Telkomsel Sep 2010 Nomura

8/6/2019 Telkomsel Sep 2010 Nomura

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29 September 2010Nomura 1

Any authors named on this report are research analysts unless otherwise indicated.

See the important disclosures and analyst certifications on pages 16 to 19.

Telekomunikasi Indo TLKM IJ

TELECOMS | INDONESIA

Sachin Gupta, CFA +65 6433 6968 [email protected]

B Roshan Raj +65 6433 6961 [email protected]

Pankaj Suri (Associate)

Needs f resh bai t

Downgrade to NEUTRAL

We downgrade PT Telkom to NEUTRAL, with a revised price target of

Rp9,300, which implies only 3% upside: 1) We don’t think the

valuation is excessively cheap at (normalised) FY11F P/E of 13.4x

(with an inferior growth profile to domestic peers); 2) We also expect

more operational surprises from peers — especially for subscriber

additions, revenue growth and margins — and see more upside in XL

Axiata and Indosat — both rated BUYs, and; 3) We see limited near-

term catalysts for Telkom — synergy benefits from a potential Bakrie-

Flexi merger may not have no significant impact on the share price.

More subdued FY10F guidance

Telkomsel’s FY10F guidance is more subdued that its peers — while

Telkomsel has guided for single-digit revenue growth, both Indosat

and XL are targeting 16-20% growth in the core wireless business.

Further, Telkomsel’s margin is expected to decline ‘slightly’, while

both Indosat and XL are again guiding for a 100-500bps improvement,

respectively.

Switch to XL Axiata, Indosat or SingTel

While Indosat trades at an 18% premium to Telkom on FY11F

normalised P/E, this reflects a superior growth outlook (PEG of 0.6x

for Indosat vs 1.5x for Telkom) and it has the opportunity to regain

revenue share, we believe. We see an FY09-12F EPS CAGR of 27%

and 61% for Indosat and XL, respectively, vs 12% for Telkom.

Alternatively, we think there could be more upside in SingTel — also a

BUY. Following recent share-price rises at Bharti and Telkom,

Singapore + Optus combined is now trading at 12.5x FY12F P/E.

Key financials & valuations31 Dec (Rpbn) FY09 FY10F FY11F FY12F

Revenue 67,526 72,372 76,771 81,340

Reported net profit 11,333 12,280 13,243 14,541

Normalised net profit 10,274 12,169 13,243 14,541

Normalised EPS (Rp) 522 616 671 736

Nor m. E PS gr ow th (%) (11 .7) 1 8.0 8.8 9.8

Norm. P/E (x) 17.2 14.6 13.4 12.2

EV/EBITDA (x) 5.2 4.8 4.4 4.1

Price/book (x) 3.5 3.1 2.8 2.5

Dividend yield (%) 3.5 3.8 4.5 5.3

ROE (%) 26.9 23.0 21.9 21.6

Net debt/equity (%) 28.0 16.4 6.7 net cash

Earnings revisions

Previous norm. net profit 11,734 13,177 14,112

Change from previous (%) 3.7 0.5 3.0

Previous norm. EPS (Rp) 594 667 715

Source: Company, Nomura estimates

Share price relative to MSCI Indonesia

1m 3m 6m

2.9 13.2 9.8

3.9 14.7 11.9

(8.9) (1.0) (6.2)

Hard

Source: Company, Nomura estimates

19,863

48.0

10,100/7,100

19.37

Absolute (Rp)

Absolute ( US$)

Relative to Index

Estimated free float (%)

Market cap (US$mn)

9.4

Major shareholders (%)

Indones ian Govt. 52.4

52-week range (Rp)

3-mth avg daily turnover (US$mn)

Bank of NY

Stock bo rrowability

6,800

7,300

7,800

8,300

8,800

9,300

9,800

10,300

S e p 0 9

O c t 0 9

N o v 0 9

D e c 0 9

J a n 1 0

F e b 1 0

M a r 1 0

A p r 1 0

M a y 1 0

J u n 1 0

J u l 1 0

A u g 1 0

70

80

90

100

110

120

Price

Rel MSCI I ndonesia(Rp)

Closing price on 27 Sep Rp9,000

Price target Rp9,300

(from Rp9,000)Upside/downside 3.3%

Difference from consensus -3.8%

FY11F net profit (Rpbn) 13,243

Difference from consensus -3.4%

Source: Nomura

N o m u r a v s c o n s e n s u s

Our estimates are below consensus,

since we expect Indosat, XL to

remain more competitive in FY10F.

From Buy

NEUTRAL

N O M U R A S I N G A P O R E L I M I T E D

A c t i o n

Following a 21% rise in TLKM shares since 1 June, we now see fair value and don’t

see catalysts for more outperformance soon. We downgrade to NEUTRAL, andrecommend switching into Indosat or XL Axiata, or play via SingTel — all BUYs.

Domestic competition will remain benign the near term, but Indosat should regain

some lost market share, perhaps at the expense of the incumbent. At 13.4x FY11F

P/E TLKM is in-line with regional peers, but on a higher PEG than local peers.

C a t a l y s t s

1. Operational results 2. Capital management 3. M&A initiatives.

A n c h o r t h e m e s

Relatively low penetration, limited near-term regulatory risks and rational

competition provide a relatively positive outlook for Indonesian telcos.



