Telekomunikasi Indonesia Size Matters

Given its superior fundamentals, Telkom is set to outperform in an uncertain market environment. Investors should accumulate on excessive weakness, given the re-rating catalysts from its tower asset’s IPO in 1H14 and continued market share gains. It is executing well on most fronts while peers are distracted by network and merger challenges. We see a more definitive capital management exercise as just a matter of time. Maintain BUY.

Double digit growth in revenue and EBITDA
Telkomsel’s revenue grew 8% y-o-y in 3Q13 (9M13: +11%), ahead of the +7.2%/+1.1% posted by Indosat (ISAT IJ, NEUTRAL, TP: IDR4,600)/XL Axiata (EXCL IJ, NEUTRAL, TP: IDR4,600). We attribute this to the robust growth outside Java where it has the largest market share. It is also witnessing strong data take-up. Telkomsel should claw further market share in 2014 on the lower competitive risks and internal challenges faced by both ISAT (network modernisation issues) and EXCL (Axis merger).

Tower IPO
Management said the first stage of the long–awaited tower spin-off exercise should be concluded in 1Q14 with the entry of a strategic partner. The listing of tower subsidiary Mitratel in 2Q14 will pave the way for emergence of SingTel (ST SP, NEUTRAL, FV: SGD3.70) as a joint strategic shareholder. Mitratel currently owns a portfolio of ˃5,000 towers and is looking to procure an additional 10,000 from Telkomsel as part of its listing plans.

Monetisation of other non-core assets
Telkom is evaluating various options to monetise some 22m sq m of landbank valued at IDR22trn (IDR1.5m/sq m). It recently divested an 80% stake in its pay-TV business for USD84m to CT Corp. We believe part of the proceeds from non-core asset disposals and the IPO may be returned to shareholders, given its surplus cash.

BUY with IDR2500 FV
We like Telkom for its overriding revenue market share, strong balance sheet and potential for capital management. The key investment risks to the stock are: i) a weaker-than-expected deceleration in the economy, and ii) stronger-than-expected market competition.