Telekomunikasi Indonesia Run Will Go On
We continue to like Telekomunikasi Indonesia as (i) we expect a strong revenue growth on the back of strong data demand and healthy competition. We expect revenue to rise 11.6%/10.3%/9% in FY16/FY17/FY18 respectively; surpassing XL and Indosat. (ii) the stock is a proxy to foreign inflow from tax amnesty program. We view that, Telkom’s EV/EBITDA of 7x EV/rolling EBITDA FY16 is still reasonable given that there is a potential re-rating in the counter. We maintain our BUY call with a higher TP of IDR4,900 (from IDR4,000) or 12% upside.
Potential re-rating in the counter
Indonesia telcos trade at an average of 8.4x FY16 EV/EBITDA, which is silghtly lower than the regional average of 10.5x. We view that, Telkom’s EV/EBITDA of 7x EV/rolling EBITDA FY16 is still reasonable given that there is a potential re-rating in the counter. There are a few reasons of re-rating catalyst:
1. Strong mobile revenue growth in the medium to long term due to more stable competition in the industry
2. Fixed broadband could be the next growth for Telkom
3. Better control cost management – which lead to an improvement in EBITDA margin
4. Stock is an excellent proxy to foreign inflow from tax amnesty program
5. Telkom has a superior ROE of 21.8% in FY16F compare to peers
Stabilisation on yield in the long run
In our view, data usage will continue to grow faster over the next few years on the back of cheaper handset, and useful mobile apps. However, the improvement in the data’s demand is on the expense of data yield – whereby data yield remains under pressure at IDR31.9/MB (-13% QoQ; -18% YoY) in 2Q16 – which is less YoY growth decline compare to last year. We expect the data yield to remain under pressure in the medium terms given the strong competition in the data segment, but will be normalise in the long run.
Another good run in 2Q16
Telekomunikasi Indonesia’s core profit of IDR10trn beat our/consensus estimates of 58%/55, respectively. Mobile internet/data revenue growth remained strong, up by 46% YoY (1H16: +47% YoY). Meanhile, voice revenue grew by 8% YoY on the back of higher revenue per minutes (RPM) of IDR169 (+17% QoQ). Data yield narrowed 13% QoQ to IDR32/mb, reflecting the migration of pay per use to data bundled plans and 4G promotion.
Maintain BUY with a higher TP of IDR4,900 (from IDR4,000, or 12% upside). Our TP implies 7.7x/7.0x FY16/FY17 EV/EBITDA respectively. Telkom remains as our Indonesia telcos.
Deserved premium valuation
Potential re-rating
We continue to see further upside on Indonesia Telecommunication. Within the sector, we think that Telekomunikasi Indonesia (TLKM IJ, BUY, TP: IDR4,900) may outperform the market again despite the recent rally. There are a few reasons for our bullish view on Telkom Indonesia:
1. Indonesia telcos trade at an average of 8.4x FY16 EV/EBITDA, which is lower than the regional average of 10.5x. Given that, Telkom Indonesia provides a better ROE of 21.8% in FY16F compare to local and regional peers – the company deserves a premium valuation, in our view
2. Despite most of the other local telcos operators recently came up with aggresive data pricing program. Telkom continues to see a higher data revenue market share in recent quarters and data yield dropped lessen than peers. We expect Telkom’s data revenue to grow 18% CAGR between FY15-FY18F
3. Strong mobile data revenue growth in the medium to long term due to more stable competition in the industry. We expect Telkom’s revenue and EBITDA CAGR of 12%/11% between FY15-FY18 respectively – which is higher among peers
4. Fixed broadband business could be a key growth story for the counter. As of 1H16, Telkom Indihome has 1.5mn subs (68% is on fibre and the remaining is using copper. The company targets of 2mn subs by the end of FY16 and 6mn subs by the end of FY18
5. Potential higher special dividend in FY17F from a higher cash (after the sale of treasury shares). Last year, Telkom’s paid 60% dividend payout
6. Better controlled cost management
7. Stock is an excellent proxy to portfolio arising from Government’s tax amnesty program – index stock
Cheapest data pricing to uplift the ARPU in the long run
At the moment, Indonesia has the lowest data yields in the world at USD2/GB and with the strong data take up from the customers. We view that the lower ARPU is to attract the subscribers to switch from pay per use (PPU) to bundled data packages. With the data usage has been increasing swiftly in the past quarters on the back of:
1. Cheaper handset
2. Useful mobile apps
3. Available infrastructure
As of 2Q16, Telkom’s data traffic consumption has increased by 78% YoY to 208,738TB
It shows that subscribers are getting attached to data consumption. Nowadays, Indonesians people are getting more attached to data on the back of better mobile apps, like online transportation services (Uber, Grab, Gojek), and the latest euphoria is Pokemon Go (please refer to our regional report on Pokemon Go).
The higher data consumption are at the expense of data yield
The data yield of telcos operators have been declined since last year. Telkom’s has the lowest dropped in data yield compare to peers. In 2Q16, the data yield dropped 18% YoY to IDR31.9/MB – it was lessen compare to last year, where it declined by 41% YoY. The peers showed a higher dropped of data yield, as both of the peers have been aggresively offer a creative data pricing – Telkom has not respond yet to this pricing. In our view, we do not think as an alarm of pricing wars in the industry – we see the promotion is accelerate the adoption of 4G (as the utilisation rates of 4G is still below 50%).
