Still Growing
TP raised to Rp8,350
We have raised our target price to Rp8,350, offering 17.5% potential upside from the current share price. Our upgrade reflects the following: 1) the tax incentive obtained from 40% plus free float, 2) healthy subscriber growth in 1Q09, and 3) the end of last year’s price war which makes Telkom’s business model more sustainable. Note that Telkom is maintaining its plans to spend capex of US$1.6bn while the other players are tending to reduce capex because of the crowded market. Being the leader in the industry and having strong operating cash flow should help the company to maintain its preeminent position we believe.
End of the price war
Since the big three operators decided to declare a truce and end last year’s price war, there has been less advertising that promotes lower tariffs. This is good news as the price war had definitely put profitability margins under pressure. The operators have now tweaked their pricing in an effort to boost their revenues per minute (RPM). Telkomsel, for instance, has reduced bonuses and changed its pricing structure within the four time bands to boost its RPM. This shall help increase the company’s profitability and generate better cash flow.
The only growing operator
Telkomsel was the only operator to report positive net additions in 1Q09. In this period, the company added 6.8mn subscribers to increase its subscriber base to 72.1mn in total. In contrast, both Indosat and XL reported negative net additions (mainly because these operators refrained from offering special offers on starter packs, a practice which had previously helped to get new subscribers to sign up). Telkomsel, as the market leader and with a strong position out of Java, has not been hit by this phenomenon.
Enjoying tax benefits
Telkom will enjoy tax incentives in the coming years as the company is eligible for a 500bps cut in its income tax rate from the current level of 28% in FY08. Telkom qualifies for the tax incentive as its free float has reached over 40% with its shareholders numbering more than 300 in total. Thus, according to the guidance provided by the company, we lower our income tax assumption from 30% to 23%.
Earnings revision
We have altered our earnings estimates - but with minimal impact on the bottom line. The 1Q09 result was slightly weaker than expectations, especially in regard to the revenues. Nonetheless, we think that the RPM has now reached its bottom. There is no significant change at the bottom line from the weaker revenues because of the positive impact of the previously mentioned tax incentive.
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