Telekomunikasi Indonesia (TLKM IJ; BUY; FV IDR 8,500): Corporate Newsflash - Calls Off CamGSM Bid

THE BUZZ
Dow Jones reported that Telkom has pulled out from bidding for a majority stake in CamGSM, Cambodia’s largest mobile operator, citing price differences but did not elaborate. Separately, Telkom’s CFO was quoted as saying the group may soon pick an adviser for the share buyback plan of Telkomsel. Telkomsel is 35% owned by SingTel and 65% controlled by Telkom.

OUR TAKE
Not a surprise. That Telkom has decided not to pursue the acquisition of CamGSM is not a surprise to us given the extremely competitive mobile market in Cambodia, characterized by 8 operators vying for an addressable market of some 9.5m and with headline penetration rising above 100% by 2012. Cambodia has one of the lowest ARPUs in the world at USD2, with the industry having gone through a tumultuous price war over the past 2 years that has resulted in a contraction in overall industry revenue. At an investor day held last month, Axiata Group, which holds a 100% stake in Cambodia’s third largest operator, Hello, expects a consolidation within the industry over the next 1-2 years and is not ruling out an exit from the market.

SingTel a willing seller? News that SingTel is willing to relinquish its stake in Telkomsel, Indonesia’s largest mobile operator, is a surprise although we are not able to confirm this. SingTel had previously indicated that it views Telkomsel as a long-term investment and is in talks with Telkom but did not provide any insights. The plan for a share buy-back of Telkomsel may have been triggered by SingTel’s resistance to Telkom’s plan to transfer the towers residing within Telkomsel to its wholly-owned tower subsidiary, Mitratel, which is slated for an IPO. We had previously surmised that a share swap deal with Telkom could be a more amenable option for SingTel at it may not wish to part ways with Telkomsel, having invested USD1.9bn in the telco over the last decade, and which is a prized asset within its stable of regional telcos that still offers robust growth potential. A share swap still grants SingTel access to Telkomsel although diluted at the parent company level given Telkom’s other businesses, i.e. fixed wireless/wired access, broadband and multimedia. Assuming a direct share swap for SingTel’s 35% stake in Telkomsel and valuing the latter at 15x annualised 1HFY11 earnings, Singtel could potentially end up with up to 30% stake in Telkom. We project that Telkom’s FY11 core earnings could be boosted by 25.1% on the back of the full consolidation of Telkomsel’s earnings, all else being equal.

Maintain TRADING BUY on Telkom based on FV of IDR8500. We are positive on the move by Telkom to back out from its plan to acquire CamGSM as proceeding with the acquisition will be value destructive considering the extremely tough market conditions in Cambodia, from which foreign investors are already looking to exit. Should Telkom manage to consolidate its shareholding in Telkomsel, it would be positive for the group via the elimination of MI leakage. That said, we believe the situation is still fluid and the eventual outcome could still pan out differently from that speculated by the media.

source: OSK dated 6 October 2011