Telecommunications Gaining More Data Mileage

The Indonesian telco sector is a NEUTRAL for 2014 given the combination of (i) macro-economic/political headwinds, (ii) earnings pressure from higher data opex/decelerating revenue growth & (iii) sustained capex spending. We like the ITC (OVERWEIGHT) due to their stronger earnings prospects. A stock-picking strategy to identify companies with discernible price catalysts and a good track record of execution is favored. Telkom and TBIG are our top picks.

Mobile revenue likely to grow at single digit clip for 2014 on rational competition
We expect industry mobile revenue to grow by mid- to- high single digit level in 2014 versus the projected 6-8% in 2013, mainly driven by the strong data revenue expansion from rising smartphone penetration (est. 18% of mobile base at end- 2013) and benign competition. As with its regional peers, Indonesian telcos are witnessing rapid voice revenue erosion although the impact is mitigated by the on-going price repair in the market which we expect to continue into 2014.

Data priced too cheaply
The Indonesian mobile operators continued to command one of the lowest data tariffs in the region (per KB basis), making it difficult for them to monetise data despite the surge in data traffic. We expect falling price-points of smartphones to further stimulate data demand and improve the economics of data for the telcos which should translate into better profitability in the longer-term.

Capex to stay elevated
With the exception of XL, we expect the capex for Telkom/Telkomsel and Indosat (ISAT) to remain high in FY14, with the focus on 3G investments. XL has guided for a moderation in FY14 capex due to savings from the combined network with Axis.

M&As to shift into higher gear
The merger between XL and Axis has set a new benchmark for further M&As in the sector. We view the consolidation in the industry as positive and inevitable in reducing competitive risks and to weed out smaller operators which lack the financial and spectrum resources to compete on a larger scale.

NEUTRAL on telcos, OVERWEIGHT on ITC
The local macro-economic (slowing consumer sentiment) and political headwinds (Presidential elections) will likely cap the broader sentiment on the market in 2014 with telco stocks likely to perform in line with the JCI at best on the back of their defensive earnings profile. We are OVERWEIGHT on the independent tower companies (ITC) due to their stronger growth prospects with healthy tower growth an indication of strong demand for towers from the operators. The mobile operators are still ramping up the number of 3G node- Bs as smartphone penetration continues to rise.