Telekomunikasi To Underperform

We downgrade our recommendation for P.T.Telekomunikasi Indonesia Tbk (TLK: 34.935 -0.655 -1.84%) to Underperform following our assessment that the company will face severe competitive pressure in 2011.  We expect future sales to remain lumpy as both wireless and wireline telephone markets become competitive in Indonesia. Operating expenses will also increase due to network upgrades and promotional activities.
Recently, Telekomunikasi declared that its fiscal 2010 revenue will decline by 4-6% year over year. This was a significant departure from the company’s earlier prediction of a year over year growth of 5-10% in its top line. Management cited declining growth of its wireless revenue as the primary reason for its downward revision. The wireless services market of Indonesia is quickly maturing as several operators are offering more or less similar services.
Deregulation of telecom segment by the Indonesian Government has enabled several competitors to provide similar services at lower costs to subscribers. That country’s wireless service providers slashed prices in 2008 in order to capture market share. As a result, ARPU (average revenue per user) reduced across the industry. Major competitors of Telekomunikasi are P.T. Indosat Tbk (IIT: 31.25 -0.89 -2.77%) and P.T. Excelcomindo Pratama.
Indonesia’s wireless subscribers often switch over to different service providers to take advantage of low promotional rates and available credit. About 10% of Telkomsel’s reported prepaid subscriptions still remain inactive. Moreover, Excelcom and Axis Telecom have signed an agreement for Indonesia’s first roaming network. The deal will allow Axis customers to use Excelcom’s network. Telekomunikasi may loose its market share if Axis further expands its operations in the country.
We also remain concerned about global economic conditions that may dampen growth in Southeast Asian countries. Furthermore, geographically Indonesia is a very difficult place to build wireless network. The country comprises nearly 17,000 little islands and mountains. It is highly expensive to build out wireless network because of frequent earthquakes and active volcanoes.
Article via Zacks Investment Research