Mandiri Sekuritas TLKM: Sector King

TLKM reported its highest ever yoy fall in operating profits in history in 1Q09 (-19.2%yoy). Slowing down of operating profits is inline with industry’s current trend, but the decline is common only to TLKM and EXCL. Though growth in cellular revenues still look promising in FY09 as Telkomsel wins the current capacity war, but its other lines of business will continue to put pressure on its earnings as reflected in FY08 and 1Q09 results. We revisit our ! underlyin g revenue assumptions and as well as cut our near term earnings. It still results in DCF TP of Rp8,200/share implying a PER09F of 17.4x. Maintain Buy.

FY08 and 1Q09 results. After reporting 15.7% decline in operating profits in FY08, TLKM reported another 19.2%yoy decline in 1Q09. For 1Q09, other than the fixed-line business (-17.1%yoy), realizations from data and internet (-5.4%yoy) as well as interconnection (-12.1%yoy) slowed down. Changes in dynamics of other lines of business has resulted in cellular revenues contributing even higher to revenue base despite its slowing down as well. ( increased from about 38% in 1Q08 to 42% in 1Q09).! Addition aly, cellular revenues showed more promising results with 6.8mn subscriber adds in 1Q09 alone, as against 1.1mn and 3.5mn drop for EXCL and ISAT. New adds is primarily in the low-end segment as ARPU has fallen from 59k as of end FY08 to 47k in 1Q09. Going forward, we expect better contribution from subscriber adds in the later years and therefore have upgraded our long term forecasts.

FY09 could follow last year’s trend. 1Q09 revenues formed 22.3% of our full year forecasts, inline with last three year average of 1Q-to-FY contribution of 22.9%, though lower than 1Q08 contribution of 24.7% to FY08 revenues. We think FY09 would mirror FY08 trend more closesly than that in earlier years with lower contribution by year end, a reverse of the trend that last 4 months of the year are the highes! t revenue contributors for telco operators. Taking this view, and based on FY08 and 1Q09 results, we have revisited our forecasts. We have revised our underlying assumptions for revenue calculation which resulted in about 19% cut in operating profits for FY09F-10F. Our opex calculation assumptions remains same.

May benefit from 5% lower tax rate. TLKM have a track record of dividend payout of 50%-55% and we expect this to continue in FY09, given that it is a government owned company, as distinguished from other telco companies. Apart from this we would like to highlight that TLKM, in accordance with Indonesian tax law, maybe be entit! led to lo wer tax rate of 5%. This would increase our EPS by 6.9%, indicating PER09F of 16.3x at TP.

Maintain Buy. We note that current market trends call for a shift from defensive stock to high beta stocks and smaller capitalization stocks as they offer most attractive risk/reward return for investors. However, we rely on our DCF valuations and high free float to choose TLKM our sector pick, though note our TP indicates PER09F slightly above regional peers average of 16.8x. Its slow growth remains no more a distinguishing factor as its industry’s current trend.