CLSA Telkom Indonesia (TLKM I) from OPF to BUY and raises the TP from Rp8,000 to Rp9,000

Wilianto upgrades Telkom Indonesia (TLKM I) from OPF to BUY and raises the TP from Rp8,000 to Rp9,000.

Maybe it is helpful to learn from the past:
HISTORY: in 1996-2002, Telkomsel spent large capex and aggressively built its network while competitors Indosat (ISAT IJ) and Excelcomindo (EXCL IJ) were busy with debt restructuring.
Result: Telkomsel gained market share from 33% in 1996 to 53% in 2002 + take over #1 position from ISAT
NOW: Telkom capex 3x its closest competitors in 2009 (US$1.8-2bn). It will widen its lead against competitors. Meantime, competitors are cutting down on capex, reducing their ability to compete and to expand coverage.

Is history repeating itself?
Early indication suggests this will be the case. Telkomsel added 3.8m subs in 2m09, with net add share of 65%. Even if we assume 80% capex absorption of US$1.5bn, TLKM capex will still be more than twice of ISAT and EXCL.

We also want to add that despite the improving environment, the stock may continue to underperform in the short term as investors are focusing on higher beta names. However, we’d like to point out that the news flow, after 2 years of mobile price war and negative news flow, has already seen marked improvement and is likely to continue. After playing defensive, Telkomsel is now turning the table and playing the aggressor.

Key points from the report:
Upgrade TLKM from OPF to a BUY as competition pressure eases.
Upside potential: to our earnings if tariff and Arpu stabilise as expected (we have not build it in our forecast).
Competitors are cutting down on capex, reducing their competitiveness.
Telkom has strong balance sheet + cash flow to sustain its capex (triple of its closest competitors).
This will allows Telkom to tap into new frontier and to strengthen its position in areas of presence through better network coverage, quality, and capacity.
A 10% incremental revenues/ Arpu in Telkomsel will boost Telkom’s consolidated earnings by 15%.
Our assumption currently called for an 8% decline in Arpu, 13% subscriber growth (8.2m net add in 2009 vs 14.9m net add in 2008), and 2% decline in Ebit margin of Telkomsel.
No change in earnings forecast.
Valuation: remains undemanding at 12.5x PER 09CL and 5x EV/Ebitda 09CL (adjusted for 30% minority), which is slightly below its regional peers.