Mandiri Sekuritas Telkom: Go Defensive (TLKM, Rp7,300, Buy, TP: Rp8,200)

TLKM share price has increased by 5.8% ytd. Despite an indication by the company that earnings dropped by around 12%yoy in FY08, we have see TLKM stock price rise by 5.8% ytd. The main reason being that it’s considered a defensive play, and it had been trading at discount to regional peers.

Still a slow growth going forward, but TLKM is our sector pick. Though we stick to our view on low growth (EPS to grow by 1.4%yoy in FY09F), we flip our call on the stock from Sell to Buy, as we see “growth” is no more a distinguishing factor to chose our sector top pick. We put a Buy for the stock and now rely our call amongst others on TLKM’s highest free float (48.8% vs 20% for ISAT), and dividend yield (4.4% vs 3.5% for ISAT), its large cap (Market cap of Rp144tn vs Rp30tn for ISAT) and
overall a defensive play. We don’t like small caps – EXCL because of huge forex debt and losses, low free-float and while we have a Buy for BTEL considering its cheap valuation vise, we like to emphasize that the stock will underperform given the risk exposed to Bakrie Group.

Reverse our call from Sell to Buy. We arrive at a new TP of Rp8,200/share (+12.3% upside) after fine tuning our earnings and adjusting our WACC from 14.9% to 13.6%. Our TP implies PER09F of 14.2x, higher than regional peer average but lower than ISAT. Note that though ISAT has historically traded at premium to TLKM given its better growth, but now given that ISAT’s free float is about half of TLKM, we think TLKM should trade inline with ISAT. In order for TLKM to trade inline with ISAT, TP should be Rp9,100/share, indicating a further 10.9% upside to our TP. Currently Telkom PER09F 12.6x.