Telekomunikasi Indo Sachin Gupta, CFA


Drilling down

Dow ngr ade to NEUTRALWe downgrade PT Telkom to NEUTRAL, with a revised price target of Rp9,300, which

implies only 3% upside from the current levels:

We don't think valuation is compellingly inexpensive at a (normalised) FY11F P/E

of 13.4x, with an inferior growth profile than its domestic peers — its PEG ratio is1.5x versus 0.5-0.6 for Indosat and XL Axiata;

We also expect more operational surprises from peers — especially for subscriber

additions, revenue growth and margins — and see more share-price upside in XL

Axiata and Indosat, and;

We see limited near-term catalysts for Telkom — synergy benefits from a potential

Bakrie-Flexi may not have a significant impact on the share price, we believe.

Exhibit 1. Indonesian telcos: stock performance during past 3 months

-20%

-10%

0%

10%

20%

30%

40%

50%

1 - J u l

4 - J u l

7 - J u l

1 0 - J u l

1 3 - J u l

1 6 - J u l

1 9 - J u l

2 2 - J u l

2 5 - J u l

2 8 - J u l

3 1 - J u l

3 - A u g

6 - A u g

9 - A u g

1 2 - A u g

1 5 - A u g

1 8 - A u g

2 1 - A u g

2 4 - A u g

2 7 - A u g

3 0 - A u g

2 - S e p

5 - S e p

8 - S e p

1 1 - S e p

1 4 - S e p

1 7 - S e p

2 0 - S e p

2 3 - S e p

PT Telkom Indosat XL JCI Index

Source: Company data, Nomura research

Exhibit 2. Indonesian telcos: relative preference

Relativeposition Stocks Valuation

Pot'lrevenueUpside

Pot'l cost/earnings

UpsideBal sheetflexibility

Cashreturn

upsideRegulatory

outlookCompetitive

outlookStock

liquidity Potential catalysts

Indosat Positive: 1) Continued

operational trends

BUYXL Axiata Positive: 1) Another

guidance upgrade; 2)FY10F dividend;Negative: 1) Slowingoperational trends

NEUTRAL

PT Telkom Positive: 1) Better-than-expected (50-55%) dividendpayout; 2) Strongoperational trends in2H. Negative:1) Cashflow intoM&A


We don't think valuation is

compellingly inexpensive atcurrent levels





Valuation not inexpensive any more

The company began to look better positioned from late May and since then, the stock

is up 25%; we think the further upside could be limited from here. The stock is trading

at an FY11F P/E of 13.4x, expensive versus 10.8x at end-May. We recommend

switching into XL Axiata or Indosat or SingTel.

We acknowledge that Indosat is trading at an 18% premium on an FY11F P/E, but

this also reflects its superior growth outlook and the opportunity to regain revenue

share (more catalysts) we believe. We see an FY09-12F EPS CAGR of 27% and

61% for Indosat and XL, respectively, vs 12% for Telkom.

Telkomsel’s FY10F guidance is more subdued that its peers — while Telkomsel

has guided for single-digit revenue growth, both Indosat and XL are targeting 16-

20% growth in the core wireless business. Further, Telkomsel’s margin is expected

to decline ‘slightly’ , while both Indosat and XL are again guiding for 100-500bps

improvement, respectively.

Given a benign competition environment — and resilient ARPUs — we think it is

likely Telkom will exceed FY10F guidance. For Telkomsel, we expect 8% revenue

growth this year with 61% margins, and for PT Telkom we expect 7% revenuegrowth y-y on 54% margin.

Exhibit 3. Indonesian telcos: FY10F guidance

Metric Telkomsel Indosat XL

Revenue growth Single digit 16-17% wirelessrevenue growth

Expected more than 20%

EBITDA margin Slight decline 48-49% (versus 48% inFY09)

Around 50% (versus 45% inFY09)

Capex Around US$1.3bn Rp8.5-9.0tn cash capex Approximately Rp 4.5-5.0tnof cash capex , of whichabout 25 – 30% for dataservices, internally funded

Subscribers Maintain market share at50% (versus 49%reported for FY09)

41-42mn wireless subs(8.5mn net adds)

n/a






Exhibit 4. Indonesian telcos: valuation sheet

Year End Dec 31 PT Telkom Indosat XL Axiata

Current Price (Rp) 9,050 5,450 5,550

Rating NEUTRAL BUY BUY

Price Target 9,300 6,300 6,500

Upside/Downside 3% 16% 17%

Valuation (x)

FY10F P/E 14.7x 20.1x 17.5x

FY11F P/E 13.5x 16.0x 13.9x

FY12F P/E 12.3x 13.5x 11.5x

FY10F EV/EB ITDA 4.8x 5.5x 6.5x

FY11F EV/EBITDA 4.5x 5.1x 5.3x

FY12F EV/EB ITDA 4.4x 5.0x 4.5x

Growth rates (FY09-12F)

Revenues 6% 9% 17%

EBITDA 5% 8% 21%

NPAT 12% 27% 66%

EPS 12% 27% 66%

PEG

FY10F 0.8 0.5 0.1

FY11F 1.5 0.6 0.5

FY12F 1.3 0.7 0.6

Profitability

EBITDA Margin FY09 54% 48% 45%

EBITDA Margin FY12F 52% 47% 50%

Change in Margins (bps) (171) (56) 451

Shareholder returns

F010F ordinary dividend 342 69 -

F010F dividend yield 4% 1% 0%

F010F FCF yield 9% -9% 8%

Dividend payout ratio 56% 25% 0%

% FCF payout 44% -15% 0%

DPS CAGR (F09-F12F) 14.7% 16.6%

Balance Sheet & Cash Strength

Gearing (ND/ND+E) 14% 59% 44%

EBITDA Interest Cover 23.4x 5.1x 10.6x

Net Debt/ EBITDA 0.2x 2.7x 1.1x

Note: 28 September, closing priceSource: Company data, Nomura research





Exhibit 5. Regional valuation sheet

Bloom berg Local Mkt Cap

tick er price (US$ m n) 10E 11E 10E 11E 10E 11E 10E 11E

Wireless

AIS ADVANC TB Buy THB 94 9,099 14.5 15.9 5.9 6.3 6.7% 6.7% 4.4% 6.8%

Axiata Group AXIA TA MK Buy MYR 4.4 12,130 14.5 13.0 6.3 5.8 0.0% 3.5% 13.0% 8.7%

