Danareksa Bakrie Telecom (BTEL IJ, Rp139 BUY) Well positioned to grow further

New target price of Rp175
We maintain our BUY recommendation with a new target price of Rp175. The company is doing well in attracting new subscribers and is benefiting from increasing economies of scale. As such, we have greater confidence that BTEL’s business model is the right one. Its pricing policy has also been consistent. The company is now expanding to areas outside Jakarta-Banten-West Java (JBJB). This should provide further growth going forward.

Tariffs are competitive and easy to understand
The three main criteria in selecting a particular telecommunications service are coverage, quality and price. As a budget operator, BTEL’s focus is on price. In this regard, BTEL has devised an easy to understand tariff structure which only differentiates between “on-net” and “off-net” calls - with no time band differentiation as adopted by the larger operators. Having a competitive single tariff coupled with sufficient coverage and quality are the key elements in BTEL’s business model.

Positioning itself well
BTEL has positioned itself as a “complementary” operator rather than as a “substitute” operator to the leading GSM operators. This means that the company can avoid head-to-head competition with the market leaders. Its customer composition of 30% GSM dual users, 30% first time users and 30% switchers tells the story. With such positioning, it is vital that BTEL’s service offers “value for money” and that it adopts an asset light strategy to keep investment costs low.

Positive net additions in 1Q09
BTEL is among the few operators that booked positive net additions in 1Q09. Its net additions reached 725,000 in this period, increasing its total number of subscribers to slightly above 8.0mn. By the end of FY09 we are confident that BTEL will have as many as 10.2mn subscribers. Another positive is that BTEL’s revenues per minute (RPM) has reached Rp175 per minute. Note that this is close to Telkomsel’s Rp200 RPM, and higher than the other GSM operators.

EBITDA revised upward
We have revised our earnings estimates on the back of the 1Q09 results. We have greater confidence in the long term success of the company’s business model. Moreover, BTEL should gain from higher economies of scale arising from strong subscriber growth despite lower ARPU. These items lead to upgrades in our EBITDA estimates of 3.2% for FY09 and 8.4% for FY10. Higher depreciation expenses, however, lead to declines in our net income estimates.