BNPP INDONESIA/TELECOMS Early signs of easing

INDUSTRY OUTLOOK Ï
No new aggressive offers from all three major operators since May.
Competition eases slightly with some earlier promotions reversed.
Operationally, Telkomsel & XL are likely to perform well in 2Q10.
Maintain POSITIVE. Top pick: Telkom Indonesia.

Telcos remove some previous promos in June-July
In our last report, Market competition stabilising, dated 14 June 2010, we highlighted that market competition remains intense but had started to somewhat stabilise with no new aggressive offers from all three major operators during May. In June and early July, there were again no new aggressive offers. Instead, Telkomsel raised the charging time block for its simPATI prepaid plan to 12 seconds from 10 seconds. Meanwhile, XL (EXCL IJ) terminated its SMS bonus program for new subscribers in end-June and also raised the threshold for free SMS to 12 paid SMS for peak periods (previously: after eight paid SMS). Indosat has also just announced that subscribers will only be getting 100 free SMS after two paid SMS from 1 August, vs after one paid SMS previously. While market competition could re-intensify in the weeks leading to and after the Lebaran festive season (10-11 September), these positive signs reaffirm our view that competition is unlikely to de-generate into a price war similar to 2008.

Telkomsel looks set to record strongest net addition in 2Q10
We expect Telkomsel (65% held by Telkom Indonesia; not listed) to report the strongest mobile net addition of 5m-6m subscribers for 2Q10. This represents a rebound from a weak 306,000 net addition in 1Q10, and comes after the launch of several promotions in February-March. This would bring its market share to above 47%, from 46% in 1Q10. We expect XL to report positive net addition of around 2m subscribers, which is stronger than the 1.1m mobile subscribers added in 1Q10. Its market share could rise closer to 19% from an estimated 18.3% in 1Q10. For Indosat, after recording an exceptionally strong net addition of 4.8m in 1Q10, we expect some subscribers to churn out of the network, which may result in softer net addition for 2Q10. It has also eased its marketing activities following aggressive promotions in the earlier part of this year.

Maintain POSITIVE; Top pick: Telkom
We continue to remain POSITIVE on the Indonesian Telco sector. While competition remains intense, our observations in May-July suggest that the market is stabilising and there are some early signs of easing. Our top pick in the sector is Telkom Indonesia (TLKM IJ; TP: IDR9,100; BUY). The stock trades on our 2010E EV/EBITDA (adjusting for the Telkomsel stake) of 5.7x, which is 8% (42%) below its 5-year average of 6.2x (peak: 9.8x). Its valuation is also below the Asian peer average of 5.9x, based on our own and Thomson One consensus estimates despite a stronger earnings growth profile (2010-12E CAGR: 9.8%). Short-term catalysts are stronger 2Q10 results and receding concerns on the Flexi-Bakrie Telecom deal. Key downside risks to our DCF-based TP for Telkom are: a) aggressive price cutting by competitors may result in loss of market share for Telkomsel or reduced margins; and b) Telkom overpays for acquisitions.