(Bloomberg) -- Turkey’s overhaul of how it allocates state contracts to private companies is spurring Akdeniz Guvenlik Hizmetleri AS to accelerate a shift into more profitable lines of business, even though it means the security firm stands to lose as much as 40 percent of its revenue next year.
“It’s been evident since 2014 that being a subcontractor to state institutions wasn’t sustainable,” Chairman Necmeddin Simsek told Bloomberg in a Dec. 26 interview in Istanbul. About 6,000 of Akdeniz’s 8,000-strong private security workforce will become state employees with a change in legislation, while existing public contracts will be canceled, relieving Akdeniz of a business that had profit margins of just 1 percent to 2 percent, Simsek said.
Turkey announced an end to the subcontractor system in public institutions in a decree under emergency law on Dec. 24. As many as one million workers will benefit from the change in status that makes them state employees entitled to civil service benefits, the state-run Anadolu Agency cited Labor Minister Julide Sarieroglu as saying on Dec. 25.
Akdeniz expects 2018 sales to decline as much as 40 percent due to the measure, it said in a Dec. 27 exchange filing. But profits are expected to be unchanged, as the government will pay as much as 10 million liras ($2.65 million) as compensation for canceled contracts, it said.
“We had about 13,000 security staff in 2016. This year it’s down to about 8,000,” Simsek said. “Some decisions are made by the calculator, not the businessman - and the calculator was explicit in telling us to get out of this business.”
Akdeniz bought half of MAI Otomotiv ve Teknoloji, a vehicle equipment maker focused on the defense industry, and is set to acquire half of Tanitek Bilisim, which sells security software to the government, including license plate recognition and probation tracking products. MAI’s first board meeting with Akdeniz will be held on Friday, while the Tanitek purchase will be finalized in January at the latest, Simsek said. Akdeniz will spend a total of 15 million liras for the acquisitions, he said.
The company also plans to pursue private security contracts in the Middle East, Africa and Central Asia, Simsek said. A confidentiality agreement has been signed to provide security at four Afghanistan airports, Akdeniz said in a Dec. 13 filing. MAI also has plans to start producing security vehicles in Oman, aiming to sell across the region. The path ahead for that plan should be clearer in January, Simsek said.
Akdeniz is the second-best performer on the 89-member Borsa Istanbul Dividend Index, after state-run defense manufacturer Aselsan. Akdeniz, whose shares have surged 134 percent this year, maintains a policy of paying 50 percent of distributable profits as dividends, and had a dividend yield of 6.3% this year, according to a company presentation.
Here are some other key messages from the conversation with Simsek:
- Akdeniz plans to enter the alarm systems business in 2019
- Expects 2017 revenue to fall to about 300 million liras as it refrains from entering into low-margin private security contracts
- Akdeniz will double Tanitek’s capital with an injection of 5 million liras
- MAI to use Renault Trucks chassis for its vehicles
- While Akdeniz has no intention to change its dividend policy, “we may assess it in the future, if we need a capital increase, again for the benefit of our investors”
©2017 Bloomberg L.P.