Indonesian Telcos 1Q11 Preview: Switching Outperformers with Underperformers - Citigroup

 Channel checks point to Telkomsel gain — We believe Telkom will be the relative
winner for 1Q11 with it benefitting from more effective price tweaks with reduced
effects from its previously irrational price promos. XL and Indosat on the other hand are expected to face seasonal revenue pressure with 1Q being the traditional weak quarter. We retain our Buy recommendations on Telkom and XL although note
potential for slight near-term disappointments for XL with the street accustomed to
aggressive growth. We maintain Indosat at Sell with a potential cost surprise.
 Industry faced a more stable competitive environment in 1Q11 — Channel checks indicate that competitive intensity in 1Q11 has eased relative to 4Q10 when aggressive tariffs were pushed. Telkomsel has started to limit its aggressive price
promotions to new subscribers, thereby limiting revenue dilution. Similarly, we see
no new aggressive price promos for XL and Indosat in 1Q11 with upward price bias.
 Indosat may surprise on higher costs in 1Q11 — This is due to the change in spectrum fees, which will raise expenses as well as the introduction of an early
retirement program in FY11 which will see the company potentially reduce its 3,800
strong workforce by as much as a third. The company may incur Rp0.6tn in costs
linked to this exercise. Labor charges may still remain flat for the next year with
Indosat potentially adjusting pay to more appropriate levels for the remaining talent.
 Telkom finally seeing better performance — Aside from potential revenue share
gains from Telkomsel’s more rational price moves in 1Q, we see the company also
benefitting from the change in spectrum fees that come into effect in FY11.
Moreover, we believe Telkom’s Flexi CDMA platform may finally start to see revenue
improvements following a management restructure for the division.
 XL moves to reality — The lack of any major marketing programs in 1Q11 and
higher 4Q10 performance base may push XL to perform more softly than its peers.