MacQ Momentum Swinging Back to Telkomsel

Event
PT Telkom held an operational briefing on 2008 results. Full financial results
will be released only in April. Management’s tone was cautiously upbeat.
Impact

Momentum has swung back towards Telkomsel (unlisted). Revenues grew by 12% QoQ and 3% YoY, versus our estimate of 10% QoQ and flat YoY growth in 4Q08. ARPU has stabilised as it remained flat QoQ, while MoU reached 31.4bn minutes in 4Q08, an 18% increase QoQ. Net adds were 4.8m in 4Q08, boosting total subscribers to 65.3m. The top line quarterly sequential trend is a lot stronger than what the other telcos are expected to report.

Fixed line remains a problem area, actively trying to fix it. Revenues in this segment declined by 14% YoY vs Macquarie’s estimate of an 11% YoY decline. Management is conservatively forecasting a double digit revenue decline again in 2009. However, they are trying to stem the decline by introducing flat unlimited call pricing schemes, expanding broadband services, and growing its Flexi CDMA service.

Inorganic growth unlikely, we believe. Management acknowledged that they are cautiously investigating the opportunity to buy into TCI, the #1 telco in Iran with 70% share in a market that is 40% penetrated and has a population size of 70m people. However, we continue to believe that the state-owned corporate culture of TLKM prevents it from being too aggressive in any competitive bidding process. The other bidders for TCI include Middle-Eastern telcos which are much more acquisitive in nature.

One-time charges and tax rate. TLKM will book a forex translation loss of Rp1.2tr in 2008 due to the Rupiah depreciation. It is also taking a Rp500bn charge in 2008 for an early retirement program for 600–700 employees. Management is also working with regulators to secure the 5% reduction in its 2008 tax rate as TLKM has a free float of more than 40%.

Action and recommendation
We reiterate our Outperform on TLKM. Momentum has swung back towards the incumbent and away from the smaller telcos, as shown by the strong 4Q08 Telkomsel results.