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Jumat, 17 Juni 2011

Bakrie Telecom - Beyond its fundamentals; downgrading to Sell - Deutsche

Downgrading to Sell; we re-instate target price of Rp235
Bakrie Telecom has been the best-performing Indonesian telco in 2011. The stock has appreciated 50% YTD (vs. JCI’s 3%). However, we believe the company's weak fundamentals do not warrant current valuations. For the past 18 months, BTEL has seen declining market share vis a vis GSM-based operators, resulting in a largely flat revenue trend in the past 2 years (2009-10). We think the trend is likely continue as data surge will largely go to GSM-based operators. A high debt burden also translates into core earnings losses. Downgrade to Sell from Hold.

Pricing no longer appeals
BTEL’s pricing positioning is increasingly unattractive to many new (and pricesensitive) users. We estimate that BTEL’s RPM of Rp151/mnt are in line with Tsel/ISAT RPM of Rp150-160/mnt and well above XL’s Rp102/mnt. Consequently, we expect BTEL to continue to lose more market share to GSM-based operators. Also, in data business, CDMA operators are losing to GSM-based operators due to coverage and/or equipment.

No value creation
Based on our forecasts, the company will likely deliver negative FCF during our forecast years. We project gearing ratios to continue to rise. Combined with the stock’s strong performance, we downgrade BTEL to Sell.

Downgrading to Sell from Hold
We are downgrading our rating from Hold to Sell with target price of Rp235 per share. We believe that the stock is trading far above its fundamentals. We have derived our target price using DCF (WACC 11%, TGR 2.5%, similar to other telcos reflecting the industry’s mature stage/penetration levels of 100%). Risks are price recovery and cost efficiencies. See pages 6&7 for more details on valuation and risks.

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