Share analysis: Telekomunikasi Indonesia – telecommunications

The Company

Telekomunikasi Indonesia (TLKM) is a state-owned company which provides telecommunications, information, media and edutainment, as well as information and technology services. The company was founded in 1856, and went public for the first time in November 1995, both on the Indonesia Stock Exchange as well as the New York Stock Exchange (as American depository shares through Bank of New York Mellon). TLKM, through its subsidiary Telkomsel, is the largest mobile operator with 141.46m subscribers, having conquered 60% of the smartphone market in Indonesia. Data and internet contributed 27% to the group’s FY2014 revenue. TLKM had a blended average revenue per user (ARPU) of Rp39,000 ($3.22) in 2014, the highest amongst the big three providers, compared to XL’s Rp27,000 ($2.23) and Indosat’s Rp27,200, ($2.25). Besides its domination in mobile services, TLKM also provides fibre-to-the-home services through its Speedy and IndiHome packages, which offer high-speed fixed broadband, UseeTV cable (IP TV) and fixed-line telephony service as a package. With 3.5m users, Speedy and IndiHome contributed 5.5% of revenue in 2014.

Development Strategy

To improve the already matured fixed telephony segment, TLKM bundles the service into a fixed broadband package called IndiHome. TLKM aims for 5m fixed broadband subscribers, a 2m increase over last year. In 2014, TLKM fixed broadband had an ARPU of Rp120,100 ($9.93). Assuming an unchanged ARPU, we come up with the number of Rp7.2trn ($595m) if the plan actually comes to realisation. 1800-Mhz spectrum refarming will allow technology neutrality, as the spectrum will be used by operators to provide 4G long-term evolution (LTE) service. The refarming kicked off on May 5, 2015, starting from Maluku, moving gradually to the west, and is scheduled to be finished by November 2015, prompting new capital expenditure spending to start from 3Q 2015 and onwards. In the mobile sector, the company is on course to reach double-digit revenue growth, mainly driven by high data use. In an effort to boost data growth, TLKM introduced the Telkomsel Android United package, which bundles a SIM card an Android phone from one of 17 manufacturers.

The company also launched 4G LTE service on December 8, 2014, and claims to have 240,000 subscribers who have already converted to 4G LTE. So far, this group consumes 25% more data than when they were on 3G. On the legacy business side, the strategy is to increase prices of SMS and voice services to balance out stagnating volume growth, hence raising overall revenue. Recently, TLKM announced a plan to issue a total of Rp12trn ($992m) serial bonds, with the Rp7trn ($579m) first series to be offered in June 2015, while the offering date for the remaining Rp5trn ($413m) is yet to be decided.

Forecast

Data has now become the growth engine for TLKM revenue. We forecast data traffic volume will grow by 49.2% year-on-year (y-o-y), translating into 29.2% data revenue growth in 2015. Meanwhile, FY2015 revenue from SMS will only inch up by 4.7% y-o-y, with voice revenue to grow slightly by 2.2% yo-y. For fixed-line services, revenue from this segment will slip by 0.2% in 2015, resulting in total revenue growth for the year of only 8.4% y-o-y to Rp98.1trn ($8.1bn). Meanwhile, to accommodate heavy increase in data traffic, TLKM will roll out 15,000 base transceiver stations in 2015: 80% for 3G, 10% for 2G and 10% for 4G. Profitability wise, the EBITDA margin is expected to decline, down from 51.9% in 2014 to 51.6% in 2015, mainly on the back of aggressive marketing promotions in the data segment that aim to make TLKM a Rp100trn ($8.3bn) company in 2015. Meanwhile, FY2015 net profit is projected to rise by 7.2% y-o-y to Rp15.7trn ($1.3bn) translating into Rp161 ($0.013) earnings per share, while dividend payout ratio is expected to be retained at 70%. Price target for the counter is set at Rp3215 ($0.27) per share. Presently, the counter is trading at FY2015 P/E of 17.7x, or 10.6% discount to average regional figure of 19.8x.

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