Indopremier TLKM 2011: Change of view

TLKM did not deliver earnings growth that we had expected. As incumbent, TLKM stood strongest in terms of coverage and financials: still, market prices and investors benefit from earnings growth, and in this
matter TLKM do not stand out. While cellular growth is being hindered by competition, in the medium term, growth from internet data area can be expected to support company’s prospect and share price. At
yesterday’s closing price of Rp7,600 TLKM was trading at 13 times FY11 our estimated earnings. While current level of multiple is below its 3 (three) year averages of 14 times, given the inferior prospects of
earnings growth, multiple expansion for TLKM seems remote. Using blended valuation methodologies of DCF of 12.1% WACC and 1% LTG and historical average-PE multiples we arrive at a target price of Rp8,400 for TLKM implying a thin 10% upside: we downgrade our call to a HOLD.

9M10 Results
TLKM reported 9M10 revenue growth of 3.9% YoY to Rp52.12trillion, while operating expenses rose by 8.4% for the same period resulting in a 9M10 decrease of operating profit by 4.2% to Rp17.1trillion, while
EBITDA managed to be slightly increased to Rp28.2trillion, +0.3% YoY. Compared to 2Q10, TLKM earnings achievement decreased: revenue by 2%, operating profit and EBITDA by 3%. Meanwhile, YoY comparison with 3Q09, total revenue thinly increased by 1.87% YoY to Rp17.87 trillion, while operating profit decreased by 8.51% YoY and EBITDA decreased by 4.3% YoY. In the last quarters, we noticed Telkomsel did increased cellular tariff but higher cost seem to prevent TLKM to book higher profitability. Competition in the cellular business still has its negative affect on TLKM profitability.

Why robust growth looks difficult for TLKM
Quarters ahead, we do not foresee TLKM will produce significantly higher growth of revenue and profitability as compared to the last 11 (eleven) quarters we observed. Competition and maturity of cellular business
were the main reason. With Telkomsel charged relatively higher effective tariff compared to competitors we view that growth from first time buyer will not be absorbed by the company. In the last 11 (eleven) quarters
(Table 5) showed how TLKM struggling to achieve higher profitability.

Valuation and Recommendation
At Rp7,600, TLKM is trading at 13 times our FY11 earnings estimate with 2% growth (vs. the JCI of 14.1X with 25% EPS growth). Our previous view was TLKM would represent Indonesia’s economic growth: we, at present, no longer hold. While internet data businesses present opportunity, this area, given current players, is also prone to competition that may lead to price war. We downgrade our call to a HOLD with target price of Rp8,400/share.