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Telkom Indonesia: Cheap Valuation Despite Strong Performance
Target Price : Rp 5.580
Closing Price : Rp 4440
Upside (Downside) Potential : +25.8%
PT Telekomunikasi Indonesia Tbk offers telecommunications and network services. The Company’s segments include Corporate, Home, Personal and Others. The Corporate segment provides telecommunications services, including interconnection, leased lines, satellite, contact center, broadband access, information technology services, and data and Internet services to companies and institutions. The Home segment provides fixed wireline telecommunications services, pay television, and data and Internet services to home customers. The Personal segment provides mobile cellular and fixed wireless telecommunications services to individual customers. The Others segment provides building management services.
Market Cap : Rp 439.8T
Shares Outstanding : 98.64 M
52 Weeks Range : Rp 3780-4840
YTD Performance : +11%
3Q17 Result: Double-digit Growth
Telkomsel Indonesia recorded 13% top line growth and 17% bottom line growth in the first nine month of 2017, supported by higher revenue and margin improvement. Operating, maintanance and telecommunication expenses is well under control, growing 15% yoy due to marked increase in leased line and CPE expenses, and cost of IT services. However, general and administrative expenses increased significantly by 30% yoy due to increase in travelling (23% yoy), training (37% yoy), meeting (22% yoy) and social contribution (130% yoy) expenses. We believe that TLKM will continue to maintain strong performance and maintain discipline in the future due to (1) wide growth opportunities from increasing data demand; (2) limited price war potential among three major telco companies (ISAT, EXCEL); (3) balance sheet capacity for further technology expansion and participation in spectrum auction. Therefore, we recommend BUY with target price of Rp 5.580, reflecting PER FY18 of 23.0x and EV/EBITDA FY18 of 8.42x.
Growth opportunities from increasing data demand. Using the revenue breakdown figure in 3Q17 (Rp 41.177 billion) and number of reported users (190 million), we derived the amount spent on data usage is around Rp 24.080 per month per individual. We also estimated the ARPU to be around Rp 56.727 per month, much lower than other emerging countries. In Malaysia, the average plan cost RM79-98 or Rp 262.264-325.340 per month. If we assume that Indonesia will reach similar state with Malaysia in the next decade, it implies revenue CAGR of 16.5%, mainly driven by data consumption.
Limited price war potential among major provider. We believe ISAT and EXCL will not start a significant price war as it will hurt their revenue and lower their EBITDA/Interest expense ratio further. It will be difficult for ISAT and EXCL to compete with TLKM due to their balance sheet constraint and TLKM economy of scale. TLKM, ISAT and EXCL debt/asset ratio are currently at 17.7%, 46.57% and 33.46%. Meanwhile their EBITDA/interest expense are at 20.78x, 5.73x and 4.95x
We value Telkom Indonesia using FCFF method with WACC of 15.86% and 4% terminal growth rate. We recommend BUY for TLKM with TP Rp 5580 per share, implying 25.8% upside potential from Friday’s closing price. Our target price implies PER FY18 23.0x and PER FY19 19.8x or EV/EBITDA FY18 8.42x and EV/EBITDA FY19 7.46x. This is in-line with comps median PER and is above comps median EV/EBITDA FY18 (7.55x) and EV/EBITDA FY19 (7.20x). We believe this is justified due to the higher growth potential, margin and return on capital TLKM has compared to its peers.
Currently there is a litigation issue for TLKM by PT Citra Sari Makmur, in which TLKM has 25% ownership. The issue was due to termination issue by TLKM that is deemed by PT CSM as one-sided and does not conform to the agreement, CSM is TLKM’s partner in transponder service to national bank in Indonesia. The nominal for this litigation is Rp 16 trillion and the issue is currently ongoing in the court. The effect of this litigation to TLKM share price is Rp 162.21/share, decreasing our target price from Rp 5586 to Rp 5424 per share.
Another risk is intensifying competition and price-cutting strategy among three major telco providers to grab market share, although we think this is unlikely due to the financial position of ISAT and EXCL. We believe that the incremental benefit of price-cutting strategy and the increase in market share is minimal for ISAT and EXCL, hence minimizing the risk of such event happening. We also see the risk of rising cost for leased line and CPE, IT services and employee-benefit related.