EQUITY RESEARCH

Friday, 10 June 2011

TELECOMMUNICATION SECTOR/ COMPANY UPDATE

SELL
Bloomberg Code Price, Rp Mkt Cap Rp bn Target Price, Rp Chandra S Pasaribu (62-21) 351 0748 chandra@danareksa.com BTEL IJ 350 9,968 270

Bakrie Telecom
Entering the maturity phase
Facing maturity Like other players in the telecoms industry, Bakrie Telecom (BTEL) is facing the prospect of entering the maturity stage despite its focus on the lower end segment. In 1Q11, earnings were flat, whilst opex increased due to higher depreciation charges and higher marketing expenses. Interest expenses also increased. As a result, BTEL booked a 1Q11 net loss of Rp41bn. Other telecoms players have experienced a similar trend. Looking ahead, BTEL will need greater discipline in managing its capex and operating costs if it is to remain profitable. Internet growth yet to take over BTEL has introduced broadband internet and Blackberry services under its sister company Bakrie Connectivity using the brand name AHA. BTELs higher advertising costs in 1Q11 owed to the introduction of the new broadband service. Furthermore, BTEL has allocated a significant amount of capex to expand the network for the broadband service. As a consequence, depreciation expenses have also increased. Currently, the number of BTEL broadband subscribers is still relatively low at 145,750. Despite the introduction of this high value-added service, BTELs ARPU remains very low at just Rp23,000/month in 1Q11 (-17.9% yoy, -4.2% qoq), an indication that revenues generation from broadband has, so far at least, been unable to lift growth. This decline in ARPU is of concern and reflects the very stiff competition in the industry which is forcing telecom operators to give more bonuses and discounts to subscribers, thereby lowering the effective RPM. Poor 1Q11 results On the back of flat revenues, BTEL booked a net loss of Rp41bn in 1Q11 since advertising expenditures and interest expenses both rose. The higher advertising expenditure (up 45.8% yoy to Rp152bn in 1Q11) owed to the introduction of the new broadband service, whilst the higher interest costs were related to the capex on network expansion. Depreciation expenses also rose in 1Q11, reaching Rp314bn (+17.7% yoy, +3.1% qoq). To fund its operations, BTEL issued US$130mn of 5-year bonds early this year with an interest cost of 11.5%. Net gearing as of March 2011 stood at 100%. Some relief, however, came from forex gains, which reached Rp116bn. At the core level, losses were Rp157bn. As for the companys total number of subscribers, they posted an increase of 525,000 qoq in 1Q11 to 13.6mn. Earnings downgraded, maintain SELL Our revenues estimates were inline with the 1Q11 result. However, our estimates for advertising expenditures were on the low side since BTELs ratio of advertising expenditures to revenues was maintained at 13%. We now take this into account in our new forecast. This leads to a downgrade in earnings to a loss of Rp153bn in FY11 and a loss of Rp60bn in FY12, vis--vis profits in our previous forecasts. Our Target Price is cut to Rp270. SELL maintained. Year to Dec Revenue, Rp bn EBITDA, Rp bn EBITDA growth, % Net profit, Rp bn Core profit, Rp bn Core EPS, Rp Core EPS growth, % BVPS, Rp Core PER, x Yield, % EV/EBITDA, x 2009 3,436 1,268 56.3 98 21 1 -90.1 175 487.8 0.0 10.8 2010 3,447 1,335 5.3 10 (330) (11) -1,695.1 180 -30.6 0.0 11.3 2011F 4,002 1,642 23.0 (153) (153) (5) -53.6 176 -65.9 -0.5 9.8 2012F 4,674 2,004 22.0 (21) (21) (1) -86.5 176 -487.8 -0.1 7.8 2013F 5,136 2,329 16.2 183 183 6 -984.7 180 55.1 0.5 6.4

Last Recommendation
Rec. 10-Jun-11 09-Mar-11 22-Dec-10 23-Nov-10 09-Jul-10 SELL SELL HOLD HOLD BUY Target Price Rp 270 Rp 280 Rp 240 Rp 240 Rp 220

BTEL relative price to JCI Index

Rp

BTEL (LHS)

Relative to JCI Index (RHS)

