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Bombed again in Bali
Let Osama bin Laden put coin in your pocket and make an easy 166 percent over the next 8 months!
by Christian DeHaemer
In October of 1999, Taipan regaled you with stories of fires and bloodshed in East Timor.
We told you how to buy the fear and pocket the greed, and gave you the means to profit from the Jakarta selloff and rebirth. If you’d taken my advice, you’d have made 54% in just a few short months.
Some time later, I recommended that you take a position in South African Breweries (SAB.L), which trades as an ADR on the London exchange as a safe play on emerging markets and a hedge against a falling dollar. It’s up more than 20% as I write this.
 Murder, Inc.
I’ve often thought that the way to make serious ducats in this world would be to set up a terrorist organization as a backend to an international brokerage house. Then you could, for instance, sell a leveraged mass of Philippine peso before tossing a series of bombs in downtown Manila, while blaming a crooked President and threatening an army coup.
Just like what happened on December 30, when a number of bomb blasts in Manila did more than just rattle windows, dropping the peso from 40 to 50 to the dollar. It’s a shame that Bin Laden is an Islamic fundamentalist, in that Muslims don’t believe in interest debt. There are no margin accounts in Iran — or so I’m told. Otherwise, old Bin could give up the arms smuggling business and become a terrorist trader.
It’s an odd quirk of fate that Taipan members will profit from his shortsightedness.
Now, I certainly don’t condone religious fanatics, CIA agents or any of the other gnawing vermin who crisscross the planet with a primordial urge to maim. But it is a given that when these fellows get in the mix, the money flows out and markets take a plunge. It’s also a trite market adage that you should be buying when there is blood in the streets.
The great Asian reflation
The latest Economist — that widely renowned fount of British wit — forecasts the growth prospects of world. According to the London punditocracy, the developing regions will grow faster than Europe and North America. Countries that are dependent on oil income will continue to do well. Turkmenistan, for example, is expected to grow more than 8 percent next year. Indonesia, which has some 35 percent of GDP coming from oil, is expected to grow more than 4.5 percent.
This is a perfect time to get back into some emerging markets. We are over two years removed from the Asian Contagion of 1998. Much of the cronyism and thuggery have been left behind. And with a falling U.S. market, you can argue that money will be brought back home where oil money is driving growth off of a low base. A falling U.S. dollar (the Euro is back up to 95 cents from a low of 79), coupled with a falling U.S. equity market, supports the repatriation argument.
The rising rupiah
The Indonesian rupiah recently gained some strength, rising above the 9,500 level on the back of dollar sales by foreign banks in Jakarta earlier this week.
Dealers are selling the dollar based on the stronger baht and Singapore dollar. But the real strength will come from Indonesia’s new ability to lower interest rates following the U.S. Federal Reserve cut a few weeks ago.
 Taipan believes that the fair value for the rupiah is somewhere between 6,000 and 7,000 on the dollar. At the depth of the Asian crisis, when students were rioting in the streets, the army was taking potshots at the mob, and the inflation rate was at 85 percent — the rupiah stopped trading at 18,000. Before the crisis, it was at 3,000.
Things have changed significantly since then. Indonesia is now a "true democracy," and the East Timor separation has been completed. I’m not saying that doing business in Jakarta is as straightforward as making deals in Jacksonville; I’m simply pointing out that the situation is improving — and given current valuations, it seems ripe for speculation.
Dialing for dollars
P.T. Telekomunikasi Indonesia (TLK:NYSE-ADR) is the local telecom provider for Indonesia, and it’s my play on the reemergence of an emerging economy. The reason is quite simple — Indonesia has the fourth-highest population on earth, with one of the lowest phone per capita rates. And then there’s this: I can’t think of a single national telecom that has gone out of business.
TLK is a solid company. It has a current price to earnings ratio of 7.5 and a market cap of only US$2.2 billion. As you can see from the revenue and EPS charts, TLK has been moving in the right direction over the past two years. For the nine months ended 9/30/00, revenues increased 21% to 6.94 trillion ruphiah. Net income increased 48% to 2.18 trillion rupiah.
| REVENUE |
| Quarters |
1999 |
2000 |
| MAR |
1,753,403 |
2,228,764 |
| JUN |
1,978,572 |
2,282,318 |
| SEP |
2,008,675 |
2,432,743 |
| DEC |
2,049,559 |
|
| Totals |
7,790,209 |
6,943,825 |
| Note: Units in Millions of Rupiah |
| EARNINGS PER SHARE |
| Quarters |
1999 |
2000 |
| MAR |
32.79 |
74.6 |
| JUN |
125.13 |
49.4 |
| SEP |
0.01 |
92.49 |
| DEC |
72.4 |
|
| Totals |
230.33 |
216.49 |
| Note: Units in Rupiah |
Gross margins are at 32%, total cash is more than US$700 million, and debt-to-equity is only 0.75. TLK trades at 1.6 times book. Solid.
As you can tell from the three-year chart on page 4, this is not a buy-and-hold type of investment. You buy when it looks like it can’t get any cheaper and sell on any resurgence of optimism. For those of you who remember the Asian crisis of September 1998, when emerging markets around the globe were devaluing their currencies and money flowed out faster than Suharto could say "martial law" — I just don’t believe anything can be as bad as that in terms of market psychology. So that US$3.50 on the share price is a natural floor.
If you went back three-and-a-half years, you would see the share price around US$30. I don’t think we’ll get there any time soon. But a decent bounce will get you above the next resistance level at US$7. If you are the type who believes that a stock should trade at a PEG ratio of 1 — that is, it should have a P/E equal to its earnings growth — then TLK should have a share price of US$11.99 today. That’s 166 percent from where it is right now!
China Telecom, for instance, has a P/E of 196 and a market cap of US$78 billion. It has double the growth rate and a more stable government behind it — but that doesn’t justify the fact that it trades at 26 times TLK’s valuation.
Reason for the selloff
Most of the recent selloff has to do with Osama bin Laden exporting terrorism to some of Indonesia’s Islamic regions. Bombs have been going off in Jakarta. And the market has taken a plunge.
There have also been plenty of complaints regarding its democratically elected leader and his ability to manage the shift of power away from the central government and back into the control of the various regions.
The risk is that the military will regain power through a coup. That is a remote possibility. But given the fact that no former authoritarian ruler has regained power since the end of the Soviet Union (Pakistan is the notable exception), I’m willing to take that bet. Furthermore, during the East Timor crisis, phone usage went up and TLK had a small surge in revenue.
As a textbook blood-in-the-streets, market psychology play, I strongly suggest that you buy P.T. Telekomunikasi Indonesia under US$4.50. Contact: P.T. Telekomunikasi Indonesia, Jalan Japati 1, Bandung 40133, Indonesia. Phone: (212) 815-2345.
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