TLKM Sustained Competition - CLSA

TLKM’s 1Q11 numbers were soft with 2% revenue and 1% NPAT growth
yoy. This was below consensus expectations for the FY11 of 6% revenue
growth and 9% NPAT growth. We suspect further consensus downgrades
to come. Again the issue lies with a rapidly maturing & hypercompetitive
mobile market. This is no more evident in TLKM’s +74% increase in
marketing costs to maintain 2% revenue growth. With no exposure to a
rising rupiah and no earnings growth catalysts we still prefer to own
other domestic plays such as the Banks which continue to outperform.

1Q11 numbers again soft – consensus to downgrade
TLKM’s 1H11 results were soft with revenue growth of just 2% which is well
below consensus expectations of +6% for FY11 but broadly in-line with our
bottom of street forecasts of +1% revenue growth for the full year. NPAT
growth of +2% for 1Q11 was also uninspiring compared to consensus
expectations of +9% growth for the full year but higher than our -2% decline
for the FY11. We suspect that consensus will be tweaking their numbers
downwards following this result.

The problem remains competition–media companies benefiting
TLKM continues to suffer from the hypercompetitive structure and a rapidly
maturing market. Mobile penetration is close to 70% with tariffs amongst the
lowest in Asia. This is also evident in TLKM cost base with marketing
expenses increasing a massive +74% in 1Q11 yoy. The winners here are
clearly the advertising/television companies and the individual consumer.

Not leveraged to a rising rupiah
The JCI has performed very well of late reaching fresh record highs. The
stocks performing have been domestic consumption plays and rate sensitive’s
with inflation fears surprising on the downside. One of the key themes has
been the strengthening IDR. Telkom is not a beneficiary as both its revenues
and costs are largely IDR based. Also most of its debt is rupiah denominated.

Valuation uncompelling – better domestic proxies and yield plays
While trading broadly in line with regional peers, Telkom offers considerably
lower earnings growth and no yield angle. This is no longer a must-own stock
with its index weighting falling from above 18%to just 5% now. Using a blend
of fair values derived from DCF and forward PE methodologies, we arrive at a
target price of Rp6,456, which implies 16% downside. For investors seeking a
domestic proxy we would advise switching to the Indonesian banks.