If and when the Indonesian mobile industry turns the corner (for the better), investors would want to own Indosat as a more leveraged mobile operator compared to PT Telkom. There has been evidence of mobile tariff and capex war receding in the recent months. Mobile tariffs have stopped falling for several months now, while the second and third biggest operator Indosat and Excelcomindo have both announced a more than 40% YoY cut to their 2009 capex budgets. Biggest operator Telkomsel is the only operator boasting a flat capex budget of US$1.5bn, but there is a good chance that Telkomsel would underspend.
In reality, mobile operators do not need to spend a single dime for revenue growth that comes from higher tariffs. Post election in 2010, there is a good chance that Indonesian utility prices (electricity, gas, fixed line telephony) will be on the rise on pent-up tariff increases, such that subtle increases in mobile tariffs are not impossible.
Indosat has lagged PT Telkom by more than 30% in terms of share price since the Qatar Telecom tender offer date, mainly due to selling pressure from event based investors. There is a re-rating potential on Indosat that trades on 10.6x 09 PER and 4.3x 09 EV.EBITDA, versus PT Telkom on 12.0x 09 PER and 5.8x 09 EV.EBITDA, especially when Indosat is showing an improved free cash flow yield (around 7%) after the 2009 capex budget is clarified.
Macquarie research rates the stock a Neutral as Ken Yap (analyst) prefers to wait for turnaround evidence and clarity on management strategy. But I personally think the risk/reward profile could favour the early birds.
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