, at 46.92 liras. The average 12-month forecast is about 40 percent lower than that.

The Turkish Armed Forces Foundation owns about 85 percent of Aselsan, whose mission statement says it aims to contribute to “the technological independence of Turkey.” The company earned 52 percent of its 3.8 billion liras ($1 billion) in revenue last year from the Turkish Armed Forces, 35 percent from public and private institutions in Turkey, and 13 percent from exports, according to information in its annual report.

In an op-ed in Star newspaper last year, Yigit Bulut, an adviser to Turkish President Recep Tayyip Erdogan, warned of foreign investors he said were plotting to take control of Turkish defense companies. Foreigners, he wrote, won’t be able to do it “even if you offer not three times, but ten times” the company’s valuation.

Aselsan shares are currently trading at 35 times expected earnings over the next 12 months, according to data compiled by Bloomberg. That compares with a multiple of 11.2 times for the Borsa Istanbul Industrials Index and 5.4 times for the Borsa Istanbul Banks Index.

--With assistance from Fercan Yalinkilic

To contact the reporter on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Benjamin Harvey

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