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Kamis, 14 April 2011

Telekomunikasi Indonesia (TLKM IJ, Rp7,100 BUY) In search for growth opportunity - Danareksa

More share buybacks
With a relatively high ROE of 28% in FY10 and limited investment opportunities, the easiest way for Telkom to enhance its returns is to invest in itself. As such, the management of Telkom plans to propose a share buyback of not more than Rp2.0tn. However, at the current share price, the planned buyback is relatively small and only represents 1.5% of the total shares outstanding. In addition to this buyback, the government - as the ultimate shareholder – intends to have a share buyback for Telkomsel, although it has yet to approach Telkom’s management regarding this issue. Presently, Telkom has a 65% stake in Telkomsel with the remaining 35% of the shares held by SingTel.

Unlocking the tower business
Telkom has yet to fully unlock the value of its tower business. In total, the company claims to have at least 16,000 towers available for lease nationwide with around 2,000 towers expected to be leased out in FY11. Currently, Telkom is in talks with Singtel regarding plans to purchase the towers of Telkomsel and place them under Telkom’s subsidiary Daya Mitra. However, Singtel is a bit reluctant to sell off the towers in view of their potential to generate revenues in the future. Singtel, notably, is not allowed to invest in a tower company since tower companies are on the negative investment list. Basically, we think that pricing is the main issue here since Singtel essentially wants to enjoy the future value of the business but at its current valuation.

Pursuing non organic growth
Telkom has the vision of becoming a key regional player. It currently has its eyes set on acquiring a Cambodian telecommunications operator, citing the strong growth potential in Cambodia’s telecommunications sector. In a budding market like Cambodia, Telkom should be able to use its expertise to develop that country’s telecommunications sector. Going forward, Telkom will also look to pursue growth opportunities in other less-developed markets within the region to pursue its non organic growth strategy.

Value remains, BUY
We have to admit that Telkom is struggling to find a new engine of growth. Internet data is growing quite rapidly but not quickly enough to have a significant impact on earnings growth. Moreover, telco companies are not willing to invest ahead of demand, fearing that they might trigger a price war. Yet from a positive aspect, Telkom still has some value due to its strong balance sheet that will allow it to pursue a non organic growth strategy as well as make significant share buybacks. Furthermore, we believe that significant value can be unlocked from the tower business. Assuming that Telkom can distribute 60% of its net profits as dividends, then the stock should have an enticing yield of almost 5%. BUY recommendation maintained with a Target Price of Rp8,750.
Posted by Saham Pilihan at 08.13

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