Kim Eng TLKM: Good 9M09 result, BUY

Growing EBITDA margin
Telkom reported Rp9,300b net profit in 9M09, up 4% YoY. The net profit is inline with our expectation. Revenue was up 6% YoY, mainly supported by a 15% growth in cellular revenue and 14% growth in revenue from data & Internet while fixed line revenue continued sliding 14% YoY. Operating expenses increased 6% YoY in line with the revenue growth. As a result, operating income was up 5% YoY to Rp17,954b. The company managed to post increase in EBITDA margin to 59.7% in 9M09 from 58.2% in 9M08. At the expense side, the company managed to cap operating expenses by cutting marketing expenses (down 5% YoY) and salaries (down 12% YoY). Major item showing growth in operating expenses is depreciation (up 12% YoY), in line with capex.

Strong subscriber growth
Telkomsel showed strong performance as the company managed to increase market share in subscriber base while maintaining ARPU QoQ at Rp48,000. Minutes of use increased significantly to 101 in 9M09 from 59 in 9M08. Telkom also succeeded in increasing subscribers of Speedy, the wireless broadband product, by 65% YoY. Flexi showed a 63% YoY subscriber growth, but ARPU came down sharply with -47% while number of SMSs increased 62% YoY.

Revenues from new waves continue growing strongly
Telkom seems to be able to grow its “new waves” (new sources of revenue) while strengthening its cellular performance. Revenue from “new waves” increased 50% YoY in 9M09, or 45% QoQ in 3Q09 alone. In comparison, “legacy” revenue (fixed line, cellular, fixed wireless) was only up by 3% YoY.

We see that the new wave revenue will continue growing strongly in the future. However, due to its small base, it will take time for the new waves to generate bi enough scale to compensate slower growth in the legacy revenue.

Having realized the above, Telkom President Director stated that the company will continue to pursue un-organic sources of growth through M&A. The company’s low gearing (still at 43% as of end of September 2009) provides room for more borrowing to finance the above-mentioned acquisitions. The company is thinking of limiting gearing at 1.0x (including funding for acquisitions).

Room for upside remains as share price lagging behind ICI
Subsided price was has benefited Telkom. That will allow the company to focus on its strategy on expanding its new wave revenues and defending legacy revenues. Although outlook is not all rosy for Telkom, share price should improve in the future as the counter has been lagging behind the Indonesia Composite Index by 28% YTD.

The company is a big dividend play. which generates a high ROE (latest was 45.5%). Reiterate BUY, target price is Rp10,120, pegging the stock at 15.4x 2011F PER, 4x 2011F EV/EBITDA.