Danareksa Bakrie Telecom (BTEL IJ, Rp135 BUY) Likely to get add...

Reiterate BUY
We retain our confidence in the company’s business model and maintain our BUY recommendation on the stock. Adding to the positive outlook is news that BTEL is very close to getting additional bandwidth in the JBJB area since the Indonesian Telecommunication Regulatory Body (BRTI) has discovered unutilized bandwidth of 1.25 Mhz in the 800Mhz spectrum. BTEL plans to use this extra bandwidth to make a push in the fast growing internet business. In regard to the impending announcement of the 9M09 results, we are upbeat and expect them to be on track.

Additional bandwidth
BRTI has discovered an idle channel in the 800Mhz spectrum. This channel is adjacent to BTEL’s existing channels in the Jakarta, Banten and West Java (JBJB) areas while for Telkom Flexi the channel is adjacent in non-JBJB areas. Technically, this idle spectrum can only be utilized by Bakrie Telecom and Telkom Flexi as there might be interference if it is used by other operators such as Mobile-8 and Indosat’s Star One. As such, the idle channel will not be tendered but, instead, directly allocated to BTEL and Telkom Flexi. Currently, the 800Mhz spectrum has 14 channels with 2 channels safeguarded. BTEL and Telkom Flexi have 3 channels each, while Mobile 8 has 4 channels and Star One only has 2 channels. With the new arrangement, BTEL would have four channels in JBJB while Telkom would have 4 channels in non-JBJB areas. Nonetheless, it should be noted that the formal process of granting the idle channel is still in process.

To use the additional bandwidth for data
With the additional channel, BTEL plans to utilize the additional capacity to develop internet access based on the EVDO standard (which is equivalent to the 3G standard on the GSM system). Currently, BTEL’s spectrum in JBJB is fully utilized for voice and data transmission. Yet with the extra bandwidth, BTEL will be able to target the fast growing internet business. However, the company has yet to disclose detailed plans concerning matters such as capex, the rollout timeline, as well as the positioning and its pricing strategy. What we do know, however, is that capex for internet development should be less than the capex for new subscribers at US$40 per subscriber. This is because the company will basically only need to make investments in equipment and the new system. We believe that BTEL is likely to disclose the business plan early next year.

The 9M09 results should be on track
The announcement of the 9M09 results is imminent – probably by the end of the month. We are confident that the company is on track to achieve its target of 10mn subscribers by the end of this year. In 2009, the RPM has tended to recover, albeit rather slowly. And there is room for margin improvement as the company stands to benefit from economies of scale. Note that most of the newly opened areas are still having to bear start-up costs. The JBJB area sets the standard for other areas, and for this area the company claims that the EBITDA margin is already above the 40% level.