400 350 300 250 200 150 100 5/4/2011 6/10/2010 7/16/2010 8/23/2010 9/28/2010 11/3/2010 12/9/2010 1/14/2011 2/21/2011 3/29/2011 6/9/2011

75 55 35 15 -5 -25

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10 June 2011

Bakrie Telecom Company Update

Going into full mobility BTEL has been granted the full mobility license. The company plans to spend US$180mn on capex in FY11, of which US$25mn will be allocated to upgrade its network for full mobility. BTEL will need to fill in the blank spots of its network to get a seamless connection, which is the whole idea of full mobility. Thus far, the company has not yet decided on any launch date for the service. In order to work properly, BTEL needs to sort out a number of outstanding issues: 1) the network 2) interconnection and 3) prefix numbering. The latter two are beyond BTELS control. Also unclear is the frequency fee. BTEL will have two different services with two different fees, for which the frequency fee for full mobility is higher than the frequency fee for fixed wireless access (FWA). BTEL aims to benefit from the full mobility service in the non JBJB areas. The non JBJB areas have relatively narrow area codes, taking away the advantage of low fixed wireless tariffs. By having a full mobility service, BTEL is hoping to be more competitive in these areas. Exhibit 1. 1Q11 Results highlights (Rp bn)
1Q11 Turnover EBITDA Operating Profit Net Int. & Invest. Inc. Forex gain (losses) Except. & Others Group Pretax Taxation Minorities Net Profit EBITDA Margin, % 900 327 13 (197) 116 4 (62) 21 0 (41) 36.4 1Q10 894 370 103 (85) 28 (0) 48 (19) 0 29 41.4 % 0.7 -11.6 -87.5 132.3 310.7 -3310.0 -228.0 -207.4 nm -241.6 1Q11 900 327 13 (197) 116 4 (62) 21 0 (41) 36.4 4Q10 902 305 0 (131) (5) 27 (107) (32) (139) 33.8 % -0.2 7.3 14798.9 50.1 nm -87.0 -42.3 -164.7 nm -70.3 FY11 %

4,002 22.5 1,791 18.3 490 2.6 (450) 43.6 nm nm 40 -155.2 (12) -172.4 nm 28 -147.8 44.7

Source: Company and Danareksa Sekuritas

Exhibit 2. Quarterly revenues relatively flat

Rp bn 592 643

902 900 879 925 894 825 827 816 850 762 808

Dec-08

Dec-09

Dec-10

Mar-08

Mar-09

Mar-10

Source: Company

Mar-11
2

Sep-08

Sep-09

Sep-10

Jun-08

Jun-09

Jun-10

10 June 2011

Bakrie Telecom Company Update

Exhibit 3. Opex to revenues has not declined due to higher depreciation and advertising expenses
Opex/revenue

80% 75% 70% 65% 60% 55% Sep-08 Sep-09 Sep-10 50% Dec-07 Mar-08 Jun-08 Dec-08 Dec-09 Dec-10
Dec-10

Mar-09

Mar-10

Source: Company

Exhibit 4. Quarterly net additions tended to weaken as the market is saturated

Net add (Quarterly) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 Sep-07 Sep-08 Sep-09 Dec-07 Dec-08 Dec-09 Mar-08 Mar-09 Mar-10 Sep-10 Mar-11
% 0.0 (3.4) (114.7) 0.0 0.0 1.9 0.0

Jun-08

Jun-09

Source: Company

Exhibit 5. Earnings revision mainly on higher advertising expenses (Rp bn)

FY11 new 4,002 1,642 (153) 13,857 91 167 135 FY12 new 4,587 2,004 (21) 14,766 91 170 142

previous Revenue EBITDA Net Profit No of subs Prepaid Postpaid RPM (Rp/minute) MoU (minutes per sub per month) Source: Danareksa estimates 4,002 1,791 28 13,766 91 167 135

% 0.0 (8.3) (650.7) 0.7 0.0 0.0 0.0

previous 4,587 2,075 141 14,766 91 167 142

Jun-10

Mar-11

Jun-09

Jun-10

10 June 2011

Bakrie Telecom Company Update

Exhibit 6. Profit and loss (Rp bn)

