Government completes Telkom placement

and attracts a large number of new investors to the stock.

Although global equity markets remain turbulent and difficult, an accelerated share placement for PT Telkom enjoyed a remarkably smooth execution to completion on Monday night. Ironically, the 3% government divestment may have also benefited from the fact that some investors re-weighting from the scandal-plagued US view Indonesia as a safe haven to put funds to work.

About 50% of the Rp1.13 trillion ($125 million) deal comprised new investors and many were said to have participated because they felt they missed an opportunity when the government completed its previous divestment in December. With Bahana Securities and UBS Warburg as joint-lead managers to the new deal, the government sold 312 million shares at Rp3,635, a 3% discount to Monday's close. This compares to a 3.7% discount for the last sale, which raised Rp3.1 trillion ($300 million) from a 12% divestment, priced at Rp2,600.

Books for the deal opened after Jakarta's close and were covered within two hours, although the deal was left open for a total of five hours to catch a couple of accounts in the US. A total of 50 accounts participated in the 144a deal, which closed two-and-a-half times oversubscribed. Because the deal was not fully SEC-registered, accounts will not be able to convert to ADRs for 12 months.

There were said to be a number of $10 million plus orders, although only two were allocated over this amount. Geographically the book split 50% US, 30% Asia (of which 8% went to Indonesia) and 20% Europe. In December, by contrast, there was a much higher Asian component - 48% compared to 35% in Europe and 17% US.

Observers say the swing factor was a handful of US-based global accounts and a number of smaller European funds that had not previously participated in Indonesia, but see good upside from a market, which ranks as Asia's third best performer this year.

PT Telkom dominates the domestic exchange, but many feel the stock still has value as it is down from its early April high of Rp4725. The stock closed Tuesday at Rp3,775, up 17.97% year-to-date against a 22.8% rise in the index, which closed yesterday at 392.036.

As BNP Paribas Peregrine analyst Manoj Nanwani explains, "There's a couple of reasons why the stock came down. Firstly, the company had to maintain a high dividend pay-out. Even though it needs the money for capex, because the government needs the money more.

"Secondly," he adds, "it's been hit by some of the fall-out in the global telecom sector, but mainly it is because of the Manulife issue and Telkom's standing as a proxy for the entire market. Whenever money moves out of the market en masse, it's always Telkom which suffers the most."

For the government the divestment will raise funds to bridge the state deficit and was timed to take advantage of an upswing in the stock, which has been on a mainly upward trend since the end of June.

At current levels it is trading on four times 2002 earnings on an EV/EBITDA basis and seven times on a P/E basis. It is also yielding about 6%. Analysts say that regional fixed line comparables are trading around the 6.5 times level on an EV/EBITDA basis.

"Telkom is trading at a 40% discount to its peers, which is still too large," Nanwani argues. "It should be more like 15%."

One further factor underpinning the deal is the prospect of a re-weighting by MSCI. The company's decision to weight markets on a freefloat basis benefits counters likes Telkom, which now has a 49% freefloat, with the government holding the 51% balance. Currently, Telkom has a 35.8% weighting in the MSCI Jakarta Index based on a 35% freefloat, with PT Sampoerna second on 19.7%. Indonesia's standing in the MSCI Asia Free Index, however, is still a miniscule 0.8%.

As a result, country experts say that Telkom's success should not encourage other IPO candidates in the pipeline to become too optimistic about their own chances. As one concludes, "Telkom is a fairly unique proposition. The market remains tricky and investors are only looking for interesting stories or in this case one which also represents such a large chunk of the market."

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