Mandiri Sekuritas TLKM: Go Defensive

TLKM share price has increased by 5.8% ytd, despite an indication by the company that earnings dropped by around 12%yoy in FY08. The main reason being that its considered a defensive play, and it had been trading at discount to regional peers. Though we stick to our view on low growth, we flip our call on the stock from Sell to Buy, as we see “growth” is no more a distingui shing 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 and dividend yield, its large cap and overall a defensive play.

Telkomsel (TSEL) market share will now be guarded... In FY08, we estimate TSEL market share fell from 50% to 46%, the main shift coming in 1H08 when subscriber adds of peers outpaced TSEL’s. This is the only period of exception, as at all other times TSEL has outpaced its peers at alteast 1.7x. In FY09, we expect it to have a subscriber add of 9.4mn about half of industry’s around 22mn subscriber add. Note, this is partially reflected in the fact that in 1Q09, TSEL net add is 4mn which we believe is double than ISAT and EXCL given that in 4Q08, TSEL net adds was 4.7mn while it was only around 1mn for other two operator. We expect add rate to fall by the end of FY09 as penetration rises, a reverse of the trend that 4Q08 is strongest.

…double capex will support the subscriber growth. TSEL capex is about twice of its peers of Rp15tn vs Rp7tn for its peers. This is justified given its expected to have higher subscriber add (about double its peers) and that TSEL has always been a leader in providing the best service. Note, that despite higher subscriber adds, TSEL growth will be, if not lower, be at par with its peers given its higher subscriber base.

Despite slow growth, TLKM is our sector pick. We have fine tune d our earnings slightly, and for FY09 we forecast earnings to grow by 1.4%yoy. We continue to emphasize slow growth for TLKM in FY09, but as the growth slows down for all operators, we consider TLKM as our sector pick based on following factors. (1) Its large cap (2) highest dividend payout and yield (3) high free float

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, 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.