TLKM posted in-line 1Q10 net income of Rp2.8tn, up by 13%yoy. It came as a result of a 6%yoy rise in revenues to Rp16.6tn, principally driven by a 24%yoy improvement from its data and internet services, which contributed about 30% of total revenue (versus 26% in 1Q09). What concerned us are the 1Q10 low net subscriber ads of only about 400k from 4Q09, the lowest among the top 3 GSM players. Despite the runaway leader in market share (about 53 % bas! ed on com bined subs of Telkomsel, Indosat and XL Axiata) and superior margins, the challenge remains on expanding its customer base amid tight competition. We maintain buy on the stock at Rp12,000/share. At the current price, the PER10F is 14.8x, an 18% discount to its main peers and a 13% cheaper than JCI.
Less than stellar earnings growth. Telkom ended up with a less than impressive net income growth of 13%yoy, though on qoq basis the growth was higher at 37%. Top-line contribution came from 40% cellular, 30% data, internet, IT, 20% fixed lines, 6% interconnection and the remainder for other services. Main revenue driver came from data, internet and IT services which grew by 24%yoy. Note th! at fixed- line services continued to be a drag to revenues, sliding by almost 7%yoy, which more than offset the 3%yoy improvement in cellular revenues. Additionally, 1Q10 EBITDA margin slipped to about 54.5% from 4Q09’s 56.7%.
New promotions/packages came much later. For the first 3 months of 2010, Telkom only registered net subscriber ads of 400k to end up with about 82mn cellular subscribers as of 1Q10, the lowest net ads among the big 3 GSM players. Either the churn rate was higher than usual or its inability to secure new customers was an issue reflected in the low net ads. Note that special promo by Simpati (i.e. Talkmania; free 50 mins talk time, etc) and Kartu AS (i.e., free chatting, etc) effectively came on stream late in 1Q, where as competitors have started their promos - particularly bonus SMS campaigns - in late 4Q. Thus, it could have resulted in the low net ads.
Top player, but challenge to expand customer base remains. We are sticking to a flat to single digit earnings growth for FY10 given that (a) challenges remain to expand an already high subscriber base amid dynamic competition and (b) impact on offering flat rates for fixed-line subscribers, to stop the segment’s gradual decline, remains to be seen. However, we are quite positive on the headways made by the company on its data, internet and IT services, which is seen to be a more significant contributor in the next few years.
Buy on valuations. Despite the subdued growth it presently offers, the company’s valuation remains attractive at PER10F of 14.8x, an 18% and 13% discount to its peers and JCI, respectively. Maintain buy at TP of Rp12,000/share.
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