Indonesian telecom sector Growing profitably despite competition - Macquarie Research

Event
? We spent 4 days marketing Indonesian and Malaysian telecoms last week through Singapore and Hong Kong. Investor response to Indonesian telecoms was very positive given robust growth, rising profitability and strong fundamentals for data revenue growth despite intense competition. Questions were focused on whether EXCL's run could continue into 2011, was the ISAT turnaround really happening and whether TLKM could bounce back in 2011.

Impact
? Does EXCL's share price still have legs? Investors are more cautious on the potential for another year of strong share price performance, but nevertheless remained quite bullish on the 12 month outlook for EXCL given its strong fundamentals. Importantly, EXCL's valuation remains undemanding at 12.9x FY11PE for arguably one of the best managed operators across the region with pure wireless exposure to one of the fastest growing telecom markets regionally. Furthermore, we still see upside risk to margins and data revenue, and also room for medium term surprises from market share gains.
? Is the ISAT turnaround really happening? Whilst investors want to believe in the ISAT turnaround, a couple of false starts in 2010 have left them somewhat gun-shy. Our positive view on ISAT was reinforced by improved growth and profitability in 2010 and a settled management team. Importantly, ISAT is now generating positive free cash flow. We expect these underlying trends to continue, although caution against volatility on a quarterly basis.
? Can TLKM bounce back? Investors were understandably unclear on the outlook for TLKM (and Telkomsel) - especially its competitive stance. There was, interestingly, limited focus on TLKM despite the significant sell-off post its FY10 results. We expect near-term management changes at Telkomsel to be key in gaining clarity on Telkomsel's competitive strategy going forward.
? Outlook for competition? As always with Indonesian telecoms, competition was a popular topic for discussion. However, incrementally there was less focus than previous marketing trips, with more attention given to individual stocks. We expect 2011 to be a continuation of the intense competition seen during 2010, whilst expecting the trend for profitable growth to continue.
? Is data revenue making an impact yet? Investor interest in the opportunity for growing (non-SMS) data revenue is getting stronger. As yet, its contribution remains relatively small at ~15% of industry revenues, but is growing at healthy double-digit levels. Importantly, Indonesian operators are benefiting from being one of the few markets which do not subsidise handsets, while 50% mobile internet penetration provides a solid platform for very strong growth without impacting profitability.

Outlook
? EXCL remains our preferred sector exposure, benefiting from the strongest management team, pure wireless exposure and an undemanding valuation of 12.9x FY11E PER. We would view any competition-led share price weakness on the back of modest 1Q11 results as a buying opportunity.