Bharti Airtel BHA RTI IN Neutral INR 373 31,353 18.3 16.4 9.2 7.6 1.1% 1.8% -37.9% 1.3%

China Mobile 941 HK Buy HK$ 79 209,113 10.9 10.6 4.8 4.6 4.1% 4.3% 8.5% 10.2%

Digi.com Digi MK Buy MYR 24 6,062 17.8 17.6 8.6 8.3 7.3% 7.4% 7.2% 6.3%

Far EasTo ne 4904 TT Neutral NT$ 43 4,442 15.8 16.0 6.1 6.1 5.7% 5.6% 6.7% 8.6%

Globe Tele com GLO PM Reduce PHP 895 2,691 11.2 10.6 4.7 4.5 8.3% 7.8% 5.8% 6.3%

Idea C ellular IDEA IN Neutral INR 75 5,482 31.2 28.2 10.0 8.7 0.0% 0.0% -26.2% -1.6%

Maxis Maxis MK Neutral MYR 5.4 12,980 17.5 16.9 9.7 9.4 6.0% 6.0% 3.8% 5.4%

MobileOne M1 SP Buy S$ 2.21 1,498 12.9 12.4 7.2 7.0 6.2% 6.4% 10.2% 8.7%

PT XL Axiata EXCL IJ Buy IDR 5,550 5,274 17.5 13.9 6.5 5.3 0.0% 1.8% 7.6% 9.4%

Reliance Com RCOM IN Reduce INR 170 7,780 17.3 12.4 7.2 6.2 1.0% 2.3% -16.7% 7.0%

SK Telecom 017670 KS Buy KRW 168,000 11,824 9.7 7.1 4.2 3.7 5.6% 5.6% 9.2% 12.0%

Taiwan Mobile 3045 TT Buy NT$ 63.8 7,724 13.5 13.2 8.5 8.6 6.7% 6.8% 8.0% 7.0%

Total Acces s DTAC TB Buy THB 41.8 3,235 10.0 14.7 4.6 4.9 5.2% 3.4% -7.7% 8.4%

Average 15.5 14.6 6.9 6.5 4.3% 4.6% -0.3% 7.0%

Median 14.5 13.9 6.5 6.2 5.6% 5.6% 6.7% 7.0%

Integrated

China Telecom 728 HK Buy HK$ 4.3 45,298 18.8 17.1 4.7 4.3 1.6% 2.1% 10.0% 11.1%

China Unicom 762 HK Buy HK$ 11.20 34,974 22.0 18.3 4.4 4.3 2.0% 1.6% -10.6% -4.9%

Chunghwa 2412 TT Buy NT$ 70 23,782 14.8 15.0 7.6 7.7 10.4% 7.4% 7.6% 7.1%

KT Corp 030200 KS Buy KRW 44,500 10,129 8.1 6.5 4.0 3.7 4.5% 4.5% 7.1% 10.7%

LG Uplus 032640 KS Neutral KRW 7,540 3,384 8.1 7.6 3.8 3.3 5.6% 3.3% 6.5% 10.6%

PLDT TEL PM Buy PHP 2,620 11,125 11.9 12.2 6.4 6.2 5.9% 5.8% 8.3% 8.8%

PT Indosat ISAT IJ Buy IDR 5,450 3,308 20.1 16.0 5.5 5.1 1.3% 2.0% -8.6% 0.1%

PT Telkom TLKM IJ Neutral IDR 9,050 19,963 14.7 13.5 4.8 4.5 3.8% 4.4% 8.6% 9.3%

SingTel ST SP Buy S$ 3.14 37,974 12.8 12.9 7.6 7.3 5.1% 5.4% 5.2% 5.8%

SK Broadban d 033630 KS Reduce KRW 5,380 1,388 n/m 38.3 6.4 5.0 0.0% 0.0% -3.2% 2.7%

StarHub STH SP Reduce S$ 2.5 3,283 17.4 18.3 8.6 8.9 7.9% 7.9% 6.3% 5.1%

TM T MK Buy MYR 3.4 3,862 23.9 23.3 5.2 5.2 5.9% 5.9% 3.2% 7.6%

Telstra TLS AU Reduce A$ 2.7 32,339 8.7 9.5 4.4 4.6 10.4% 9.6% 14.0% 12.2%

True TRUE TB Reduce THB 5.2 1,193 n/m n/m 5.2 5.2 0.0% 0.0% -40.6% 1.6%

Average 15.1 16.0 5.6 5.4 4.6% 4.3% 1.0% 6.3%

Median 14.7 15.0 5.2 5.0 4.8% 4.5% 6.4% 7.4%

FCF yield (%)Ra tin g Cur r ency EV /EBIT DA ( x) Div yie ld (%)PE (x)

Note” 28 September, closing priceSource: Bloomberg, Nomura estimates

Weaker trends expected versus peers

Analysing the companies’ 1H10 performance along with FY10F guidance versus our

forecasts, we see better revenue and EBITDA growth trends for Indosat and XL Axiata

for the balance of this year and in FY11F.

