Deutsche Bank Telkomsel targets higher net adds in 2011

After revenue growth of probably only 5% yoy in 2010 (below original guidance of 6-7%); Telkomsel's chief targets 115 million subscriber base in 2011 - up from 2010's level of 95-98m users. The implied net adds is 17-20m users in 2011. This is higher than estimated net adds of 15m users in 2010; and is ahead of our estimates in previous report.

We think that this is an aggressive target in particular when we take into account the fact that at the end of 2010, total cellular subscriber base will probably reach 232m users (representing 97% of total population). We estimate that combined net adds in the cellular industry would be at least 25m users - bringing up total subscriber base to 257m users (or 8% above Indonesia's population). The fact that non-major subscriber market share is at approx 22%, suggesting that industry's churn rate will remain high. Given 10 operator market, intense competition will keep prices low.

The good news is that target capex for 2011 at Telkomsel is Rp10.5tr - down from 2010's projected capex of Rp13-15tr. Despite sluggish revenue growth trend in 2011, declining capex should more than offset lower margin, which would still raise FCF to Rp12.8tr in 2011F - up from Telkomsel's annualised FCF (from 9M10 result) of Rp10.3tr.

Despite competition risks, we retain our BUY rating on the stock. At 11.5x 2011F PER, we see limited de-rating risks on the stock.