CLSA Telkom Competition to Ease in The Mobile Sector, Telkom to Flex Dominance

Research Today: competition to ease in the mobile sector, Telkom to flex dominance

Wilianto has been very early in identifying the trend: easing of mobile competition and Telkomsel's rising dominance. The theme is starting to play out. The aggressive player in the mobile sector Excelcomindo (EXCL IJ), also the 3rd largest mobile operator in Indonesia, booked a net operating loss in 4Q08. Bottom line is also negative Rp15bn in FY08 (vs. net profit of Rp891bn in 9M08). Rights-issue in 2Q09 has been talked about w/ TI MK (owns 83.79%) and Etisalat (owns 15.97%) as standby underwriters.

As pointed out by Nick Cashmore, EXCL generated Rp4.7tn in net operating cashflow last year but spent Rp1.15tn on debt servicing and Rp11.3tn on capex. It has Rp1.17tn in cash on hand but Rp1.27tn in debt due within 12 months. The co has total interest bearing debt of Rp18.7tn, cash of Rp1.1tn, giving a net debt of Rp17.5tn against total equity of Rp4.3tn.

Reasons: (i) EXCL subscribers are more sensitive to macro downturn (ii) weaker brand equities (iii) lower customer loyalty.

Cheap financing no longer available = capex cut at EXCL.
Assuming Rp5tn in operating CF this year + flat debt servicing, the capex budget must be cut 70% just to break even on CFs.
EXCL’ gearing is very high: 407% net debt to equity + large funding gap. Parent TM International is also highly geared with net gearing of 125%.
To halve the net debt to equity ratio to even two times, EXCL needs to raise Rp8.6tn against a mcap of Rp7.4tn...

Implication?
This will force EXCL to slow down expansion + greatly reduces ability to compete.
It is likely that EXCL’s aggressive marketing and pricing strategy is coming to an end. This is good news for Telkom (TLKM IJ) will only strengthen TLKM’s domination in the mobile sector. TLKM is our top pick in the sector. Even the weaker Indosat (ISAT IJ) might see some relief in the coming quarters.