International telephone carriers have started to perform well this year, so let’s take a look at one of my favorites: Indonesia’s largest telephone company, Telkom Indonesia (NYSE: TLK). It is up +5% for my Strategic Advantage newsletter’s portfolio this month, and offers exposure to one of the world’s fastest growing markets. TLK is also an excellent income investment, paying a fat 5.5% dividend.
When investors look towards Asian markets, they fixate on China alone. Yet as you know from discussions earlier in the year, Indonesia should not be overlooked as the world’s fourth most populous country. The nation is rich in natural resources as the world’s largest tin producer and second largest natural gas exporter. It has the third largest coal reserves in the world and has sizable gold, silver, copper, and nickel deposits.
A young population (only 6.1% of the population is over 65 years old) combined with an expanding middle class is stimulating infrastructure investment. With low interests rates, minimal inflation, and surging consumer confidence, Indonesia is expected to grow 5.9% in 2010 and 6.2% in 2011.
Telkom should benefit from these positive trends. It is the gorilla of the Indonesian telecommunication market with a $17.5 billion market cap and $7.5 billion in annual sales. Its wired network reaches more than 90% of the population while its 65% owned subsidiary Telkomsel controls nearly half the wireless market. Most competitors must pay royalties to use Telkom’s network to provide service in certain areas.
TLK had an excellent first quarter. Revenue was up 6.2%, net income jumped 13%, and its wireless customer base expanded 14%.
Since 2006, the number of wireless subscribers in Indonesia has exploded from 47 million to 180 million. Despite this growth, only 60% of the population has wireless service. TLK is well positioned to capture many of these 70 million remaining customers with its superior network quality and well-recognized brand name.
In the chart above, you can see that Telkom has skyrocketed since 2002, leaving American telecom carriers AT&T (NYSE: T) and Verizon (NYSE: VZ) in the dust. Management has expanded its subscriber base in every market, often at the expense of competitors. Since entering the long-distance market in 2005, Telkom has aggressively expanded to control 50% of the market by dislodging Indosat IIT.
Mobile broadband is another tremendous area of growth. Since 2009, TLK’s customer base jumped 607% to 2.1 million. TLK has a stranglehold on delivering mobile content with a 71% market share. Further proliferation of smartphones will boost earnings.
Analysts expect Telkom Indonesia to earn $2.96 a share in 2011. At this valuation, TLK is trading at 12x forward earnings. With sizable growth prospects and a historical valuation around 15x earnings, the stock could trade for as much as $45 by the end of the year.
Global headwinds may temporarily dampen the price/earnings multiple investors are willing to pay, but eventually they will value TLK again as an entity within the growing Indonesian economy rather than the stagnating global economy. This attractive foreign growth stock also pays a 5.5% dividend. Keep holding, and it is a good buy on any pullback.
As of this writing, Jon Markman was recommending TLK in his Strategic Advantage newsletter. For more ideas, check out his Trader’s Advantage and Strategic Advantage newsletters.
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