Bakrie Telecom Mass market appeal
Pursuing a consistent strategy
Bakrie Telecom (BTEL) is performing well in Indonesia’s highly competitive telecommunications industry. With the big three players involved in a price war, BTEL has adopted a successful strategy in terms of product positioning and pricing. As a result, BTEL has become well known among consumers for its “value for money” products. This has enabled BTEL to build up its subscriber base and record excellent operating performance in FY08.
Tower sales to be completed soon
The sale of the company’s towers will be completed soon. In this regard, three potential buyers have been shortlisted although no names have been mentioned yet. Initially the plan was to sell 543 towers to raise around Rp380bn. However, we believe there is upside to this figure. The plans will allow the company to reduce its assets and free up cash. Proceeds from the sale of the towers will be used to help finance capex of an estimated US$200mn this year.
Concerns on the short term investments
As of Dec 08, BTEL’s cash and equivalent stood at Rp1.6tr, comprising cash holdings of Rp500bn (placed at a number of banks including Standard Chartered and Deutsche Bank) and nearly Rp1.1tr of short term investments which were mostly invested through Recapital Asset Management and Samuel Sekuritas. In regard to the short term investments we believe there are some risks due to a lack of transparency in how the funds have been invested and whether there are losses as a result of the turmoil on the capital markets. If this is the case - and the company has to delay capex - then BTEL could potentially lose a window of opportunity to further penetrate the telecoms market. In this business, timing is everything: there is little left for latecomers.
Attractive valuation
BTEL has a proven business model. Hence, the company is performing well and it has good operating cash flow. The downside, as already mentioned, relates to the lack of transparency in regard to its short term investments. This overhanging issue may dampen sentiment on the stock in the short term (especially as there is news that the holding company is having trouble honoring its repurchase agreements), but from a longer term perspective it offers a buying opportunity. Valuation wise, the stock is attractive. Our TP is Rp114. This translates into EV/EBITDA FY09 of 3.9x and core PER FY09 of 11.4x. BUY recommendation maintained.
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