2009 Gross Revenue Discount and interconnection Net Revenue Depreciation Selling exp. Salary and wages Overhead Network Others Total Opex Operating Income Net interest exp/income Forex Others Other income/ expense Pre tax Income Income tax Minorities Net Income Source: Company and Danareksa Sekuritas 3,436 (693) 2,743 (979) (451) (291) (225) (506) (1) (2,454) 288 (220) 98 (20) (143) 146 (47) 98 2010 3,447 (682) 2,765 (1,145) (453) (321) (222) (433) (2,574) 191 (438) 127 213 (98) 93 (83) 10 2011F 4,002 (712) 3,291 (1,305) (520) (373) (256) (498) (2) (2,954) 337 (556) (556) (219) 66 (153) 2012F 4,674 (828) 3,847 (1,422) (561) (435) (299) (546) (2) (3,264) 582 (610) (610) (28) 7 (21) 2013F 5,136 (901) 4,235 (1,524) (514) (478) (329) (584) (2) (3,431) 804 (560) (560) 244 (61) 183

Exhibit 7. Balance sheet (Rp bn)

2009 Cash & Equivalent Receivable Inventory Other current assets Total Current Asset Fixed assets Depreciation Other LT assets Total Non Current Asset TOTAL ASSET ST Loans Payable Current portion of LT loans Other current liabilities Total Current Liab. Long term loans Other LT Liab. Total Non Current Liab. Equity Retained Earnings Others Total Equity TOTAL LIABILITIES and EQUITY Source: Company and Danareksa Sekuritas 1,273 94 28 336 1,732 11,656 (2,341) 390 9,704 11,436 235 955 534 338 2,062 4,052 285 4,337 5,604 (612) 44 5,037 11,436 2010 607 102 28 699 1,436 13,782 (3,486) 620 10,917 12,353 1,078 427 255 1,760 5,029 370 5,398 5,604 (602) 192 5,195 12,353 2011F 578 110 32 444 1,165 16,341 (4,790) 620 12,171 13,336 1,101 330 1,431 6,430 390 6,820 5,604 (712) 192 5,085 13,336 2012F 136 129 38 488 790 17,510 (6,212) 620 11,918 12,708 1,000 1,286 378 2,664 4,585 390 4,975 5,604 (726) 192 5,070 12,708 2013F 715 141 41 517 1,415 18,537 (7,736) 620 11,421 12,836 1,000 1,413 410 2,823 4,425 390 4,814 5,604 (598) 192 5,198 12,836

10 June 2011

Bakrie Telecom Company Update

Exhibit 8. Cash flow (Rp bn)

2009 Pretax Depreciation Tax Working capital CFO Capex Investment Others CFI Short term debt Current portion LT LT Loan Equity Others CFF Change in Cash Source: Company and Danareksa Sekuritas 146 920 131 597 1,793 (4,477) (78) (4,555) 235 420 1,939 88 (231) 2,451 (311) 2010 93 1,145 (16) (361) 860 (2,249) 12 (2,237) (235) (168) 966 148 711 (666) 2011F (219) 1,305 95 311 1,492 (2,559) (2,559) (427) 1,421 (0) 995 (29) 2012F (28) 1,422 (31) 203 1,566 (1,169) (1,169) 1,000 (1,845) (845) (442) 2013F 244 1,524 (87) 140 1,821 (1,027) (1,027) (160) (160) 578

Exhibit 9. Ratios
2009 ROE, % ROA, % EBITDA margin, % Operating margin, % Net margin, % Receivable TO (days) Payable TO (days) Inventory TO (days) Debt to Equity (X) Interest Coverage Ratio (X) Net Gearing (%) Current Ratio (X) Quick Ratio (X) Source: Company and Danareksa Sekuritas 1.0 1.9 36.9 8.4 2.9 10.0 100.4 2.9 1.3 1.7 83.4 0.8 0.8 2010 0.1 0.2 38.7 5.5 0.3 10.0 100.4 2.9 1.4 1.2 100.2 0.8 0.8 2011F -1.2 -3.0 41.0 8.4 -3.8 10.0 100.4 2.9 1.6 0.6 117.2 0.8 0.8 2012F -0.2 -0.4 42.9 12.5 -0.4 10.0 100.4 2.9 1.5 1.0 109.5 0.3 0.3 2013F 1.4 3.6 45.3 15.7 3.6 10.0 100.4 2.9 1.5 1.4 92.6 0.5 0.5

10 June 2011

Bakrie Telecom Company Update

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