Blood in the streets means money in the bank:
You could see a 77% gain on our Indonesian telecom pick by August!

by Christian DeHaemer

Last month, Taipan recommended that you buy our favorite blood-in-the-streets emerging market telecom. As usual, you had the information in your hands as early as could be: the June issue of Taipan was posted on the web on May 22—right on schedule! Three days later, P.T. Telekomunikasi Indonesia Tbk., which goes by the name of TELKOM and trades in New York as an American Depository Receipt (ADR) under the symbol TLK, jumped 20 percent.

What caused this miraculous surge in investor confidence?

It was none other than our good old friend, positive earnings. TELKOM reported a net profit increase of 19% to US$78.7 million in Q1. This isn’t pro forma EBITA or any other Wall Street trickery, but real, solid numbers.

Telkom stated that its revenue from telephone operations rose 14% to 1.385 trillion rupiah, up from 1.21 trillion rupiah last year. Revenue from telephone operations was the biggest contributor to the company’s total operating income, which rose 16% to 2.589 trillion rupiah, up from 2.228 trillion rupiah.

At this writing, US$1 equals 11,185 rupiah. The rupiah has been falling steadily against the dollar since October of 1999 because of political uncertainty in Indonesia. But it seems to have hit a temporary low. Any bounce back in the rupiah towards its assumed fair value of 8,000 would benefit our position.

Blind, dim and on the way out
Longtime followers of the Indonesian situation will know that the blind, crippled cleric who is now the president of the country, Mr. Wahid, is as lame in his leadership as he is in his stroke-addled mind.

His 19 months of inept rule have pleased few. Mr. Wahid won power as a quick fix to the three-decade dictatorship of former autocrat Suharto.

The irony is that while political uncertainty hovers like a hangman over the Jakarta Stock Exchange—the stock market is down 16 percent for the year!—the underlying economy of this oil-exporting nation continues to improve.

Short-term interest rates are at 16%… lower than most credit card APRs in the U.S. The GDP has grown 4% in the last year, industrial production is up 4.5 percent, the trade balance is up 26 percent, the current account balance is up 5.5 percent, and Indonesia has 22 billion in foreign reserves.

Veep leap
Without delving into the minutiae of Indonesia’s pseudo-parliamentary government, it looks as if the current vice president, Miss Megawati, will take power within months. And under the current legislative schedule, Wahid will be impeached in August.

The only detail to be worked out is whether he will accept a figurehead position—or spurn his followers (less than 10% of the population) for the pleasure of burning down what is left of Jakarta.

In the end, I don’t believe it will matter. Miss Megawati is a nationalist, with the generals and parliament firmly in her camp. Resolution of the political instability seems increasingly likely.

In the best-case scenario, the new government will strengthen the rupiah against the dollar and reinvigorate demand for TELKOM stock in New York and London. This should push TLK above US$7.50.

The worst-case scenario is that we sell at our stop-loss of US$4.50, the price we got in at. In the immortal words of Foghat, you can take a free ride.

Continue to hold on TLK ARDs for big gains on any positive news out of Indonesia