Our research assistant Vera Ongyono has just written her first report: Excelcomindo (EXCL IJ). Free float in this telco operator is less than 1%, so it is not really investable for most investors, but Vera’s report provides an interesting insight into the third largest mobile operator in Indonesia (and also the most aggressive). The company has 17% market share of the subscriber market but only 9% share of the profits.
EXCL’s balance sheet is the weakest amongst the big three, carrying net debt of Rp15tn as of 1H09. A US$300mn rights issue will alleviate the immediate cash draught. However, as EXCL has almost Rp1.3tn of debt maturing this year itself and plans to spend USD300m in capex. Unless there is a significant price increase without customers lost, EXCL’s operating cash flow may not be able to cover its capital expenditure.
Mobile tariff in Indonesia has dropped off from US$0.12/min to US$0.02/min, literally from one of the highest in the world to one of the cheapest within 6 months. No wonder that EXCL only generated Rp2.2tn in operating cash flows out of Rp10.7tn capex investment last year.
Clearly, the cash bleeding can’t go on forever. In fact, after years of price war, price has finally started to show an improvement. Rev/min has finally risen albeit very slowly. With 9 mobile companies still operating in Indonesia, expect price recovery (i.e. price increase without losing subscribers) to be gradual at best.
Rival Indosat is faring bit better, but is clearly still struggling as well. Even during the peak season in Sept09 for Ramadhan, this second largest mobile operator was not able to improve its operating profit (see analyst Wili comment for Indosat’s weak 9M09 results.
We prefer dominant Telkom Indonesia (TLKM IJ) as it has the strongest balance sheet and brand equity. Profitability has already improved and sub growth is likely to follow. BUY TLKM
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