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Gunshots, ballots, cities engulfed in flames...What's the Dili?
by Christian DeHaemer
What do the East Timorese use to call CNN? It's time to dial up 93 percent potential returns on this Indonesian phone company.
Indonesia is on fire again -- literally. Last summer, when the Asian contagion was cascading around the world, Indonesia was the worst leper of the lot. Cash stampeded out of the country, which labored under a crushing foreign debt load.
The Indonesian currency, the rupiah, was freed from its dollar constraints and tumbled from 3,000 rupiah to the dollar to 18,000 -- at which point trade stopped altogether. Investors considered themselves lucky to get out with pennies on the dollar.
Commodities, including oil, an Indonesian export staple, fell to 30-year lows. Massive forest fires ravaged the countryside and choked the cities with smog. Endless chaos seemed a certainty.
Another one bites the dust
Sidhartu's thirty-year dictatorship was rife with crony capitalism. His family, who previously reaped the rewards of his power -- making fortunes off everything from rice monopolies to grandiose real-estate investments to toll roads and car manufacturing pipe dreams -- ducked for cover. All the while, inflation eroded the people's ability to purchase basic needs such as cooking oil or food.
The dictator's, long-time pact with the masses -- economic growth in exchange for totalitarian rule -- fell apart almost overnight. Students by the hundreds of thousands rioted in the street. The business class represented by ethnic Chinese were raped, murdered, and their houses burned. Most fled, taking their capital and business savvy with them.
It looked like a sequel of Sidhartu's rise to power thirty years previous, when 250,000 people lost their lives in a bloody civil war. It would have taken a bold investor indeed to step up and buy. But some did. I know a guy who, literally, made millions.
Let's all get rich together
Who could have known that Sidhartu would step down, leaving the government to his hand- picked successor B.J. Habibie? Or that Habibie would prove so successful in quelling the genocidal instincts of the Army while pacifying the great unwashed?
Things change fast in today's world and hope springs eternal. Remember the predictions based on the Asian contagion? Devaluation would destroy pricing power. There would be no one left to buy American exports. Long Term Capital was just the tip of the hedge fund iceberg. The evil specter of a worldwide depression loomed. Hungry bands of marauding speculators would steal your investments and eat your dog. The Dow would fall to 5,000 or 3,000 or whatever.
Bah, how many times do you have to hear that before it comes true? If the Dow fell to 3,000 tomorrow Allen Iberson would claim it was headed to 1,500, all the while crowing about how right they've been over the past 15 years. It doesn't matter that they've missed the greatest bull market in history as long as it crashes someday. The fact that bad news sells is just as true for the investment media as it is for the local news.
The Great Asian reflation
They were wrong. The Asian stock markets have turned around. The Hang Seng Index in Hong Kong is pushing 14,000, up 100 percent from a low of 7,000 a year ago. And perhaps most remarkably, its dollar peg remains intact.
The Thailand Set has risen from 220 a little more than a year ago to 551 in July before selling off to 443, where it closed just the other day -- that's a 150 percent increase! That doesn't even take into account the currency appreciation. Needless to say, the tremendous buying opportunity is long gone.
Jakarta on my mind
If you had bought a fund (non-existent) that follows the JSX Index (Jakarta Stock Exchange) when it was trading at 300 last September and sold it in July at 720, you would have made 140 percent on your investment.
 However, when you take into account the currency rates of 13,000 rupiahs to the dollar last year when you bought and 6,000 when you sold, you would have made a total of 256 percent on your investment. Of course, these things work both ways. As I write this, the rupiah has fallen to 9,000.
Like a phoenix from the kabota
If you need further examples of the Far East reborn, look to Japan. It is dawn again in the land of the rising sun. GDP has grown 0.2 percent in April-June from the previous quarter. That's two quarters of growth in a row. How exciting. As I write this, the yen is rising from 111 per dollar to 104. Finance ministers are now worried that the yen will grow too strong.
Bottom fishing in Indonesian telecoms
The goal of investing is to buy low and sell high. Was it Gram or Dodd who said, "Buy when the body count runs up faster than Clinton's legal debt, and sell when Merrill puts out a Strong Buy recommendation?"
