Danareksa TLKM (TP Rp11,200) - Danareksa: Riding on a new wave

Buy call reiterated
Considering the stiff competition, Telekomunikasi Indonesia (Telkom) has announced a pretty good set of 9M09 results. An encouraging development this year has been the end to the damaging price war which did little to support revenues growth. For its part, Telkom has changed its strategy and is focusing on balanced pricing and service quality in an effort to maintain its existing customers and acquire new ones. So far the strategy seems to be working well as Telkom is continuing to dominate the market. The company’s balance sheet is strong and this should support capex in future years. We maintain our BUY recommendation on the counter with a target price of Rp11,200, translating into PER FY10-11 of 16.3-14.5x and EV/EBITDA FY10-11 of 5.7-5.1x.

“New wave” revenues are key to future growth
Telkom’s revenues can be differentiated into legacy revenues and “new wave” revenues. The legacy revenues are mostly the company’s revenues from its core businesses that are already mature in respect to both its cellular and fixed line services and are recording low single-digit growth. As for the “new wave” revenues – that is revenues from the more prospective business segments such as Data, Internet and IT applications – the growth prospects are much brighter. Telkom currently only has 2.4mn broadband subscribers (wireline & wireless) and if market penetration can get anywhere near to the cellular market penetration then breakneck growth is assured ( Indonesia currently has around 150mn cellular subscribers). Growth has already been solid. From only 6.6% in FY04, the new wave segment now contributes around 9.0% of total revenues.

Cellular: on the right track
The end of the price war is a reassuring development and raises confidence that Telkom’s cellular business is on the right track. This business is extremely important to Telkom since cellular revenues account for the bulk (61%) of Telkom’s total revenues. In 3Q09, Telkomsel added 3.7mn subscribers with relatively stable ARPU of Rp48,000/month. The revenues per minute (RPM) are estimated at around Rp200 per minute. Another positive has been Telkomsel’s good cost control. This has helped lift the EBITDA margin to 66.1% in 9M09 from 64.7% in FY08. With the price war now over, margins should hold steady considering the industry is already quite mature.

Rp20tr of capex planned for 2010
Capex is the main driver for growth as technological innovations bring about faster and better quality communications. For 2010, Telkom has indicated capex of Rp20tr, with 65% of this amount allocated to Telkomsel, 27% to Telkom and the remainder to support its other subsidiaries. For the “new wave” business segment, the allocated capex is Rp3.75tr (+29% higher yoy), consisting of direct capex of Rp1.75tr and indirect capex of Rp2.0tr. With net gearing of only 42.6%, the company will not face any financial constraints in undertaking its capex plans.