Rifka Hayati
Elevator Pitch
I still have a Buy investment rating for PT Telekomunikasi Indonesia Tbk (NYSE:TLK) [TLKM:IJ] shares.
With my previous April 10, 2023 update, I touched on Telekomunikasi Indonesia’s “value creation levers.” In the current update, my research finds that the long-term growth prospects of the company’s key fixed broadband and mobile businesses are excellent. In that respect, I choose to stick with my existing Buy rating for TLK.
Fixed Broadband Business Has Substantial Growth Potential
There are a number of metrics which indicate that Telekomunikasi Indonesia’s fixed broadband business has a very long growth runway.
Firstly, TLK disclosed in its Q1 2023 results announcement that the company’s fixed broadband business saw its subscriber base expand by +7.0% to 9.35 million as of March 31, 2023. Although Telekomunikasi Indonesia achieved decent growth in its number of fixed broadband subscribers in the most recent quarter, TLK’s fixed broadband subscriber base represents a fraction of the company’s mobile subscriber base. As a comparison, Telekomunikasi Indonesia boasted approximately 151 million wireless subscribers (or around 16 times the number of its fixed broadband subscribers) as of the end of March this year.
Secondly, the fixed broadband penetration rate in Indonesia, Telekomunikasi Indonesia’s home market, is significantly lower than that in its neighboring countries. According to an April 6, 2023 Reuters news article, the average penetration rate of fixed broadband services in the Southeast Asian region as a whole is roughly 40%. In contrast, Indonesia’s fixed broadband penetration rate is a mere 14%. It is reasonable to expect Indonesia to play catch-up with the rest of the countries in Southeast Asia with regards to fixed broadband penetration over time.
Thirdly, a growing market is typically a tailwind for the largest player which can exert its dominance to boost its revenue growth prospects. As per statistics quoted in a recent June 9, 2023 Fitch Ratings research report, the vast majority or approximately three-quarters of the current fixed broadband users in Indonesia are Telekomunikasi Indonesia’s subscribers.
In my prior April 10 write-up, I noted that the “spin-off of the Company’s IndiHome (fixed broadband) business to Telkomsel, TLK’s wireless or mobile business arm” will “facilitate cross-selling between these two businesses.” At the company’s Q1 2023 earnings briefing on May 8, 2023, Telekomunikasi Indonesia also guided that this planned spin-off will “accelerate the process of providing broadband services to the public throughout all regions of Indonesia.” The spin-off transaction is projected to be concluded by the third quarter of this year.
In summary, the fixed broadband market in Indonesia is underpenetrated, and TLK is in a great position to increase its revenue contribution from fixed broadband services by virtue of being the outright market leader in this space. Specifically, Telekomunikasi Indonesia has set its eyes on ramping up cross-selling activities (to its mobile subscriber base) as the key driver of its fixed broadband subscriber base expansion.
Profitability Improvement Potential For Mobile Business
Telekomunikasi Indonesia’s EBITDA margin contracted by -6 percentage points from 55.4% in FY 2021 to 49.4% for FY 2022 as per financial data sourced from S&P Capital IQ. But the market’s consensus financial forecasts for TLK point to the company’s EBITDA margin recovering to 55.8% for FY 2023 and staying in the mid-fifties percentage range for the FY 2024-2026 period.
The stable competitive environment for the Indonesian mobile market is the key factor contributing to expectations of an improvement in profitability for TLK in the next few years. Telekomunikasi Indonesia noted at its first quarter results call that it has experienced “more favorable competition in its mobile business”, and added that its mobile segment “could have more flexibility to do some (upwards) price adjustments.”
TLK’s management commentary is consistent with the company’s recent quarterly metrics. As revealed in its Q1 2023 financial results release, the ARPU (Average Revenue Per User) for Telekomunikasi Indonesia’s mobile business grew by +11.6% YoY to around IDR45,000 in the first quarter of this year.
An earlier October 17, 2022 Fitch Ratings article highlighted that the Indonesian “mobile industry has consolidated into three major telcos, after PT Indosat Tbk merged with PT Hutchison 3 Indonesia” to form a new entity known as PT Indosat Ooredoo Hutchison Tbk (OTCPK:PTITF) last year.
Based on Indonesian financial firm Ciptadana Capital’s research, the growth in Indonesian mobile services revenue (for the industry as a whole) accelerated from +7.4% in 2013 to +8%-10% for the time period between 2014 and 2016. This was largely attributable to “competition de-escalation” and “ARPU uplift on better tariff monetization” driven by the merger of XL Axiata (OTCPK:PTXKY) (OTC:PTXAF) and Axis Telekom Indonesia in 2014 as per Ciptadana Capital research.
Looking ahead, it is realistic to see a faster pace of top line growth and margin expansion for Telekomunikasi Indonesia’s mobile business in the coming years driven by recent industry consolidation activity (Indosat-Hutchison 3 Indonesia merger).
Concluding Thoughts
I remain bullish on Telekomunikasi Indonesia’s outlook. The prospects for TLK’s fixed broadband business and mobile business are reasonably good, and I don’t see any reasons to change my Buy rating for Telekomunikasi Indonesia.