There aren't very many safe ways to play emerging markets bounces. As a rule you want to look for survivors. Oil, telecoms and breweries make up the short list. When trolling for Indonesian companies I looked at smaller commodity plays that don't have an ADR. It might seem odd, but the greatest sell-off occurred in the larger foreign-owned blue chips -- which is great, because I'd much rather buy a stock traded in New York than Jakarta. It's more liquid and transparent.
A crisis record of profit
I've made plenty of profits for Taipan members in the past by buying blue chips during a crisis. In March we bought PLD Telecom, a Russian communication company -- and pulled in 162 percent gains in only four weeks!
Or how about last year, when we pulled in 102 percent returns off of D&G -- the makers of Red Stripe beer. Or 48 percent on China Telecom, or 54 percent from South African Breweries. the list goes on and on. It's those kind of returns that make up my religion, and we're going to do it again this month.
Ricky, don't lose that number
PT Telekomunikasi Indonesia (TLK-NYSE) is the Ma Bell of Indonesia, the world's fourth largest country. Telekom's main business activities are threefold. They provide local and domestic long-distance services.
Secondary activities include mobile cellular services, leased lines, telex, satellite transponder leasing and VSAT. Telekom has a series of subsidiaries, partnerships and joint ventures among the cell phone providers. The company currently has seven regional divisions and one national long distance provider.
The third branch provides information services, repair, training and property management. Telekom is a true Indonesian blue chip.
Eye of the tiger
Telekom is a survivor. They have weathered the economic storm of the last two years admirably -- to the point where they had significant foreign exchange gains over the first six months of this year.
It's a macro turn around story, to be sure. As you can tell by the chart, Telekom was a high p/e growth stock with a share price in the US$30s a little over two years ago. Following the devaluation, the Telekom share price hit a low just under US$3 where it traded below liquidation value.
Fear rules.
The fact is, Telekom was never going to go under. I don't know of a national phone company that ever has. Regardless, Telekom has made all the correct moves since then.
For the six months ending June 30, 1999 eps was 157.9 over a loss of (126) over the first six months of 1998. Net income for the first half of 1999 increased 225% to 1,473.9 billion rupiah.
This company is far better today that it was a year ago. Total operating revenue grew 15.3 percent over the last six months. Ebita grew 9 percent. Ebita margin continues to hover above 70 percent.
Perhaps the most telling sign of management savvy is the resurgence of loans based in rupiah. Last year 55 percent of Telekom's loan portfolio was in foreign debt. This year 53 percent of the loan portfolio is in rupiah. The greater the domestic denominated debt the less exposure to currency fluctuation.
Big company
Telekom has some 38,000 employees and 5,758,780 telephone lines now in service. Their stated goal of five years ago is 10 million lines by 2001. I don't think they'll make it. Growth has slowed -- they are putting in about 100,000 lines a year. Telekom has entered into a prudent spending period. It's working. Cash almost doubled over the last year, coming in at rp 3,286 billion vs. rp 1,333.3 billion in 1998.
Fine, Telekom will stay in business, but how do we know it's cheap and what makes it better than other Indonesian telecoms? Well, I'll tell you.
The other Indonesian telecom is Indosat (ITT-NYSE). Indosat deals with international long distance from Indonesia. Indosat has sold off in a similar proportion as Telekom and currently sports a favorable p/e of 10 compared to 13 for TLK. However, the 5-year eps growth of Indosat is a negative (12.30) while TLK's is a positive 20.6 percent. But as you can see by the chart these two companies trade in tandem, so in that sense they are equal.
