Link Net Simply the best
We initiate coverage of Link Net (LINK) with a BUY call and a DCF derived TP of IDR6,500, implying a 27x/21x FY15F/16F P/E. Link Net is one of the leading providers’ of cable broadband and pay TV in Indonesia with a network in affluent areas. As a leader in Broadband internet industry, LINK has a major advantageous to capture Indonesia internet boom; which is made up from rising wealth, rising E-commerce, rising internet penetration, and growing urbanisation.
Main players to capture Indonesia’s internet boom
Link Net operates in the low penetration environment of 7% penetration for broadband and 11% penetration for cable TV; which we believe, Indonesia has a significant potential for broadband industry to grow further – based on rising wealth, rising internet penetration, and E-Commerce boom. We forecast Link Net’s revenue will grow at 21% CAGR between FY14-17F. We like their focus on big cities (less sensitive to macro downturn) rather than diversified accross nations.
Broadband’s subscribers is the driver
Link Net’s FY14 revenue came from Broadband (57%) – household and enterprise, Pay TV (34%), and Others (9%). We believe the earnings will increase at 24% CAGR between FY14-FY17F – largely driven by higher additional new subscribers. We forecast Link Net’s additional subscribers will grow at 21% CAGR between FY14-17F to 1.35mn subscribers in FY17F. While, we estimated the ARPU will stay muted due to competition.
Indosat, XL, and MNC are eyeing for LINK’s stake sale
According to Bloomberg; Indosat, XL, and MNC are looking into possibility to acquire LINK; as the company is being put on sale by Lippo Group (major shareholders).
Risks
Macro economy downtrend – which affect the purchasing power; Higher competition will pressure the ARPU in the future; A weakening Rupiah against USD (40% of opex are denominated in USD).
Initiating coverage with a BUY call and TP of IDR6,500 (a 16% upside)
Our DCF based TP is derived using WACC of 11.6% and a TG of 3%, implying a 27x/21x FY15F/FY16F P/E.
Investment Summary
Main players to capture Indonesia’s internet boom
As at the end of FY14, Link Net owns and operates an upgraded cable network passing 1.4m home passed, predominantly in Jakarta, Surabaya, and Bali. Link Net operates in the low penetration environment of 7% penetration for broadband and 11% penetration for cable TV; while we believe, Indonesia has a significant potential for broadband industry to grow further – based on rising wealth, rising internet penetration, and E-Commerce boom.
We forecast Link Net’s revenue will grow at 21% CAGR between FY14-FY17F. We like their focus on big cities (less sensitive to macro downturn) rather than diversified accross nations.
Broadband number of subscribers is the driver for growth
Given the current Indonesia economy condition, and Rupiah depreciation – resulted into weak consumer purchasing power; as well as fierce competition from the other players (Telkom Indihome, MNC play media go, and Bizznet). We see a downside risk in terms of potential muted ARPU growth in the next few years.
However, we believe that Link Net’s could maintain their performance from the additional number of subscribers – given the larget market share in broadband industry.
Link Net’s FY14 revenue came from Broadband (57%) – household and enterprise, Pay TV (34%), and Others (9%). We believe Link Net’s earnings could grow at 24% CAGR between FY14-FY17F – largely driven by higher broadband additional subscribers. We also forecast Link Net’s additional subscribers will grow at 21% CAGR between FY14-17F to 1.35mn subscribers in FY17F. While, we think that the ARPU of broadband and pay TV will stay muted due to fierce competition.
New players coming in – pressures ARPU growth
Competition in fixed broadband market will intesify in the future as new entrants such as Telkom Indihome, MNC Play Media Go, and Biznet will fight with Linknet over number of subscribers. We have put into consideration this situation and we have reflected into our model; we estimate lower ARPU for broadband in FY15F with 4% YoY growth to IDR225k vs. 6.5% YoY growth in FY14.
While, we also lowered our pay TV ARPU’s estimate in FY15F with 2.2% YoY growth to IDR190k vs. 23% YoY growth in FY14. We believe that Link Net’s revenue growth will be depends on the volume – number of additional subscribers.
Indosat, XL, and MNC are looking into possibility to acquire LINK
According to Bloomberg; Indosat, XL, and MNC are looking into possibility to acquire LINK; as the company is being put on sale by Lippo Group (major shareholders). We believe that MNC is trying to acquire LINK in order to boost their synergies with their MNC play media broadband business. While, Indosat (ISAT IJ, BUY, TP: IDR4,900) and XL (EXCL IJ, BUY, TP: IDR5,100) are trying to put their foot into broadband business to compete with Telkom Indonesia (TLKM IJ, BUY, TP:IDR3,600).
Initiate coverage with BUY rating, IDR6,500TP (16% upside from current price)
We initiate LINK with BUY call based on following reasons.
1. Link Net has a biggest market share in the broadband industry – we believe LINK will be a key beneficiaries in the growing Indonesia internet boom and E-commerce
2. Indonesia under penetration of broadband industry only 7% in FY14 – we believe it will be a room for growth
3. Offers highest ROE of 21%/22% in FY15F/FY16F, respectively; compare to peers in Regional. We do not take into account Astro Malaysia, since Astro has a different business environment between Indonesia and Malaysia. Astro is monopolise the business in Malaysia.
Our TP of IDR6,500 is based on DCF as we believe it is the most appropriate valuation methodology to capture the medium and long term growth prospects. We assume a risk free rate of 8%; market risk premium of 5%; equity beta of 0.8; terminal growth rate of 3%; which result in a WACC of 11.6%.
