MandiriSekuritas Telecommunication sector: Still upside

Tariff war in FY08 benefited smaller players at the expense of big players, but in FY09 we expect slow growth for all operators. Big operators because of their large base while small operators losing out to big operators as now the rule of game lies on brand, coverage and capacity where big players lead. Hence, we accept slow growth as industry’s trend as competition has created a loss-loss situation for all. Without any change in fundamentals other than for EXCL, we upgraded TPs for tel! co stocks under our coverage, as we lower our WACC on the back of lower risk-free rate and market risk premium. Our new TPs are at least 10% upside to current price and therefore we have a Buy for all (TLKM, ISAT and BTEL) except EXCL. With 3 Buys from 4 stocks under our coverage, we upgraded our call from Neutral to Buy on Telco sector.

Tariff war changed market dynamics. With continuous tariff cuts in last 1 year, we see tariffs dropped by as much as ±80% from ±Rp1,200/minute to ±Rp200/minute. Tariff war last year increased wireless penetration from ±38% to ±62%, and market shares shifted from Telkomsel to smaller or newer players. The impact of tariff war in GSM also spilled over to CDMA segment, leaving them with smaller market share. Going forward, with still 10 player industry, we expect growth to be limited for each operator as competition has left a loss-loss situation for all. Among! st all, we view Telkomsel’s simPATI would emerge market winner, as it has the best brand visibility, coverage and signal quality.

More stabilization but no win-win situation for any operator. simPATI’s leadership will only partially offset the negative impact of Telkomsel’s high base and lackluster performance of its other brands. To add on, lower realizations from fixed-line business would negatively impact TLKM’s earnings. ISAT have a better fate given that fixed-line contributes marginally to its revenues, while its internet business is growing rapidly. We expect EXCL to lose out to big players therefore implying a low growth going forward. Lastly, while BTEL’s growth has been affected, we view its growth story is still strong enough to be able to outperform its peers.

Buy for telco sector. We reduced our WACC estimates to factor in lower risk free-rate (now at 9.5%) and market premium (now at 5.0%). We also adjusted our beta estimates. The cut resulted in increase in TP for TLKM from Rp8,200/share to Rp9,300/share (WACC: 13.6% to 12.5%), and therefore we maintain our Buy call. For ISAT, the TP increased from Rp5,000/share to Rp6,600/share (WACC: 13.8% to 11.9%) while for BTEL from Rp96/share to Rp150/sha! re (WACC: 14.2% to 12.2%). We therefore upgraded our call from Neutral to Buy for both stocks. Lastly, we give discount of about ±38% to EXCL’s DCF derived equity value of Rp2,100/share to arrive at TP of Rp1,300/share. (We also adjusted our forecasts and upgraded our TG from 0% to 3%) The discount is given because EXCL’s free float is only 0.2%.