CLSA Telkom, lagging despite improvement

Telkom (TLKM IJ) has been a difficult stock for many investors. Despite talks about improving competitive landscape, TLKM share price has been a big laggard.

Investors might need another quarter or two of sustainable earnings recovery before TLKM share price can regain momentum. But there are sign that earnings are bottoming from the low in 3Q08, as shown in the table below.

Is TLKM ex growth? In the past 10 years, total mobile industry sub growth has been in the region of 35-100%! Certainly those days are behind us. We are looking at 10-25% sub growth for the next few years.

However, it worth pointing out that (1) while SIM card penetration has hit 70% level, unique individual penetration rate is believed to be much lower at around 50%, given that many Indonesians have more than one mobile phone number. Subs growth will be lower due to the following (2) higher penetration rate + higher base of mobile subs = lower subs growth going forward (3) We believe that marginal subscribers are not spending enough on mobile. Not that they don’t want to talk more but they just don’t have the money. Assuming income will continue rising in Indonesia, expect more mobile spending.

TLKM will go ex div date on 8 July, total div amount is Rp296.94. This will lend support to the stock price.


Key points from the report:
TLKM has underperformed market in 2Q09 as market chasing for high beta stock and ignore the potential earnings recovery.
TLKM still trades below its 5-year average PE while market (JCI) trades at 1sd above. It is seen as defensive stock.
Earnings showed sign of bottoming from the low in 3Q08 and our view of structural change in competition landscape remains unchanged.
TLKM will benefit from industry consolidation and the end of price war given its ability to continue investing in capex at a time when competitors are cutting down spending.
If revenues per minutes hold, TLKM could deliver 6.3% better than expected earnings.
Any 1% further incremental increase in tariff (as price war ends) will lead to further 1.5% upside in earnings.
Indonesia still has room to grow: a) SIM card penetration rates is only at 70% while unique individual penetration rate is estimated at 50%. b) a lot of existing subscribers still can not afford to spend as much as they would like, thus as income increase, spending on telecom services will continue to grow.
Valuation: at 12.2x PE and 5.3x EV/Ebitda, Telkom looks compelling.