| ADR INFORMATION |
| Shares Per ADR |
20 |
|
|
| Reporting Currency |
Rupiah |
|
|
| Current Exchange Rate |
7,900 Rupiah Per US Dollar |
|
| Fiscal Year Ending Rate |
8,025 Rupiah Per US Dollar |
|
| Fiscal Year Avg. Rate |
9,875 Rupiah Per US Dollar |
|
| Contact info: The Bank of New York, P. T. Telekomunikasi Jalan, Japati 1 Bandung 40133 Indonesia; Phone: (212) 815-2345
|
| GROWTH RATES |
| |
1 YEAR |
3 YEAR |
5 YEAR |
| Revenue |
11.69% |
8.94% |
13.03% |
| EPS |
13.75% |
-3.90% |
-2.12% |
| Dividend |
17.50% |
-8.71% |
3.34% |
| Short list of share info |
| Market cap |
US$3.5 billion |
| Float: |
107 million |
| Shares outstanding: |
466 million |
| 52 week high: |
14 3/8 |
| 52 week low: |
2 9/16 |
| Recent price: |
Last 7 9/16 |
| Ticker: |
NYSE:TLK |
| Stock holders equity grew from 8 billion rupiah to 11 billiom from 98 to 99 (about 1.6 billion US depending on the exchange rate) during the hight of the crisis. |
You might also notice that the ADR has sold off considerably more than the underlying shares. New York is much more jumpy than Jakarta due to currency risk. Of course the government owns 66 percent of the shares and foreign fund companies own the vast majority of the rest. Less than 2 percent is owned by individual Indonesians. That said, the government has been selling off large blocks of TLK (10 percent of outstanding last year) in a slow privatization program.
Telecom graceland
Other telecoms in the area include New Zealand (NZT-NYSE) and our old friend China Telecom (CHL-NYSE). NZT is a mature company serving a limited population base. It has a p/e of 19 and a market cap of US$7.7 billion. Its growth rate is 2 percent on US$1.8 billion in sales. You'd be paying a 46 percent premium over TLK's p/e for 1/7 the growth rate. The NZT chart tells the story of a dog. It has been stuck in a 20 percent trading range for the past year. Not a lot of dramatic upside potential.
China Telecom is on the other end of the spectrum. It has been flying of late and looks expensive. It has a p/e of 50 on growth of 20 percent. This price may be justified, however, in that CHL is a priority for the state and telephone penetration is minimal in China -- some estimates put it at 1 line per 100. There is plenty of growth potential. At the same time China has yet to undergo a devaluation crisis and can't rise GDP 8 percent annually for ever.
TLK has the same upside potential as CHL in that there are now roughly 10 million lines in a country of 200 million. The fact that TLK is heavily involved in cellular, cable and recently launched a Lockheed Martin-built satellite bodes well for any information superhighway dreams you want to lay on it. By the way, if TLK had launched that satellite two years ago it would have tacked 15 percent on its share price.
Buy fear, sell greed
In the end none of this matters. This is a psychological play based on fear of widespread destruction and civil war.
The problems in East Timor arose 250 years ago when Portugal colonized it. The portuguese left in 1975 and the Indonesians invaded. East Timor (oddly, Timor means "east") has been fighting for independence ever since.
Earlier this year, Habibie offered them the chance to vote for self-rule. They took it. 98 percent cast their ballots for freedom. During this time the militias, puppets of the national army, set about punishing the region. Reports are that they have been systematically killing thousands of Timorese, destroying their homes and forcing them into refugee status.
Many believe that the destruction of Dili, the capital, is meant as a warning to any other region of Indonesia that hopes for autonomy. Habibie called in the UN because he had no other way of controlling his army.
The UN has had a fairly decent record of late in stabilizing conflicts after many of the main participants are dead. By the time the UN arrives there will be little left to protect. That said, once the industrial nations arrive, the money to rebuild will come in by the bucketful, the economy will revive and foreign investors will be willing to risk more capital.
There is a general election in November. I wouldn't be surprised if the old guard lost ground to fresh faces who lean toward democracy. It wasn't that long ago when South Korea and Taiwan were totalitarian regimes.
The bet is that TLK won't plummet past its level of a year ago during the worst of the Asian contagion when it fell below its liquidation value around US$3.5 a share. The medium-term upside is US$15. The long-term upside is a return to pre-crisis level of US$30. I don't plan on sticking around that long. Chances are good that there will be further decline in the share price before you receive this issue. TLK is a buy at current levels below US$7.50. It is a strong buy under US$5 with a 12-month target of US$14.50 for a gain of 93 percent.
Oh, and for a bonus it pays a dividend.
In addition to his duties at Taipan, Chris DeHaemer is the editor of The Hammer.
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