DBS Telkom: Fixed line outshines cellular; BUY Rp7,700; Price Target : Rp10,000

* Net profit of Rp2.8 tr (+13% yoy, -5% qoq) was in line with our and consensus expectations
* Fixed line profitability was the key positive; low cellular subscriber addition was the key negative, but is likely to be resolved in 2Q10
* Potential upside to FY10F/11F earnings if fixed line profitability is sustainable
* Re-iterate BUY for over 30% potential return

1Q10 net profit is 24% of our FY10 forecast. Non-cellular earnings surprised at Rp958bn (+19% yoy, +4% qoq) thanks to (i) healthy 12% qoq growth in fixed broadband subscribers from 1,145K in 4Q09. (ii) lower personnel and marketing costs in the traditional fixed line business. The focus on broadband growth and cost cutting should continue under its Fixed Business Improvement Programme (FBIP).

Cellular business turnaround expected in 2Q10. Telkomsel's Rp1839bn earnings contribution (+10% yoy, -14% qoq) was below expectation due to lower subscriber addition in 1Q10 (0.3m vs 6m at Indosat). Telkomsel took time to respond to the SMS promotions (due to regulatory concerns) but it finally came out with SMS promotions in 1Q10, which should be reflected in healthy subscriber addition (of over 3m) in 2Q10F.

BUY for cellular recovery in 2Q10F. Recent warnings from the regulator are discouraging telcos from offering free offnet-SMS promotions, which is good news for the sector. Telkom is a clear laggard in the JCI with appealing valuations. The near term catalyst should be better cellular performance in 2Q10F.