International Investing: Indonesian Telecom

Investors’ experience in many European telecommunications stocks over the last few years has been nothing short of disaster. Dutch telecom operator KPN, for example, has seen its stock price fall from 14 euros per share to 4 euros per share in the last 5 years. The dividend also has been cut on various occasions. In May 2012 there was some hope for KPN’s shareholders as the world’s richest man, Carlos Slim, bought a 28% stake in the company at 8 euro per share.

The problem with all telecom players is that margins are getting squeezed because users increasingly shift away from paying services (calls, SMS, data) and call for free using Skype or Apple’s FaceTime, while surfing for free on widely available Wi-Fi networks. Emerging-markets telecom players have done better than their European peers, and the Indonesian telecom operator PT Telekomunikasi Indonesia, also known as PT Telkom (ticker: TLK), is a good example of this. (Companies are mentioned only for educational purposed. No investment recommendations are intended.)

PT Telkom is one of the oldest telecom companies in the world. The company has its roots as the first electromagnetic service company established by Dutch Colonial Government in Indonesia in 1884. Today PT Telkom serves over 130 million customers in Indonesia: 110 million mobile subscribers via its Telkomsel unit and over 20 million fixed wireline subscribers. PT Telkom has about 60% broadband market share, which continues to grow rapidly (64% growth in 2011). Even its cellular subscriber base continued to grow at 13.8% in 2011. Singapore Telecom, controlled by the Singapore government, is a 35% shareholder in Telkomsel (PT Telkom’s mobile unit), and earlier this year there were talks between Singapore Telecom and PT Telkom, as the Indonesian government wanted to have a larger stake in the mobile unit. Discussions broke down and recent news suggests there will be no change in shareholder register.

Earnings are expected to grow at mid single digits for the next few years, and the dividend should increase along with earnings. PT Telkom is trading at 13 times 2013 earnings estimates and has a 5% dividend yield.

As with any investment, there are risks investing in PT Telkom. Telecom players around the world are under continuous margin pressure, but Asian telecom players have so far done better than others. PT Telkom also is controlled by the government, and it might do something contrary to the interests of minority investors.

Nic Van Broekhoven is a portfolio manager at Value Square Asset Management, which holds no position in PT Telkom but does hold shares in Singapore Telecom.