P H
Apr 25, 2016 09:19:58
Strong performance already priced in

Downgrade to Hold on share price spike post 1Q16 earnings announcement. We downgrade TLKM to a HOLD with an unchanged DCF-based target price of Rp3,800. We think TLKM’s solid performance as seen in 1Q16 (in-line) is well priced in, leaving only less than 5% potential upside to our target price, following its share price rally on the back of strong 1Q16 earnings expectation.

1Q16 performance largely in-line. EBITDA reached Rp14.7tr (+18.5% y-o-y, +2.2% q-o-q, EBITDA margin: 53.2%), slightly above our estimate and in line with consensus. NPAT reached Rp4.5tr (+20.2% y-o-y, +16.3% q-o-q), in line with our estimate but above consensus on stable financing cost. We expect is EBITDA margin to decline slightly on continuous broadband infrastructure development for both its mobile and fixed-line businesses, in line with guidance.

Solid top-line growth driven by Telkomsel. Revenue reached Rp27.5tr (+16.6% y-o-y, +3.0% q-o-q), in line with our and consensus estimates on strong Telkomsel performance. Amid stabilising price competition among operators, Telkomsel has raised its ARPU steadily while continuously growing its subscriber base, resulting double digits y-o-y top-line growth.

Valuation:
We downgrade TLKM to a HOLD with an unchanged target price of Rp3,800 (adjusted FY16 EV/EBITDA 7.7x), which is derived using the discounted cash flow (DCF) model with 9.4% weighted average cost of capital (WACC) and 1.0% terminal growth.

Key Risks to Our View:
Disruption to benign competition. If any player becomes aggressive in gaining market share and triggers a new wave of price war, the whole sector could suffer.

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