The data segment offers the greatest potential
Indonesia’s telecommunications industry is nearing maturity. Cellular subscribers have reached 197mn (based on data from BRTI), translating into a penetration rate of 85%. This number could be overstated as it is based on SIM card penetration. Nonetheless, we think that with this level of market penetration, the voice and SMS segment has reached maturity. Thus, natural growth should follow the real GDP growth. In contrast, the data segment is still promising as the penetration rate is still quite low. Factors affecting growth in this segment include: 1) purchasing power 2) equipment prices 3) software applications and 4) pricing of data services.
The price war to be resumed?
We notice that the telecom operators have been offering very low SMS prices, even after a gentleman’s agreement among the operators (witnessed by the BTRI regulatory body) to avoid a costly price war. The main operators are offering free SMS that can be used both “on-net” and “off-net”. The common structure is that for a certain usage of voice calls and/or SMS, users will be eligible for a certain amount of free SMS that can be sent to any operator. However, there are different types of segmentation based on geographical area, time of usage and activation periods (old vs. new customers) before a customer is eligible for free SMS. We believe it is more of a marketing gimmick than anything, given the complicated nature of the terms and conditions which apply.
Maintaining its dominant position
Telkom has announced its FY09 results. They are within expectations down to the operating level. However, we underestimated the interest expenses and tax payment, meaning the bottom line was lower than expected. Telkom has maintained its market leadership in almost all segments. Going forward, Telkom does not plan to reduce its capex as its competitors do. This is key to maintaining its dominant market position even with the market mature. The second wave of growth will come from data transmission. Telkom intends to spend about US$2.0bn on capex in FY10. This will give it the edge in the data market.
Maintain BUY despite earnings downgrade
We have revised our earnings estimate mainly to align our numbers with the FY09 results. The most significant change is a higher tax rate of 30% compared to 23% previously. Earlier we had expected Telkom to be eligible to enjoy tax incentives due to its high free float. However, this did not turn out to be the case and the effective tax rate was 29% in FY09. As a result, we lower our EPS estimates by 7.2% for FY10 and by 15.4% for FY11. Nonetheless, we remain positive on Telkom. It has strong cash flow which allows the company to continue to invest for future growth. Despite our lower Target Price of Rp9,650 we maintain our BUY recommendation on the stock.
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