WSJ article ALERT:
February 26, 1998
The Rupiah's Plunge Is Expected
To Hit Telkom's 1997 Earnings
By EDHI PRANASDIHI
Dow Jones Newswires
JAKARTA, Indonesia -- The relative stability in the rupiah is seen
ending the lucrative game of arbitrage that's been played in phone giant
PT Telekomunikasi Indonesia, and threatens to bring further losses to
the Jakarta Stock Exchange index.
Earnings in Telkom are expected to be hit by the plunge in the rupiah
and a government ban on tariff increases, eroding the fundamental
picture of the company. As telecommunications firm is the largest listed
stock on the index, the outlook for the Jakarta market overall is now
bearish.
Traders said the rupiah looks to be stabilizing and investor confidence is
just not as strong as when the currency was going up and down.
For months, Telkom seemed to defy logic as its share price rose in
contrast to the free fall in the rupiah. While the currency plunged to 80%
below its value a year ago, Telkom was trading at a healthy level of
5,000 rupiah (53.6 U.S. cents) in early February. Its gains were able to
keep the Jakarta index above 500 points for much of February.
Telkom's gains, however, had nothing to do with fundamentals and
everything to do with pure arbitrage. Traders in New York, were
Telkom American depositary receipts are denominated in dollars, were
exploiting the fall in the rupiah to make profits through the differentials
in Jakarta rupiah-denominated shares. The speculation kept Telkom well
bid.
In recent weeks, however, the rupiah has been strengthening. In
particular, hints by the government that it was going to implement a
controversial currency board plan has brought the rupiah to around the
9,000-rupiah level from 17,000 rupiah to the U.S. dollar in January.
On Wednesday, the local currency closed at 9,175 rupiah.
This strengthening, however, has been disastrous for Telkom. From a
high of 5,000 rupiah per share on Feb. 2, it fell to 3,050 rupiah 10 days
later when the rupiah briefly strengthened to 7,050 rupiah. On
Wednesday, Telkom closed at 3,625 rupiah, down 250 rupiah, on 4
million shares while the Jakarta Stock Exchange Index shed 11.479, or
2.3%, to 483.411.
With the arbitrage game abating, traders say the market will again focus
on fundamentals, which will not lend long-term support to Telkom
shares in the current bearish conditions. The market is focusing on the
telephone-line service provider's cash-flow, which is being hit by a
slowdown in domestic traffic as well as higher costs for imported items.
With the government capping Telkom's ability to raise domestic
long-distance tariffs, earnings growth looks bleak.
"In term of being able to get back to solid earnings and cash flow
growth, Telkom is really in a difficult situation," says Shaun Cohen, an
analyst with W.I Carr Securities in Jakarta.
So difficult, in fact, that Cohen predicts Telkom's net profit in 1997 will
be halved to 974 billion rupiah from 1.502 trillion rupiah in 1996, a
drop of 65%. The fall is largely due to the foreign exchange losses and
higher operation costs.
Mr. Cohen expects the company will book a net loss of 1.7 trillion
rupiah for 1998.
At its current price of around 3,700 rupiah, Mr. Cohen wouldn't exactly
project at what price Telkom should be trading, but says, "The current
price is very expensive, and people are not making trades in Telkom
based on it."
Traders also blame Telkom's joint operation scheme as a contributing
factor to the drop in its financial performance. Under these schemes,
Telkom cooperates with other companies to install telephone lines in
specified areas in Indonesia.
The company in 1997 had a full year target of installing around 400,000
phone lines. In reality, however, the joint ventures have so far been able
to install only 130,000 phone lines, sources at Telkom say.
Traders said the problems with Telkom's joint operation schemes -- and
of lower-than-expected demand -- are not going to go away soon.
However, Adrian Rusmana, the head analyst of PT BNI Securities, is
more confident about Telkom's financial performance in 1997 and this
year.
He mentions the currency board system in which the government is
likely to peg the rupiah at 5,000 to a U.S. dollar as the main factor for
adjusting Telkom's 1998 outlook upwards. Mr. Rusmana says that, if
implemented, the currency board will yield the company foreign
exchange gains.
Mr. Rusmana sees Telkom's net profit in 1997 at 1.1 trillion rupiah,
down only 27% from 1996.
For 1998, he expects the company to book 1.2 trillion rupiah in net
profit with an earning per share at 140 rupiah. "But, if the rupiah is
pegged at 5,000 to a U.S. dollar, Telkom's net profit this year will be
better at 1.6 trillion rupiah with EPS at 193 rupiah," he adds.
Most analysts, however, reiterate that it is not fundamentals that have
drawn investors to the stock.
Traders said that currency speculation has been dominating the trade,
and added that when the rupiah is pegged at a certain rate, Telkom's
share price will tumble, and the rest of the shares in the local market will
follow suit.
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