Fixed broadband is the long term catalyst for Telkom
As of 1H16, the company continues to develop fibre to home (FTTH) access network. As of 1H16, the home passed was at 10mn – which remains the same since the last few quarters. We saw some improvement in the penetration rate of Indihome, in 1H16; the penetration rate was at 15% or 1.5mn subs (from 13.6% or 1.36mn subs). In FY16, we expect the company could have 20% penetration rate. In order to increase their penetration rate, Telkom’s keep building the human resources both in terms of capabilities and quantity. In June 2016, Telkom’s have 4,400 fibre technicians for Indihome installation.
Better cost management
Telkom has 1,200 landbank that they will use it to build an office space and also plan to do a JV with a commercial property companies. In FY16, we expect that Telkom will have a lower than expected operating expenses – as the company will move their operation office to one office building. At the moment, some of the operators still rent an office space that cost IDR1.1trn (or 2% of sales) in FY15. Some of the operations have moved to the new office building owned by Telkom. In our view, in FY17 we will see a decline in the rental expenses.
Change in assumption on rental expenses
We have a higher EBITDA margin in FY16/FY17/FY18 of 49.9%/50%/51%, respectively from 49.4%/48.5%/48.4% previously. The higher EBITDA margin is a result of lower rental expenses – we expect the higher decline in rental expenses will happen next year.
Potential higher dividend in FY17 from extra cash on treasury shares
In June 2016, Telkom has succesfully sold 864mn shares which are part of 2.6bn treasury shares that they had. The selling price was at IDR3,820/share which is not lower than IDR1,461/share which is the average repurchase price of treasury stock. Based on the management, these proceeds maily will be utilised to support the company’s capex and recapitalisation of subsidiaries. In our view, it also could be utilised to pay a higher dividend in FY17. Currently, Telkom paid 60% dividend pay out ratio.
Tax amnesty could bring a positive stand to Telkom’s share price
Based on our latest strategy report on 29 June 2016, “Tax Amnesty Is On”. Our Head of Research are positive on the amnesty approval that could bring a stronger than expected foreign net inflow to Indonesia market. We view that this potential higher foreign inflow into equity market will bode well for big cap stocks with ample liquidity, c. Telekomunikasi Indonesia (TLKM IJ, BUY, TP: IDR4,600). In the past few months, we have seen the stock has performed well on the back of stronger foreign inflow to the market, besides the superior fundamental of the company.
Our WACC assumptions
We lower our assumptions on cost of debt to 6% from 7%, resulting in a lower WACC of 10.7% from 11.5% previously. We maintain our assumptions ie a risk-free rate of 8%, a market risk premium of 5%, equity beta of 0.9 and a terminal growth rate of 1.5%. We believe that DCF is the most appropriate valuation methodology as it captures Telekomunikasi Indonesia’s medium- and long-term growth prospects.
2Q16 – Another Good Run
Another good performance in 2Q16
Telekomunikasi Indonesia’s posted 2Q16 core profit of IDR5.39trn (+15% QoQ; +31% YoY), bringing 1H16 core profit of IDR10trn (+25% YoY) – which beat our/consensus estimates of 58%/55, respectively. The better than expected results was driven by higher revenue of IDR28.9trn (+5% QoQ; +15% YoY) in 2Q16 on the back of higher mobile revenue growth and Lebaran seasonality. Besides that, it was also supported by a higher other income and lower tax rate of 24% in 2Q16 compare to 1Q16 of 26%. Telkom’s EBITDA margin fell 3.5% QoQ to 48.9% in 2Q16 on the back of higher ERP, marketing expenses (seasonality of Lebaran) by +22% YoY, and higher operating and maintanance cost by 15% YoY.
Data and voice drives the topline growth
Telkomsel’s revenue grew 3.5% QoQ to IDR20.9trn (+15% YoY), which was partly driven by Lebaran season. Mobile internet/data revenue growth remained strong, up by 46% YoY (1H16: +47% YoY) – led by higher smartphone penetration and data adoption. Meanhile, voice revenue remained positive, as it still grew by 8% YoY/ 6% QoQ on the back of higher revenue per minutes (RPM) of IDR169 (+17% QoQ). While, SMS business kept their declining mode, as the SMS revenue fell 2.3% QoQ on lower SMS revenue/unit which slipped 2% QoQ.
Telkomsel’s remains their strong EBITDA margin in 2Q16 of 58.2% from 57.8% in 1Q16. We expect the EBITDA margin to normalise in 3Q16 driven by stronger competition within the data segment.
Data yield YoY contraction slowed in recent quarters. Data yield narrowed 13% QoQ to IDR32/MB, reflecting the migration of pay per use to data bundled plans and 4G promotions. The YoY contraction in data yield has nonetheless slowed in recent quarters.
Fixed broadband continue its growth
Fixed broadband revenue grew 15.7% YoY in 1H16 driven by a higher additional subscribers based. Fibre home passed was at 10mn in 2Q16 – which is remains the same since the last few quarters. The subscribers increased to 1.5mn subs from 1.36mn subs in 1Q16. However, blended ARPU dropped to IDR300k in 2Q16 from IDR326k in 1Q16. We suspect the declined in ARPU was due to promotional package in Lebaran season and the way to grab market share in broadband from their competitors.
