Telkom’s net profit of Rp2.46tn in 1Q09 is 22% of our full year expectation and core earnings ex-FX loss is 23% of our full year. Margin has recovered from the low in previous two quarters and is expected to stabilise as price war comes to an end.
Although yoy comparison still looks pale with Ebit down 19% yoy and net profit down 23% yoy. Telkom profitability has shown some stability as Ebit and core net profit off the low from previous quarters.
Net add in 1Q09 was strong as Telkom adding 6.8m subs, well ahead of expectation. Total mobile subscribers increased to 72.1m or +40.5% yoy in 1Q09. However, this has not translated into revenues growth which is still falling -2.2% yoy and -8.6% qoq to Rp14.7tn.
Network costs (depreciation + maintenance) have increased sharply compared to last year due to coverage and capacity expansion to accommodate higher traffic. However, qoq trend is encouraging with lower payroll and G&A costs while network costs are stabilising.
Overall Telkom 1Q09 is not exciting although it will not trigger earnings downgrade as profitability will improve going forward as price war ends and tariff stabilising.
Indonesian telecom industry is expected to consolidate given the smaller operators are still not profitable and can no longer get cheap financing. Even the #2 operator Indosat and #3 operator Excelcomindo are cutting down their capex aggressively (nearly half) which will limit their ability to continue their low tariff high traffic business model.
Telkom is the only operator with positive free cash flow and low net debt to equity that allow it to continue its network expansion and coverage.
We retain our positive view on Telkom and our BUY recommendation.
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