CLSA Telkom contrarian buy?

Good Morning. Despite y'days weakness largely on the back of European woes, there was still some decent buying support noticeable which underlines the recent belief that every sell-off is a buying opportunity. Strong 1Q10 als continue to stream in, underpinning the strong macro outlook in Indonesia.

I have been asked by my regional colleagues what big cap name would I buy here if one don't want to chase say the usual suspects like Astra, BCA, Mandiri, United Tractors etc. I must say Telkom Indonesia is looking increasingly interesting. The stock has underperformed both the JCI and Indosat by 35% in the last 6 months - see chart below. While I admit the industry dynamics is no way as attractive is it used to be with now too many players and perpetual price wars, most of the negative news is already priced in the stock. With mobile penetration still only at 60%, there would still be decent growth but obviously not the 20-30% they enjoyed for the last few years.

As Peter Lych will probably say, Telkom has gone from as fast grower to a Stalwarts (or mid-growers). Stalwart are huge already, but they either buy market share (in Telkom's case, possibly buying a stake of value operator Bakrie Telkom). But they have retail oomph that they can generate 10-12% annual growth in earnings. If you buy Stalwarts at the right time, you can still make 30 or even 50% return in relatively short time.

Investors have been getting tired of holding to Telkom, we started to see capitulation in this massive laggard. 1Q results will likely disappoint because they were late in responding to the recent sms price war. However 2Q onwards will see improvement as Telkom defended their market share. Voice tariffs have bottomed and started to tick up again as player becoming more rationale.

Comps below show Telkom standing out almost in every metrics with the exception of PLDT. Further dips in this stock warrants a BUY.

Everyone hates the stock but I begin to like! Nothing wrong paying 11x for 10-15% growth, 5% divy yield and 30% ROE.