Rising Internet Penetration from Wealthier Generation and Urbanisation
Rising internet industry in Indonesia
We are positive on Broadband sector due to several reasons, c. rising wealth, rising internet penetration, rising E-commerce, and growing urbanisation. According to Media Partner Asia, Indonesia wireless broadband internet penetration of population will grow from 14% in FY13 to 108% in FY2023F on the back of rising middle class population in Indonesia. Furthermore, based on the data from EMC, we found that Indonesia’s population can not live without internet access.
Riding on wealthier generation and urbanisation
Indonesia’s population is young, growing, and rapidly urbanising – making it one of the fastest consumer market in the world. We believe it could further drive the future take up of broadband and pay TV. Based on CEIC, 60% of the population in Indonesia is below the age of 30 years, and we believe in the coming years the household formation will shiftly increased and it can drive the demand of broadband and pay TV.
Furthermore, the Indonesia’s population is swiftly urbanising
According to World Bank data, 54% moved to urban area in 2010 and expect 67% population move to urban area in 2050. This trend should benefit Link Net in terms of higher demand, since the company focus on three largest cities. The urbanisation could help to increase the penetration rate in its coverage area (27.5% as at FY14).
Focus on high GDP cities
Link Net has a different customers focus compared to their competitors. The company focus on the three largest cities in Indonesia (c. Jakarta, Surabaya, and Bandung) – targets the affluent upper and middle income households (c. AB and CI); household income greater than IDR2m per month. According to data in 2013 from Nielsen, there are an approximately 4.1m households in Jakarta, Bandung, and Surabaya.
In the future, the company plans to establish their presence in other cities in Indonesia with high GDP (c. like Medan, Semarang, and Yogyakarta). The company is targeting the new cities to invest with the high GDP growth p.a and also the KM/density.
Broadband is the cash generator
Business pillars of Link Net. Link Net has a dominant market share in broadband (exclude ADSL) in Indonesia – 98% market share in Indonesia based on FY14 data. We believe that the company has a better positioned to catch the internet boom. As per FY14, around 56% of the total revenue came from broadband (household and corporate) division.
While, Pay TV contributed 37% of the total revenue. The rest of the total revenue contributed by installation charges and sale of cable modems. We believe the company has a better positioned to capture the internet industry boom due to their market share and no competition at the moment.
Broadband is the driver
We forecast Link Net’s additional subscribers will grow at 21% CAGR between FY14-17F to 1.35mn subscribers in FY17F. While, we estimated the ARPU of broadband and pay TV will stay muted due to fierce competition. Despite the fierce competition that could pressurised ARPU, we believe that Link Net will be among the biggest beneficiaries in the Indonesia broadband industry boom that comes from Indonesia rising middle class, urbanisation, and growing E-commerce. We also believe that broadband have a better and mature infrastructure than telco players in terms of internet access.
Bundling package is the differents in pay TV business
Negative on pay TV industry
We are negative on pay TV industry going forward; as we see there is no premium differences between FTA and pay TV channels. We think that pay TV packages are not attractive enough to draw mass market. Furthermore, higher competition in the pay TV industry has pressurised the ARPU.
More attractive with the bundling package with broadband
We believe LINK’s pay TV business are a compliment from their core business unit in broadband – which is the reason why we are positive on the business. As per FY14, 93% of customers subscribe to both NGBB and cable TV services, from 91% in FY13. We also believe that the pay TV business could be a sweetener for their broadband product; and also could maintain high ARPU in the medium term.
Arising competition pressures ARPU growth
New players coming in – pressures ARPU growth
Competition in fixed broadband market will intesify in the future as new entrants such as Telkom Indihome, MNC Play Media Go, and Biznet will fight with Linknet over number of subscribers. At the same time, network expansion by Linknet and upgrades by Telkom Indonesia will also grow the market and help scale up product offerings. As the more companies has entered into the broadband market, and with a relatively similar products or services, we believe pricing is going to decline.
We believe this condition could have a negative impact to the LINK’s performance
We believe the downside risk lies in the potential muted ARPU growth given tougher than expected competition, as well as the weaker purchasing power – due to slowdown in Indonesia economy condition. We have put into consideration this situation and we have reflected it in our model; we estimate lower ARPU in FY15F with 4% growth to IDR225k from IDR216k in FY14. We believe that the revenue growth will be depends on the volume – number of additional subscribers.
Valuation
We assume a risk free rate of 8%, market risk premium of 5%, equity beta of 0.80, cost of debt of 8.3% (after tax), and a terminal growth rate of 3%, which result in a WACC of 11.6%. We believe that DCF is the most appropriate valuation methodology, becasue it captures the medium and long term growth prospect of LINK. Our TP implies a 27x/21x FY15F/16F P/E.
In our model, we take into account the competition in the industry, Indonesia economy slowdown, and Rupiah depreciation. We assume the additional broadband and cable subscribers is 158k numbers of subscribers, or increase 34% YoY in FY15F. While, we expect muted ARPU growth in FY15F-17F due to competition. We expect the broadband ARPU will be at IDR225k/IDR232k in FY15F/FY16F, respectively. While, pay TV ARPU will be at IDR190k/195k in FY15F/FY16F, respectively.
Link Net History
Company background
Link Net is one of the leading providers’ of broadband (c.98% market share for cable technology ex. ADSL) and pay TV in Indonesia (offers 120 SD and 60 HD channels); it caters to residential (household) and corporate users (BCA, Unilever, IDX, and etc) with customised product packages. Link Net owns and operated an upgraded high fiber coaxial (HFC) cable network passing 1.4m home passed (as per FY14) and the management targets to increase 200k home passed p.a; predominantly in Jakarta, Surabaya, and Bali.
Furthermore, the company also plan to expand its network to Medan, Semarang, and Yogyakarta in the future and expand its home passed from 1.4m in FY14 to 1.8m in FY16F – capitalising on growing demand for broadband and bundles of digital video with high speed internet.
