(TLKM IJ / TLKM.JK, UNDERPERFORM - Downgraded, Rp8,100 - Tgt. Rp8,400, Telecommunications)
We came away from Telkom's analysts briefing feeling less enthusiastic about the stock as the guidance given was unexciting. Risks are also increasing as its rivals are eyeing the ex-Java islands where Telkomsel has a large market share. Telkom believes that a consolidation in the CDMA space could happen this year and we believe the telco is a likely consolidator. We cut our FY10-11 core net profit estimates by 7-10% on assumptions of lower revenue and higher depreciation. We also raise our WACC by 0.4% pts to 12.2%, leading to a lower DCF-based target price of Rp8,400 from Rp12,000 previously. We also cut our recommendation to UNDERPERFORM from Neutral as we feel that Telkom's performance is likely to disappoint on the back of rising competition in the ex-Java islands and soaring depreciation on persistently high capex.
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