Mandiri Sekuritas BTEL share price going up

BTEL share price have gone up 18% yesterday, due to the comment made by TLKM president director Rinaldi, that TLKM is considering buying a CDMA company.

As it's not based on fundamentals of BTEL but rather on a possible acquisition or Merger with TLKM we don't think the price rise is sustainable. This is because we don't see a near term acquisition or merger with BTEL and talks are only preliminary stage. These talks have been on since quiet sometime about BTEL possible acquisition or merger. However, if based on fundamentals we think it's a good sign as we have a Buy for BTEL (TP: 68) and its trading at Low PER09F of 7.2x as compared to TLKM 12.6x and ISAT 15.5x.

Details
We talked to Investor Relation of TLKM yesterday.
1) The announcement in the press is just in preliminary stage.

2) There are many uncertainties/hurdles regarding the same.
TLKM has to clearly separate TLKM flexi (CDMA) division from cellular (GSM). It has already doing that but still there is no clear subsidiary for Telkom Flexi.
Whether to acquire or merge with CDMA operator, though it announced only of a possible acquisition its open to both.
Which company it has to consider? There are 6 CDMA operators but TLKM has said it would look at only BTEL, mobile-8 or Indosat. ( 6 CDMA operators are Indosat, Bakrie Telkom, Mobile-8, Sampoerna Telekomunication, Telkom, Smart Telecom)
Still to calculate benefit from the consolidation. Main aim is to get the frequency/spectrum.

3) Hurdles regarding acquiring/merger with the 3 possible target companies…
Mobile-8 Coverage in same areas as Flexi and hence redundancy of assets usage. Also has lot of debt repayment obligation.
BTEL- Strong financially and market share and may not want to be acquired as still growth is sound in next 2 years. Additionally TLKM said that BTEL would like to keep the majority stake. No details from BTEL on this. So we don't see BTEL as a target of acquisition. For merger, its possible given both will complement each other ' together will operate as a monopoly in the CDMA market.
Indosat ' Starone ' Big hurdle 1) StarOne license is bundled with IDD (International Direct Dialing) license. So have to find a way how it should be separated 2) Since StarOne (CDMA) and Indosat GSM business uses the same spectrum, there maybe possibility that new operator who acquire StarOne may not use the frequency efficiently and which may impact GSM service quality of ISAT.

Despite all hurdles, and that CDMA market share is around 15% of the total wireless market share, we do see consolidation positively either in CDMA or GSM, as we believe all operators have similar pricing strategy and target market, and hence the market share gets divided with non one operator emerge as clear winner. With consolidation, one strong operator can maintain a better subscriber growth, and also modify tariffs as it would act as monopoly; therefore report better growth.
Best regards,

Surabhi Chopra Mandiri Sekuritas