Exhibit 6. Indonesian telcos: revenue and EBITDA growth trends (y-y)

Telkomsel Indosat XL Axiata

Revenue growth

1H10 7% 8% 35%2H10F 9% 9% 14%

FY10F 8% 15% 23%

FY11F 8% 12% 16%

EBITDA grow th

1H10 2% 6% 72%

2H10F 2% 10% 17%

FY10F 6% 8% 40%

FY11F 7% 9% 14%

Note: EBITDA growth for Indosat is for consolidated business vs only wireless businesses for Telkomsel and XL.






Exhibit 7. Indonesian telcos: blended ARPU trend

0

10

20

30

40

50

60

70

80

1 H 0 7

2 H 0 7

1 H 0 8

2 H 0 8

1 H 0 9

2 H 0 9

1 H 1 0

2 H 1 0 F

Telkomsel Indosat XL(Rp '000)


Exhibit 8. Indonesian telcos: net adds trend

(10,000)

(5,000)

0

5,000

10,000

15,000

1 H 0 7

2 H 0 7

1 H 0 8

2 H 0 8

1 H 0 9

2 H 0 9

1 H 1 0

2 H 1 0 F

Telkomsel Indosat XL('000)






Exhibit 9. Indonesian telcos: quarterly trends

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Revenue share

Telkomsel 60% 55% 54% 57% 57% 59% 59% 57% 55% 55%

Indosat 25% 26% 27% 27% 27% 23% 23% 24% 24% 24%

XL Axiata 15% 18% 19% 16% 17% 18% 18% 19% 21% 21%

Revenue growth rates

Telkomsel -6% -5% -1% 10% -7% 10% 7% 2% -10% 6%

Indosat -7% 7% 4% 6% -9% -7% 4% 11% -5% 4%

XL Axiata 2% 21% 5% -11% -2% 14% 7% 11% 4% 3%

Total revenue growth -5% 2% 1% 5% -6% 6% 7% 6% -6% 5%

EBITDA growth rates

Telkomsel -4% -16% -8% 22% -7% 17% 6% -2% -11% 3%

Indosat -10% 0% 2% 17% -18% -1% -7% 20% -8% 7%

XL Axiata 4% 30% 2% -32% 9% 31% 15% 18% 9% 6%

Total EBITDA growth -5% -8% -4% 12% -8% 15% 5% 5% -7% 4%

EBITDA margin

Telkomsel 67% 59% 55% 61% 60% 64% 64% 61% 60% 58%

Indosat 52% 48% 47% 52% 47% 50% 45% 49% 47% 48%

XL Axiata 43% 47% 45% 35% 38% 44% 47% 50% 52% 54%

Total margin 59% 54% 51% 54% 53% 57% 56% 56% 55% 55%

EBITDA share

Telkomsel 67% 61% 58% 63% 64% 66% 67% 62% 59% 59%

Indosat 22% 24% 25% 26% 24% 21% 18% 21% 21% 21%

XL Axiata 11% 16% 17% 10% 12% 14% 15% 17% 20% 20%

Mobile subs (‘000)

Telkomsel 51,335 52,443 60,503 65,300 72,133 76,014 79,774 81,644 81,950 88,316Indosat 26,438 32,387 35,473 36,510 33,267 28,857 28,700 33,100 37,700 37,800

XL Axiata 18,398 22,898 25,087 26,016 24,892 24,672 26,647 31,437 32,524 35,204

Total subs 96,171 107,728 121,063 127,826 130,292 129,543 135,121 146,181 152,174 161,320

Mobile net adds(‘000)

Telkomsel 3,445 1,108 8,060 4,797 6,833 3,881 3,760 1,870 306 6,366

Indosat 1,893 5,949 3,086 1,037 (3,243) (4,410) (157) 4,400 4,600 100

XL Axiata 2,929 4,500 2,189 929 (1,124) (220) 1,975 4,790 1,087 2,680

Total net adds 8,267 11,557 13,335 6,763 2,466 (749) 5,578 11,060 5,993 9,146

Net adds share

Telkomsel 42% 10% 60% 71% n/m n/m 67% 17% 5% 70%

Indosat 23% 51% 23% 15% n/m n/m -3% 40% 77% 1%

XL Axiata 35% 39% 16% 14% -46% 29% 35% 43% 18% 29%


Limited near-term catalysts

There do not appear to be any major catalysts for the balance of the year, we believe.

A possible merger of Bakrie-Flexi merger is a likely event — but timing/ structure/

pricing remain unclear. Regardless, we do not expect it to be a material share-price

driver, and also don't see a material change in cashflows. Flexi represents around 5%

of total PT Telkom’s revenues.

Both Bakrie and Flexi operate CDMA businesses with 16mn and 11mn subscribers,respectively — and appear to have struggled with more intense competition from the

GSM players — who account for >75% of total market and >85% of total revenues.

The customer base of the top-three GSM players grew by 58mn in past two years,

compared to an 18mn increase for the CDMA players.





Exhibit 10. Indonesian telcos: market shares


Exhibit 11. Indonesian telcos: revenue shares


We think a possible merger is likely — however, there could be a potential

management change at Telkom at the upcoming EGM (timing uncertain still); in that

event, this will likely be put on the backburner for now, we believe.

