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Monday, January 9, 2012

Telkom Indonesia - BUY Recommendation

by Ciptadana Sec

We reinstate our coverage on Telekomunikasi Indonesia (TLKM) with a Buy recommendation and 12-month SOTP based target price of Rp9,000/sh. Against the backdrop of saturated telco industry, we see that TLKM still possess the strong defensive characteristic due to its dominant position in cellular market, strong financial firepower, its’ up-trending data and internet revenue, and the potential upside from unlocking its tower assets value through IPO.

Dominant Position in Cellular Market. Even though Telkomsel (TLKM’s subsidiary) has lost a tiny fraction of its aggregate market share from 57% in 1Q’05 to 54% in 2Q’11, it still leads the cellular market with 102 million subscribers at end of June 2011, leaving behind Indosat (ISAT), its closest peers, with a huge gap of 55 million subscriber and XL Axiata (EXCL) with 63 million subscriber. Going forward, we believe that Telkomsel’s strong market presence, widest coverage, and good brand image will help to maintain its leading position.

Strong Financial Firepower.

TLKM has the largest free cash flow among Indonesian telco companies with Rp9.6 trillion as of 1H’11, while ISAT and EXCL only booked Rp1.3 trillion and Rp1.6 trillion respectively. With its huge cash flow stream and underleveraged balance sheet, TLKM should be able to fund its expansion with ease.

Up-trending Data and Internet Revenue.

In 2008, data and internet only contributed 8% of the total revenue. But as of 1H’11, this segment has added its portion to 14% of total revenue. Therefore, with the dwindling prospect of its legacy business, we deem that declining revenue of legacy business could be mitigated by the rising income from data. Backed by the growth of mobile broadband, we forecast the data and internet will contribute 18% and 19% in 2012F and 2013F respectively.

Unlocking The Value of Tower Assets.

TLKM’s subsidiary PT Daya Mitra Telekomunikasi (Mitratel), which engaged in telco tower providing business, plans to go public in second semester of 2012. Mitratel targets to own 2,500 tower and operate 3,500 of Telkom Group’s tower by the end of 2011. As TLKM and Telkomsel agreed to gradually hand over their towers’ management to Mitratel and combined with its IPO plan, Mitratel has the potential to be the largest listed tower company in Indonesia. Should this plan goes well according to the expected scenario, TLKM could unlock its tower asset value which subsequently put an upside potential to TLKM’s valuation.

Valuation and Risks.

We reinstate our coverage on Telekomunikasi Indonesia with a Buy recommendation and 12-month SOTP based target price of Rp9,000/sh. We identify several downside risks to our call, namely: 1) irrational competition in wireless and broadband industry, 2) adverse change in regulatory environment, 3) poor and slow execution of strategy, 4) economic and political risk relating to Indonesia, 5) emergence of substitute for current wireless technology.







Ciptadana Sec : TLKM

We reinstate our coverage on Telekomunikasi Indonesia (TLKM) with a Buy recommendation and 12-month SOTP based target price of Rp9,000/sh. Against the backdrop of saturated telco industry, we see that TLKM still possess the strong defensive characteristic due to its dominant position in cellular market, strong financial firepower, its’ up-trending data and internet revenue, and the potential upside from unlocking its tower assets value through IPO.

Dominant Position in Cellular Market. Even though Telkomsel (TLKM’s subsidiary) has lost a tiny fraction of its aggregate market share from 57% in 1Q’05 to 54% in 2Q’11, it still leads the cellular market with 102 million subscribers at end of June 2011, leaving behind Indosat (ISAT), its closest peers, with a huge gap of 55 million subscriber and XL Axiata (EXCL) with 63 million subscriber. Going forward, we believe that Telkomsel’s strong market presence, widest coverage, and good brand image will help to maintain its leading position.

Strong Financial Firepower.

TLKM has the largest free cash flow among Indonesian telco companies with Rp9.6 trillion as of 1H’11, while ISAT and EXCL only booked Rp1.3 trillion and Rp1.6 trillion respectively. With its huge cash flow stream and underleveraged balance sheet, TLKM should be able to fund its expansion with ease.

Up-trending Data and Internet Revenue.

In 2008, data and internet only contributed 8% of the total revenue. But as of 1H’11, this segment has added its portion to 14% of total revenue. Therefore, with the dwindling prospect of its legacy business, we deem that declining revenue of legacy business could be mitigated by the rising income from data. Backed by the growth of mobile broadband, we forecast the data and internet will contribute 18% and 19% in 2012F and 2013F respectively.

Unlocking The Value of Tower Assets.

TLKM’s subsidiary PT Daya Mitra Telekomunikasi (Mitratel), which engaged in telco tower providing business, plans to go public in second semester of 2012. Mitratel targets to own 2,500 tower and operate 3,500 of Telkom Group’s tower by the end of 2011. As TLKM and Telkomsel agreed to gradually hand over their towers’ management to Mitratel and combined with its IPO plan, Mitratel has the potential to be the largest listed tower company in Indonesia. Should this plan goes well according to the expected scenario, TLKM could unlock its tower asset value which subsequently put an upside potential to TLKM’s valuation.

Valuation and Risks.

We reinstate our coverage on Telekomunikasi Indonesia with a Buy recommendation and 12-month SOTP based target price of Rp9,000/sh. We identify several downside risks to our call, namely: 1) irrational competition in wireless and broadband industry, 2) adverse change in regulatory environment, 3) poor and slow execution of strategy, 4) economic and political risk relating to Indonesia, 5) emergence of substitute for current wireless technology.

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