Deutsche Bank - Equity Research
Telkom {Ticker: TLKM.JK, Target Price: 7,800 IDR, Recommendation: Buy}
Our recent discussion with management suggested Telkom has formed a team that will look at this investment into Iran whcih looks at valuations, political and regulatory risks. It is also considering financing availability for this investment if it were to take place.
The valuation may be well above what we have highlighted previously of Rp2tr for a 25% stake in Telecom Company of Iran (TCI). For this reason, if it proceeds with the plan, Telkom will seek shareholders' approvals as this transaction is considered material.
According to Bapepam regulations, a material transaction is if the cost is 10% of revenue or 20% of equity. This implies that the investment costs may be about Rp6-8tr. Based on limited information availability, Price to EBITDA would be about 0.8-1.0x. Obviously, there is a risk that acquisition cost could be higher than Rp8tr
particularly there are several interested parties from Malaysia, India and South Africa.
Why making international plan? Telkom argues that Iranian market has robust growth potential with penetration rate of 40% and GDP/capita of >US$10,000. It is considered as one of the strongest growth markets outside of India. Currently, TCI holds about 70-80% market share with about 90% of its customer base are post-paid.
Conditions for the transaction to take place. Assuming Telkom reached an agreeable price for the acquisition and securing the funding, it will seek clarification if the investment is not considered to be investment into negative list countries. If such risk is triggered, Telkom will not pursue plan.
We prefer to see Telkom focus into domestic market. We continue to see strong growth potential in domestic market both in voice and broadband. But issues relate to weak cost control and executions.
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