We see the following merits:

The combined spectrum will increase to 9Mhz spectrum — Bakrie has 4.9Mhz in

Jakarta Banten Jawa Barat region, and Flexi in other areas. Higher spectrum

should improve the network capacity and allow the service provider to offer more

bandwidth-intensive services. This bodes well for ARPUs.

Second, the merger is expected to bring coverage synergies. While Bakrie is quite

strong in Jakarta, Flexi is performing relatively well in regions outside Jakarta.

Third, we expect both companies to benefit from economies of scale; cost

synergies should result. Key areas where synergies could be achieved: 1)

combining of networks — this includes towers, BTS, transmission network,

operation and maintenance network; 2) combining of field force, and; 3) combining

distribution channel.

Fourth, this entity would be a market leader in the fixed wireless access segment

with a 97% share.

Last, it will allow Telkom to have another brand/ avenue to compete more for thelow-end customer and not cannibalise its relatively higher-end ARPU under the

Telkomsel’s brands (Simpati, kartuAs, kartuHalo etc.).





Exhibit 12. Bakrie Telecom: quarterly P&L

(Rpbn) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Gross revenue 816 850 879 891 894 825

Telco service revenue 740 768 789 821 813 748

Net i/c service and discounts (82) (95) (107) (91) (105) (79)Net revenue 658 673 683 729 708 668

% chg q-q 2% 1% 7% -3% -6%

Operating expenses

Operating and maintenance 211 46 127 122 109 109

General and administrative 65 50 53 68 54 60

Personnel 59 79 75 77 72 86

Marketing and sales 91 115 119 126 104 61

Total operating expenses 426 291 375 392 339 315

% chg q-q -32% 29% 5% -14%

EBITDA 232 382 308 337 369 353

% chg q-q 65% -19% 10% 10% -4%

EBITDA margin 28% 45% 35% 38% 41% 43%

D&A 162 293 251 273 267 281

EBIT 70 89 57 64 103 72

% chg q-q 28% -36% 12% 61% -30%

Financial charges

Interest - net (46) (60) (50) (66) (85) (121)

Others (15) 57 30 16 31 17

Net financial charges (61) (2) (20) (49) (54) (105)

Profit before tax 9 87 37 14 48 (33)

Tax expense (3) (19) (12) (13) (19) 6

Reported net income 6 67 25 1 29 (26)


Exhibit 13. Flexi-Bakrie merger: enterprise value

Bakrie Telecom Rpbn TelkomFlexi Rpbn

Market cap 6,836 EBITDA 1,323

Total debt (2Q10) 5,274 EV/ EBITDA 7Cash & cash equivalents (2Q10) 490 EV 9,261

EV 11,619

Combined EV (Rpbn) 20,880






Exhibit 14. Fixed wireless access: spectrum ownership

Allocation Uplink Freq. Downlink Freq. Allocation Uplink Freq. Downlink Freq.

New 1.23 MHz 824.265 - 825.495 869.265 - 870.495 New 1.23 MHz 824.265 - 825.495 869.265 - 870.495

1.23 MHz 825.495 - 826.725 870.495 - 871.725 1.23 MHz 825.495 - 826.725 870.495 - 871.725

1.23 MHz 826.725 - 827.955 871.725 - 872.955 1.23 MHz 826.725 - 827.955 871.725 - 872.955

1.23 MHz 827.955 - 829.185 872.955 - 874.185 1.23 MHz 827.955 - 829.185 872.955 - 874.185

GUARD BAND 829.185 - 830.415 874.185 - 875.415 GUARD BAND 829.185 - 830.415 874.185 - 875.415

1.23 MHz 830.415 - 831.645 875.415 - 876.645 1.23 MHz 830.415 - 831.645 875.415 - 876.645

1.23 MHz 831.645 - 832.875 876.645 - 877.875 1.23 MHz 831.645 - 832.875 876.645 - 877.875

1.23 MHz 832.875 - 834.105 877.875 - 879.105 1.23 MHz 832.875 - 834.105 877.875 - 879.105

GUARD BAND GUARD BAND

1.23 MHz 835.905 - 837.135 880.905 - 882.135 1.23 MHz 835.905 - 837.135 880.905 - 882.135

1.23 MHz 837.135 - 838.365 882.135 - 883.365 1.23 MHz 837.135 - 838.365 882.135 - 883.365

1.23 MHz 838.365 - 839.595 883.365 - 884.595 1.23 MHz 838.365 - 839.595 883.365 - 884.595

1.23 MHz 839.595 - 840.825 884.595 - 885.825 1.23 MHz 839.595 - 840.825 884.595 - 885.825

GUARD BAND 840.825 - 842.055 885.825 - 887.055 GUARD BAND 840.825 - 842.055 885.825 - 887.055

1.23 MHz 842.055 - 843.285 887.055 - 888.285 1.23 MHz 842.055 - 843.285 887.055 - 888.285

1.23 MHz 843.285 - 844.515 888.285 - 889.515 1.23 MHz 843.285 - 844.515 888.285 - 889.515

E x i s t i n g

Star-one

E x i s t i n g

E x i s t i n g

Remarks

FLEXI

(4.92 MHz)

Mobile-8

Star-one

Remarks

E x i s t i n g

E x i s t i n g

E x i s t i n g

Mobile-8

Jakarta Banten Jawa Barat region

BTEL

(4.92 MHz)

FLEXI

(3.69 MHz)

Non Jakarta Banten Jawa Barat region

E x i s t i n g

BTEL

(3.69 MHz) E x i s t i n g

Source: Bakrie Telecom

Regulatory considerations

The regulator, BRTI, is likely to revise termination rates next year, and while the

possible revision remains difficult to predict, any material changes are likely to be

passed on to subscribers. Such an event may see some further pricing pressure

which could adversely impact revenue and earnings for the operators.

