Telekomunikasi to Expand Globally - Analyst Blog

P.T. Telekomunikasi Indonesia Tbk. (TLK), the largest telecom operator in Indonesia, recently announced that it is all set to conclude its first ever cross-broader acquisition in Cambodia. Telekomunikasi will acquire majority stake of CamGSM, the largest wireless operator in Cambodia. This planned acquisition will be Telekomunikasi's first global expansion drive after its failed attempt to purchase Iran Telecommunications Co. in 2009.

CamGSM was established in 1996 as a joint venture between Millicom International Cellular S.A. (MICC) and Royal Group, a local telecom operator. In August 2009, Millicom sold its 58.4% in CamGSM to the Royal Group for $346 million as a strategic divestiture. However, Telekomunikasi is likely to pay more than $500 million for the majority holding of CamGSM. Mobitel and Callcards are the two popular brands of CamGSM. The proposed acquisition is expected to be closed by the first quarter of 2011.

The Indonesian wireless services market is quickly maturing as several operators are offering more or less similar services. Recently, Telekomunikasi forecasts that its fiscal 2010 revenue will decline by 4%-6% year over year. This was a significant change 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 this downward revision.

Deregulation of the telecom segment by the Indonesian Government has enabled several competitors to provide similar services at lower costs to subscribers. Indonesia's wireless service providers slashed prices in 2008 to capture market share. As a result, ARPU (average revenue per user) reduced across the industry. In an effort to counter the growing internal threat, Telekomunikasi has taken this strategic move to expand globally as it may generate growth in its top line.

We believe financing of this deal would not be much of a problem for Telekomunikasi. The company has also decided to sell its CDMA wireless wing TelekomFlexi to P.T. Bakrie Telecom.  The deal size is likely to reach $1 billion and close by the end of 2010, subject to regulatory approval.

We expect near-term sales of Telekomunikasi to remain lumpy as both wireless and wireline telephone markets have become competitive in Indonesia. Operating expenses will also increase due to network upgrades and promotional activities. Consequently, we maintain our long-term Underperform recommendation for Telekomunikasi. Currently, it is Zacks #4 (Sell) Rank stock.

 
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