Tekomsel shows better performance
Telkomsel has an internal target based on a 50% share of industry net additions. The management set a moving target because of the stiff competition in the marketplace. In 1Q10, Telkomsel failed to meet its internal target as it only attained a 4.2% market share of the total industry net additions of 7.6mn. 2Q10 should be a much better quarter, however, as Telkomsel has indicated net additions of 1.7mn in April 10 and 2.4mn in May. Competition may be tight, but the price war has thankfully eased off, with Telkomsel’s revenues per minute increasing to Rp240 from a low of Rp200.
Developing its broadband business
Broadband has huge growth potential in Indonesia. Some indications suggest there are only 30mn internet users in Indonesia. This translates into a very low penetration rate of 13%. To develop this market, Telkom is targeting fixed broadband services at multi users and mobile broadband at personal users. Pricing remains a key issue. For fixed broadband, Telkom plans to lower its monthly subscription fee from Rp220,000 currently to Rp180,000 for unlimited access. When this service was introduced the subscription fee was Rp250,000. Telkom currently has 1.2mn Speedy subscribers (fixed broadband) and 13.0mn mobile broadband subscribers.
Possible towers spin-off
Telkomsel is mulling the possibility of spinning off its towers to unlock the value of the assets. Telkom has already entered into talks with Singtel (which owns a 35% stake in Telkomsel). The main obstacle to the sale of towers is that the negative investment list does not allow foreign ownership of towers. This means that Singtel would need to be compensated when the towers are sold (to a domestically owned company – most probably under Telkom). So far, Telkom and Singtel have not reached agreement on the pricing. At the end of the day, the towers would be sold to Mitratel (a subsidiary of Telkom). Mitratel would then have about 9,000-10,000 towers available for rent to third parties. The ultimate plan is for Mitratel to go public eventually.
Maintain BUY
Although Telkom is a solid company with a healthy balance sheet and strong operating cash flow, subdued growth due to tight competition has put the stock price under pressure. Going forward, however, a second wave of growth from the data business could make the stock an attractive investment proposal given the stock’s discount to the market. BUY maintained with a target price of Rp9,650
Merger overhang
The proposed Flexi –BETL merger has entered a “status quo” period, since approval for the merger will need to be sought from the new management of Telkom. The Ministry of State Owned Enterprises has yet to appoint the new members of Telkom’s BOD. Hence, the existing management term will retain their positions until the next extraordinary general meeting. Telkom’s intention is to utilize the CDMA based technology for lower priced services whilst keeping Telkomsel as a provider of premium services. By focusing on two market segments, it should be easier for Telkom to compete in the marketplace.
Blackberry price war?
The Blackberry is quickly gaining popularity in Indonesia. However, the size of the market is still quite limited and there are less than 2mn users. The relatively high subscription fees and costly handsets put the device out of the reach of most Indonesians. Moreover, from a technical aspect, the 3G network is still limited to the large cities in Indonesia (although Blackberry can still utilize the 2G network). In a bid to spur growth, operators have been offering lower subscription fees. Nonetheless, price is not everything and network quality is an important consideration for some Blackberry users. In this regard, the cheaper offerings from 3 and Axis may find the going tough as the quality of their networks is not as good as the quality of the incumbents’ networks. In our estimates, the variable cost for the operator to Research in Motion is about US$8 per month. At this level, 3 and Axis are barely making money.
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