Based on our scenario analysis, a 5-15% reduction in cellular ARPU (versus our

current estimates) could result in 4-9% adverse impact on Telkomsel’s total

revenues. Also, a reduction in IC rates is likely to see a higher impact for

Telkom/Telkomsel, as compared to Indosat, XL, as Telkomsel is net IC recipient,

while Indosat, XL are net payers.

There is also an expectation that beginning FY11F, the spectrum charge

methodology could be revised to be based on the bandwidth of spectrum held,

versus the current approach of linking it to the number of base stations. Such a

change in calculation of spectrum charges could result in higher expenses for

operators not making efficient spectrum use. In this regard, we see limited risks for

Telkomsel, XL, while there could higher expenses for Indosat relatively; however inour recent meetings with Indosat’s new management, it suggested that it does not

expect a significant operational impact. It has more spectrum than some of its

peers, which should allow it to penetrate the data market further.





Exhibit 15. Indonesian telcos: potential impact of ARPU decline versus current estimates

Prepaid revenue (Rpbn) FY11F FY12F FY13F FY14F FY15F

Base case 42,517 45,255 47,929 50,390 52,263

5% decline 40,391 42,992 45,533 47,870 49,65010% decline 39,030 41,544 43,999 46,258 47,977

15% decline 37,946 40,390 42,777 44,973 46,644

Telkomsel: Prepaid revenue impact

5% decline -5% -5% -5% -5% -5%

10% decline -8% -8% -8% -8% -8%

15% decline -11% -11% -11% -11% -11%

Telkomsel: Total revenue impact

5% decline -4% -4% -4% -4% -4%

10% decline -7% -7% -7% -7% -7%

15% decline -9% -9% -9% -9% -9%

SimPATI

Base case 38 37 35 35 34

5% decline 36 35 34 33 32

10% decline 34 33 32 31 31

15% decline 32 31 30 30 29

Avg. SimPATI subs (mn) 67 73 79 84 88

kartuAs

Base case 30 29 28 28 27

5% decline 29 28 27 26 26

10% decline 27 26 25 25 24

15% decline 26 25 24 23 23

Avg. kartuAs subs (mn) 33 37 42 46 49


Exhibit 16. Indonesian telcos: spectrum ownership

Operator Frequency (MHz) Bandwidth (MHz)

Telkomsel 900/ 1800/ 2100 2*40

Indosat 900/ 1800/ 2100 2*40

XL Axiata 900/ 1800/ 2100 2*25

HCPT 1800/ 2100 2*15

Axis 1900/ 2100 2*20

Source: Presentation on “Overview of spectrum issues in Indonesia” , Ministry of Communications and InformationTechnology, 28 April,2010

XL received an additional second 3G carrier recently, which is reflected above.

Current tariff analysis

We have compared base tariffs of Indonesian telcos with their previous levels:

Telkomsel’s (SimPATI) voice tariff has increased in the time slot of 00:00 to 11:59

hours. However, its time slot — 12.00 to 17.59 — reflects a slight downward trend.

For both, Indosat’s Mentari and XL’s Sampe Puas, base tariffs remain unchanged.

Telkomsel’s on-net SMS tariff is up 25% to Rp150/ SMS.

Indosat is continuing with its Mentari Package 50 (National). This package allows: 1)

On net calling at Rp50/minute (versus minimum of Rp 300/ minute on Mentari Base





tariff); 2) Off-net calling at Rp1,000/minute (versus minimum of Rp1,200/ minute on

Mentari Base tariff); 3) Rp 50/SMS (versus Rp 99/ SMS on Mentari Base tariff).

XL’s package NELPON GILA appears aggressive. For example, in Jabodetabek

and banten, if a user makes a call for one minute to other XL numbers OR send

SMS for at least Rp 2,000, he receives: 1) Free 1000 SMS to all operators; 2) 100

minutes of talk time to XL numbers, and; 3) 1MB.

Exhibit 17. Indonesian telcos: tariff trends

(Amounts in Rp)

Call to Operator

1 2 3 1 2 3 1 2 3

Simpati (00.00 - 05.59) 610 640 670 610 640 670 726 756 786

Simpati (06.00 - 11.59) 610 640 670 610 640 670 726 756 786

Simpati (12.00 - 17.59) 900 1365 1395 900 1655 1685 900 1626 1656

Simpati (18.00 - 23.59) 900 1800 2265 900 1800 2410 900 1800 2352

Mentari (23.00 - 4.59) 300 600 900 300 600 900 300 600 900

Mentari (5.00 - 16.59) 1200 2400 2700 1200 2400 2700 1200 2400 2700

Mentari (17.00 - 22.59) 1200 2400 2700 1200 2400 2700 1200 2400 2700

Nel pon : Murah SAMPE PUAS

(00.00–11.00) 300 ; 400 300 ; 400 300 ; 400 400; 400 401; 401 402; 402 400; 400 401; 401 402; 402


(11.00-17.00) 900 ; 1000 900 ; 1000 900 ; 1000 800; 1000 801; 1001 801; 1001 800; 1000 801; 1001 801; 1001


(17.00–24.00) 1200 ; 1200 1800 ; 2000 1800 ; 2000 1200; 1200 2000; 2200 2001; 2201 1200; 1200 2000; 2200 2001; 2201

Simpati 1800 3600 3630 1800 3600 3630 1800 3600 3630

Mentari (23.00- 16.59) 1200 2400 3600 1200 2400 3600 1200 2400 3600

Mentari (17.00- 22.59) 1200 2400 3600 1200 2400 3600 1200 2400 3600

Nelpon : Murah SAMPE PUAS 1500 3000 4500 1500 2250 2251

Simpati 900 1800 1830 900 1800 1830 900 1800 1830

Mentari ( 23.00 - 16.59) Rp.

