Danareksa Bakrie Telecom (BTEL IJ, Rp103 BUY) Going International]

Entering the IDD market
Bakrie Telecom (BTEL) has entered the international direct dialing (IDD) market with the prefix 009. It is the third player in this market segment – the others being Indosat and Telkom. In our estimates, the total size of the IDD market is around Rp2.5tr per year. BTEL hopes to attain a small but valuable market share of around 20-30% within the next three years. It is true that Indonesia’s IDD business is stagnant in general and that growth prospects going forward are rather limited. Yet if BTEL can attain its goals in terms of market share, then the IDD segment would contribute around 15% to BTEL’s total revenues. Nonetheless, this new business is not yet incorporated into our model since it will take time before it makes a significant contribution.

Towers sale completed
The towers sale has been completed with final touches being made to the Sale and Purchase Agreement. In principal, BTEL has agreed to sell and lease back 543 towers to Solusi Tunas Pratama (which we know is linked to the Ciptadana Group). The amount agreed was Rp450bn. This includes Rp60bn which is retained for land rental for up to 10 years. As such, BTEL will receive fresh funds of only Rp390bn – most probably next month. These proceeds will be used to partly finance the capex of US$200mn in FY09.

Wary of providing guidance
Telecom firms are very wary of providing guidance for FY09. This is because of the uncertainties on the global economy coupled with the very stiff competition within the domestic telecoms market. All we know is that BTEL targets total subscribers of 10.5mn by the end of FY09 and that it plans to spend US$200mn on capex during the year. BTEL may be the only operator to achieve positive net additions in 1Q09 (Indosat and XL have already indicated that they will record negative net additions in this period).

Maintain BUY
We retain our BUY recommendation on the stock as the valuation remains attractive. Our target price is Rp114. BTEL is pursuing the right strategy of becoming a budget operator which is light on assets (as shown by the just-completed towers sale). Its entry into the IDD market has the potential to lift revenues going forward – although it may take some time before it makes a significant contribution.