PT Telkom (Neutral) - Chasing Singtel stake a distraction? - Macquarie

Event
§ The Indonesian Government (51% TLKM shareholder) has instructed TLKM's
management to assess purchasing Singtel's 35% stake in Telkomsel in a bid to
gain 100% control of Telkomsel separate from last week's AGM.

§ TLKM's proposed buyback was approved at its AGM for up to Rp5tr or 645m
shares (3.2% of outstanding shares) over a maximum period of 18 months, which we
estimate will be ~2% EPS accretive. Whilst the buyback is positive, we maintain
our Neutral call given TLKM's challenging outlook.

Impact
§ Assessing Singtel's Telkomsel stake potentially a distraction. We flag TLKM's
assessment of purchasing Singtel's stake in Telkomsel as a potential distraction
from the bigger picture of improving Telkomsel's underlying operational
performance. We note the key short-term benefit from purchasing Singtel's stake
would be to fast-track TLKM's tower restructuring plans which appear to have
stalled, whilst also improving its growth prospects through diluting the
contribution from its declining fixed line business with minimal execution risk
from an M&A perspective. We assign a probability of less than 50% for the
transaction being realised given Singtel's stated intention to retain its stake
and given Telkomsel's status as Indonesia's incumbent operator in a market with
strong long term growth potential.

§ Buyback ~2% EPS accretive, good use of cash reserves. TLKM's Rp5tr buyback
should be ~2% EPS accretive, also providing near term support to the share
price. The buyback represents 48% of TLKM's cash reserves, increasing its ND/E
from 18% as at 1Q11 to 29% assuming the full allocation is spent. Whilst we see
the buyback as a good use of TLKM's cash, we still prefer a higher dividend
payout ratio given its strong cash generating ability.

§ Outlook remains challenging. TLKM's outlook remains challenging given its
ongoing intention to aggressively defend market share through downward price
adjustments which in our view has accelerated market share declines as
highlighted in our note "Losing Voice" (18 May 2011).

Earnings and target price revision
§ No impact.

Price catalyst
§ 12-month price target: Rp 7,350 based on a DCF methodology.
§ Catalyst: 2Q11 results in July 2011

Action and recommendation
§ TLKM appears fully valued at 12.9x FY11E PER given its challenging outlook
reflected by limited near term earnings growth potential. We continue to prefer
XL Axiata ( EXCL IJ , Rp 6,500 , Outperform , TP: Rp 7,300 ) which in our view
offers stronger leverage to mobile internet relative to peers and benefits from
strength in execution.