Mentari ( 17.00 - 22.59) Rp.

Simpati

Mentari

February 2010 rates

Minute duration

Sep 2010 rates

Minute duration

May 2010 rates

Minute duration

On-net : R p. 150/SMS

Off-net : Rp 150/SMS

All operators : Rp 99/ SMS

O n N e t

O f f N e t

M o b i l e

P S T N

S M S

On-net : Rp. 120/SMS

Off-net : Rp 150/SMS

All operators : Rp 99/ SMS

SMS packet rate : Rp 50/SMS

Validity : 1 February – 31 March 2010

SMS packet 'Obral Obrol ' rate : Rp

2/SMS


Exhibit 18. XL: Nelpon Gila package


Earnings revision

We have increased our FY10-12F revenue forecasts by 3-5% pa to account forchanges in ARPU assumptions at Telkomsel – which leads to 1-5% change in EBITDA

and NPAT.





Exhibit 19. PT Telkom — earnings revision

(Rpbn) FY10F FY11F F12F

New forecasts

Revenue 72,372 76,771 81,340

EBITDA 39,176 41,363 42,649NPAT 12,280 13,243 14,541

Old forecasts

Revenue 69,016 74,566 77,764

EBITDA 38,333 41,163 41,780

NPAT 11,734 13,177 14,112

Changes

Revenue 4.9% 3.0% 4.6%

EBITDA 2.2% 0.5% 2.1%

NPAT 4.7% 0.5% 3.0%


Valuation methodology and risks

Our price target is based on a DCF methodology with a WACC of 12.1%, beta of 1.0, a

risk-free rate of 9%, an equity risk premium of 5%, a cost of debt of 8.5% and a

long-term growth rate of 3% (methodology unchanged).

Key downside risks include more aggressive competition, fixed-to-mobile substitution

and limited access to capital. Key upside risks include poor execution from peers and

favourable regulatory changes.





Financ ia l s t at ements

Margins could decline

Income statement (Rpbn)

Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F

Revenue 63,953 67,526 72,372 76,771 81,340

Cost of goods sold (3,629) (4,053) (3,257) (3,455) (3,782)Gross profit 60,324 63,473 69,116 73,317 77,557

SG&A (39,121) (39,556) (44,648) (47,649) (50,265)

Employee share expense

Operating profit 21,203 23,917 24,468 25,668 27,293

EBITDA 34,621 36,560 39,176 41,363 42,649

Depreciation (11,069) (12,566) (13,394) (14,408) (15,357)

Amortisation (2,349) (77) (1,314) (1,288) -

EBIT 21,203 23,917 24,468 25,668 27,293

Net interest expense (910) (1,538) (1,676) (1,102) (572)

Associates & JCEs 20 (30) - - -

Other income - - - - -

Earnings before tax 20,314 22,350 22,792 24,565 26,720

Income tax (5,640) (6,373) (5,698) (6,141) (6,680)

Net profit after tax 14,674 15,977 17,094 18,424 20,040

Minority interests (4,054) (4,644) (4,814) (5,181) (5,500)

Other items 1,059 (1,059) (111) - -

Preferred dividends - - - - -

Normalised NPAT 11,679 10,274 12,169 13,243 14,541

Extraordinary items (1,059) 1,059 111 - -Reported NPAT 10,620 11,333 12,280 13,243 14,541

Dividends (5,846) (6,233) (6,754) (7,946) (9,451)

Transfer to reserves 4,775 5,100 5,526 5,297 5,089

Valuation and ratio analysis

FD normalised P/E (x) 15.2 17.2 14.6 13.4 12.2

FD normalis ed P /E at p ric e target (x) 15.7 17.8 15.1 13.9 12.6

Reported P/E (x) 16.7 15.6 14.5 13.4 12.2

Dividend yield (%) 3.3 3.5 3.8 4.5 5.3 Price/cashflow (x) 7.3 6.0 5.5 5.1 5.0

Price/book (x) 5.2 3.5 3.1 2.8 2.5

EV/EBITDA (x) 6.8 5.2 4.8 4.4 4.1

EV/EBIT (x) 11.1 8.0 7.6 7.1 6.4

Gross margin (%) 94.3 94.0 95.5 95.5 95.4

EBITDA margin (%) 54.1 54.1 54.1 53.9 52.4

EBIT margin (%) 33.2 35.4 33.8 33.4 33.6

Net margin (%) 16.6 16.8 17.0 17.2 17.9

Effective tax rate (%) 27.8 28.5 25.0 25.0 25.0

Dividend payout (%) 55.0 55.0 55.0 60.0 65.0

Capex to sales (%) 24.8 30.3 23.8 23.5 20.7 Capex to depreciation (x) 1.4 1.6 1.3 1.3 1.1

ROE (%) 31.2 26.9 23.0 21.9 21.6

ROA (pretax %) 27.2 27.5 27.0 27.5 28.6

Growth (%)

