CIMB Telekomunikasi Indonesia

Company update - Robust growth but largely priced in - by Kelvin Goh CFA
(TLKM IJ / TLKM.JK, NEUTRAL - Downgraded, Rp7,300 - Tgt. Rp8,500, Telecommunications)

We downgrade Telkom Indonesia to NEUTRAL from Outperform after a recent surge in its share price and recommend investors to switch into cyclicals. The stock has outpaced the JCI by 44% since our upgrade to Outperform in Aug 08. We remain positive on Telkom given: 1) its stronger net adds in Jan-Feb 09; 2) potential benefits from a revamp in spectrum fees; and 3) easing competition. However, our key concern is that usage in commodity-driven areas has softened. Our forecasts remain unchanged but we are raising our DCF-based target price from Rp7,300 to Rp8,500 after lowering our WACC assumption to 12.3% from 13.1% on lower competitive risks and the possibility of a new spectrum fee regime. Telkom's forward P/E has surged from a sharp 25% discount to a 10% premium over the JCI, and near its previous peak of 20%, suggesting that further outperformance prospects are diminishing.