Telkom (TLKM IJ), sideshows dominating - CLSA

CLSA Indo HoR Dee Sena is re-iterating his SELL call on Telkom (TLKM IJ). TLKM offers almost no earning growth. Plus, no yield angle. Also not a leveraged to a rising rupiah, as both revenues and costs are largely IDR based. In term of weighting in the index, it has fallen from above 18% to just 5% now. His view is that for investors seeking a domestic proxy, we would advise switching to the Indonesian banks.

Key points from the report:
· Considerable coverage around TLKM potentially buying SingTel’s 35% interest in Telkomsel. The plan seems unworkable.
· SGT would be unwilling to cede control without being compensated at a hefty price.
· Moreover if SGT’s Telkomsel stake was swapped for a stake at the TLKM level it would require the Government relinquishing control (currently 51%) an unlikely scenario.
· FY10 results were uninspiring. NPAT of Rp11.4tr representing 1% growth yoy. This was 3% below consensus.
· TLKM gave guidance for FY11 NPAT growth of 10%. We believe this is unrealistic given the current hypercompetitive and rapidly maturing mobile market. CLSA forecasts 2% 2012 NPAT growth and is 8% below consensus.
· Not leveraged to a rising rupiah. Both its revenues and costs are largely IDR based. Also most of its debt is unfortunately rupiah denominated.
· Valuation: not compelling across all metrics. Using a blend of fair values derived from DCF and forward PE methodologies, we arrive at a TP of Rp6,409, which implies 10% downside.
· Trading broadly in line with regional telcos, Telkom offers considerably lower earnings growth and no yield angle.
· For investors seeking a domestic proxy we would advise switching to the Indonesian banks.