Revenue 2.3 5.6 7.2 6.1 6.0

EBITDA (6.6) 5.6 7.2 5.6 3.1

EBIT (20.3) 12.8 2.3 4.9 6.3

Normalised EPS (12.0) (11.7) 18.0 8.8 9.8

Normalised FDEPS (12.0) (11.7) 18.0 8.8 9.8

Per share

Reported EPS (Rp) 538 576 622 671 736

Norm EPS (Rp) 591 522 616 671 736

Fully diluted norm EPS (Rp) 591 522 616 671 736

Book value per share (Rp) 1,738 2,538 2,880 3,232 3,588

DPS (Rp) 296 317 342 402 479

Source: Nomura estimates





Cashflow (Rpbn)

Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F

EBITDA 34,621 36,560 39,176 41,363 42,649

Change in working capital 2,841 (1,410) 741 524 412

Other operating cashflow (13,145) (5,434) (7,366) (7,244) (7,252)

Cashflow from operations 24,316 29,716 32,551 34,644 35,809

Capital expenditure (15,864) (20,479) (17,238) (18,047) (16,809)

Free cashflow 8,452 9,236 15,313 16,596 19,001

Reduction in investments (55) 18 - - -Net acquis itions - - - - -

Reduction in other LT assets

Addition in other LT liabilities - - - - -

Adjustments (627) (1,367) (531) - -

Cashflow after investing acts 7,771 7,887 14,782 16,596 19,001

Cash dividends (11,766) (9,196) (6,233) (7,368) (8,608)

Equity issue - - - - -

Debt issue 5,383 3,248 (692) (2,050) (1,804)

Convertible debt issue - - - - -

Others (4,531) (931) (3,915) (4,200) (4,404)

Cashflow from financial acts (10,914) (6,879) (10,840) (13,618) (14,815)

Net cashflow (3,143) 1,008 3,943 2,978 4,185

Beginning cash 10,300 7,157 8,165 12,108 15,086

Ending cash 7,157 8,165 12,108 15,086 19,271

Ending net debt 11,726 13,966 9,331 4,303 (1,686)Source: Nomura estimates

Balance sheet (Rpbn)

As at 31 Dec FY08 FY09 FY10F FY11F FY12F

Cash & equivalents 7,157 8,165 12,108 15,086 19,271

Marketable securities

Accounts receivable 3,619 3,918 4,199 4,454 4,719

Inventories 512 435 435 435 435

Other current assets 3,335 3,668 3,668 3,668 3,668

Total current assets 14,622 16,186 20,410 23,644 28,094

LT investments 169 152 152 152 152

Fixed assets 71,067 76,420 79,261 82,901 84,352

Goodwill 3,188 2,428 1,288 0 0

Other intangible assets 2,211 2,373 2,904 2,904 2,904Other LT assets

Total assets 91,256 97,559 104,015 109,600 115,502

Short-term debt 7,100 7,673 7,673 7,673 7,673

Accounts payable 12,169 10,249 11,271 12,050 12,727

Other current liabilities (2,275) (18,166) (24,090) (30,275) (36,626)

Total current liabilities 16,994 (244) (5,146) (10,552) (16,226)

Long-term debt 11,782 14,458 13,766 11,716 9,912

Convertible debt

Other LT liabilities 8,478 6,461 5,641 5,533 5,533

Total liabilities 47,259 47,636 47,145 45,767 44,640

Minority interest 9,684 - - - -

Preferred stock

Common stock 5,040 5,040 5,040 5,040 5,040

Retained earnings 29,274 44,883 51,829 58,793 65,822

Proposed dividends - - - - -

Other equity and reserves - - - - -

Total shareholders' equity 34,314 49,923 56,869 63,833 70,862

Total equity & liabilities 91,256 97,559 104,015 109,600 115,502

Liquidity (x)

Current ratio 0.54 0.61 0.74 0.83 0.96

Interest cover 23.3 15.6 14.6 23.3 47.7

Leverage

Net debt/EBITDA (x) 0.34 0.38 0.24 0.10 net cash

Net debt/equity (%) 34.2 28.0 16.4 6.7 net cash

Activity (days)

Days receivable 20.4 20.4 20.5 20.6 20.6 Days inventory 36.5 42.7 48.8 46.0 42.1

Days payable 961.9 1,009.5 1,205.9 1,232.0 1,198.8

Cash cycle (905.1) (946.5) (1,136.7) (1,165.4) (1,136.1)

Source: Nomura estimates





Other Team Members:

Pankaj Suri (Associate) — All enquiries arising here should go to Sachin Gupta.

ANALYST CERTIFICATIONSWe, Sachin Gupta and B. Roshan Raj, hereby certify (1) that the views expressed in this Researchreport accurately reflect our personal views about any or all of the subject securities or issuers referredto in this Research report, (2) no part of our compensation was, is or will be directly or indirectly relatedto the specific recommendations or views expressed in this Research report and (3) no part of our

compensation is tied to any specific investment banking transactions performed by Nomura SecuritiesInternational, Inc., Nomura International plc or any other Nomura Group company.

ISSUER SPECIFIC REGULATORY DISCLOSURES

Issuer Ticker Price(as at last close)

Closing Price Date Rating Disclosures

Telekomunikasi Indo TLKM IJ 9050.00 IDR 28 Sep 2010 Buy

Previous Ratings

Issuer Previous Rating Date of change

Telekomunikasi Indo Neutral 27 May 2010

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