Today the market has been up and sideways basically, perhaps a little more defensive this afternoon,...
Telkom Churning Out Nothin’ But Risk
05/11/2011 9:42 am EST
It’s hard to understand how Telkom Indonesia (TLK)—or more formally, Telekomunikasi Indonesia—managed to turn its first quarter into a disappointment.
But it did.
The company, Indonesia’s biggest telecom business, broke through the 100-million-subscribers ceiling in the quarter. And it also predicted that it would add 10 to 12 million subscribers this year.
But big increases in operating and marketing costs negated all that good news. First-quarter 2011 net profit rose just 1.4% from the first quarter of 2010, to 2.83 trillion Indonesian rupiah ($330 million) from 2.79 trillion rupiah.
Marketing costs rising fast enough to wipe out profit increases from new subscribers are a bad sign in the telecommunications sector. It’s usually an indicator that the company is experiencing so much churn that it has to spend lots of money to replace those departing subscribers.
In this case, Telkom Indonesia has a huge landline legacy business that’s experiencing significant defections to wireless systems—including its own wireless operation.
Last week, I said I would drop Telkom Indonesia from my Dividend Income portfolio. That’s still my intention. Fundamentals like this don’t make me thrilled to own the stock—even as a surrogate for the booming Indonesian economy.
That’s especially true now that emerging-market volatility has stepped up. Indonesia has decided to pursue a risky, China-style inflation policy, emphasizing measures such as raising bank-reserve requirements rather than interest rates. I think that also increases the risk in this stock.
If not for the current volatility in emerging markets, I’d stick around to see what the company’s annual meeting on May 19 decides about the dividend. (That payout is why I bought the stock initially, after all.)
The government has approved paying out 55% of 2010 net profits as a dividend in 2011. (That would be up from 50% last year.) I assume the record date will be sometime after the annual meeting.
It’s up to you to decide to stay for the payout or not. For me the risk isn’t worth it, but that’s just me.
I’ll be selling the stock out of the Dividend Income portfolio today. The closing price on May 10 was $35.67.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not hold shares of Telkom Indonesia as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
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