DBS (Indo) Telkom: Capitalizing on elasticity (Buy, TP Rp10,700)

Telkom (Rp8,700; Buy; TP Rp10,700; TLKM IJ)

Capitalizing on elasticity

• Telkomsel has carefully capitalized on elasticity to grow revenue despite lower MOU

• Lowered group capex to USD2.1b but raised ERP to Rp875b, and adjusted Ni by 2%

• Switch from Indosat to TLKM, with a target price of Rp10,700.

Telkomsel gained market share vs. Indosat (ISAT IJ). Telkomsel’s (Tsel) revenue growth of 7.4% q-o-q exceeded the 5.6% increase recorded by ISAT. Tsel added 5% subscribers to 79.8m, while ISAT suffered a 0.5% q-o-q decline. Though Tsel’s MOU fell 6.6% q-o-q to 32.7b minutes, its estimated 3Q09 ARPU rose 5% as Tsel pursued higher-value minutes. We maintain FY09F revenue growth at 11%, as implied by its 9M09 result and 63% EBITDA margin.

Minor adjustment to group NI. We lowered FY09F and FY10F group capex to USD2.1b each, which represent 32% and 29% of group revenue. We also raised ERP (early retirement plan) expense to Rp875b from Rp500b previously for FY09F, in line with the planned Rp750b to Rp1t expense. Conservatively, we included the same for FY10F. Hence, core NI is adjusted up c. 2% for FY09F and FY10F.

Reiterate BUY. We nudged up our DCF-based price target to Rp10,700. We expect TLKM to take advantage of Indosat (ISAT IJ)’s weakness to gain market share. Also, the IDR has strengthened 13% vs. the USD YTD-Sep09, which should keep capex and international interconnect costs low. We forecast positive earnings growth for TLKM vs. contraction at ISAT. Besides, TLKM’s 13x FY10F PE and 5x EV/EBITDA valuations are more reasonable than ISAT’s 27x and 6x. We recommend switching from ISAT to TLKM.