Mandiri Sekuritas BTEL Breeding ground for growth

Based on FY08 subscriber indication given by the company, we cut our subscriber base by 9.0% for FY08F and due to spill over effect, we cut our FY09-10F operating earnings by 4.8% and 6.7% respe! ctively. Despite the cut, BTEL’s operating income growth is at 37.8%yoy for FY09F and 8.9%yoy for FY10F, higher than peers. The cut resulted in lower DCF derived TP of Rp68/share. Our TP is offering 36.0% upside to the current price; hence we maintain Buy call.

FY08 subscriber indication. BTEL has indicated that subscribers base reached 7.3mn (+91.2%yoy) by end FY08. From this we see that in 4Q08, BTEL’s subscriber adds slowed down to around 753mn from an average of 910mn per quarter during 9M08. Slowdown is inline with our latest market check where we found that demand for Esia had comparatively slowed down. Additionally, vendors admitted that GSM was more popular than CDMA, a rever! se of wha t we inferred from our market check in Apr08. Moreover, some vendors said that sales of Esia’s biggest competitor – Flexi had been improving post its new promo, though Esia still leads.

BTEL’s strategy behind its history of growth. BTELs market share expanded from 0.9% to 4.7% between FY05-9M08, while Flexi’s fell from 7.9% to 6.5% over the same period. Growth is driven by 1) Successful strategy; primarily one brand (No brand cannibalization, more focus A&P), simple and cheap on-net tariff of Rp51/min, SMS of Rp1/chr 2) Successful promotion of bundling cheap handset (around US$20) with the sim-card 3) Handsets are more attractive than Flexi’s. 4) First mover advantage- first to introduce the cheapest tariff in Indonesia in the wireless segment. 5) CDMA still has a differentiated target market as compared to GSM.

BTEL’s growth at its peak in FY08, FY09 will not be a replication of FY08. As BTEL’s growth is mainly driven by subscriber growth given that its tariffs have been flat since 2005 at Rp51/min and MoU has been more stable as compared to GSM players, lower subscriber growth will therefore limit high revenue growth going forward. However, revenue growth will still be high and above industry av! erage as explained by - 1) Subscriber growth will still be high given the massive expansion to 30 new cities in FY08 where the usage is still limited and penetration still low. 2) Subscriber base for BTEL is still the lowest, hence making it easier to report higher YoY growth 3) CDMA still have a differentiated target market 4) Competition is primarily from flexi only in the CDMA market.

Maintain Buy. We reduce our subscriber by 9.0% for FY08 only, and the spill over impact resulting in 4.8%-6.7% cut in our FY09-10 operating earnings respectively. For FY09 we factor in the impact of tower sales (sales value of Rp380bn, gain of Rp127bn and net book value of Rp254bn) and therefore resulting in 64.3%yoy rise in our net earnings from our earlier forecast. Earnings cut for FY09-10F resulted in slash in our DCF dervied TP by 9.3%, from Rp75/share to Rp68/share. Maintain Buy.