Telekomunikasi Indonesia: Attractive Yield Play Notwithstanding Headwinds

Summary

  • Telekomunikasi Indonesia is an attractive yield play with a forward dividend yield in excess of 5%.
  • Telekomunikasi Indonesia's various businesses do face headwinds relating to COVID-19, but the company is expected to deliver positive earnings growth this year.
  • Telekomunikasi Indonesia trades at 8.5 times trailing 12 months' EV/EBITDA and 8.7 times consensus forward next 12 months' EV/EBITDA.
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Elevator Pitch

I upgrade my rating for PT Telekomunikasi Indonesia Tbk (NYSE:TLK) (OTCPK:TLKMF) [TLKM:IJ], Indonesia's largest integrated telecommunications company, from Bearish to Neutral.

In the current low interest rate environment, Telekomunikasi Indonesia stands out as an attractive yield play with a forward dividend yield in excess of 5%. This is especially true when one compares Telekomunikasi Indonesia to its Indonesian telecommunications peers, which either offer a very low dividend yield or do not pay any dividends at all. Furthermore, Telekomunikasi Indonesia's dividend payout ratio has been consistently high in the 60%-90% range for the past seven years, and its future dividends are supported by a relatively low net debt-to-equity ratio of 28.4% as of end-FY2019.

Telekomunikasi Indonesia's various businesses do face headwinds relating to Covid-19, so there are downside risks to the company's FY2020 earnings, which means that a Bullish rating for the stock is not warranted. Nevertheless, the company is still expected to deliver positive earnings growth this year, driven by data revenue growth for the mobile business and new subscribers for the broadband business. As such, Telekomunikasi Indonesia's +5% forward dividend yield should be intact.

This is an update of my prior article on Telekomunikasi Indonesia published on November 19, 2019. Telekomunikasi Indonesia's share price has declined by -20% from IDR4,000 as of November 18, 2019, to IDR3,180 as of June 29, 2020, since my last update. Telekomunikasi Indonesia trades at 8.7 times consensus forward next 12 months' EV/EBITDA, and it offers a consensus forward FY2020 dividend yield of 5.1%.

Readers have the option of trading in Telekomunikasi Indonesia shares as ADRs on the New York Stock Exchange with the tickers TLK or TLKMF, or on the Indonesia Stock Exchange with the ticker TLKM:IJ. For Telekomunikasi Indonesia shares listed as ADRs on the New York Stock Exchange, average daily trading value for the past three months is decent at $4 million, but lower than that for the Indonesia-listed shares.

For shares listed in Indonesia, there are limited risks associated with buying or selling them in terms of trade execution, given that the Indonesia Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $32 million, and market capitalization is above $21 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own Telekomunikasi Indonesia shares listed in Indonesia include The Vanguard Group, Vontobel Asset Management, Matthews International Capital Management, and Norges Bank Investment Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.

Legacy Business Continues To Be A Drag For Telkomsel In 1Q2020

Telekomunikasi Indonesia's 65%-owned mobile/cellular subsidiary Telkomsel is the largest player in Indonesia's mobile industry. Telekomunikasi Indonesia has yet to report 1Q2020 financial results, but it is possible to have a "sneak preview" of Telkomsel's latest quarterly performance by reviewing Singapore-listed regional telecommunications company Singapore Telecommunications' (OTCPK:SGAPY) (OTCPK:SNGNF) [ST:SP] 1Q2020 results. This is because Telkomsel, which is not listed, is an associate company of Singapore Telecommunications.

Singapore Telecommunications released its 4QFY2020 (YE March or calendar year 1Q2020) financial results on May 28, 2020, and it indicated that Telkomsel's profit before tax grew by +7.3% QoQ and +4.8% YoY, respectively in 1Q2020, which is expected to be partly driven by the implementation of the new International Financial Reporting Standard or IFRS16. However, Telkomsel's revenue declined approximately -2% QoQ in 1Q2020, and the number of Telkomsel's mobile subscribers decreased by -5.0% QoQ to 162.5 million in the most recent quarter.

In Singapore Telecommunications' 1Q2020 results press release, it noted that "Telkomsel continued to face intense competition outside Java and pressures on its legacy business ((cellular voice, Short Message Service or SMS, and fixed line voice))." At Telekomunikasi Indonesia's FY2019 earnings call on June 2, 2020 (held much later than prior years), the company acknowledged that its "revenue share has dropped mainly because of our legacy (business), which is still in decline" and highlighted the fact that "our voice revenues are significantly higher" compared to peers.

Looking ahead, Telekomunikasi Indonesia aims to continue growing data revenues to offset the structural decline of the legacy business. The company currently has a 62% share of data revenue among the top three Indonesian mobile companies; the second and third largest players are PT XL Axiata Tbk (OTCPK:PTXKY) (OTC:PTXAF) [EXCL:IJ] and PT Indosat Tbk (OTCPK:PTITF) [ISAT:IJ], respectively. Late last year, Telkomsel launched Indonesia's first digital prepaid cellular service referred to as "by.U", which is targeted at digital-savvy young people in the country. While Telkomsel's competitors have similar digital products or brands, by.U is unique in the sense that it only sells mobile data products via online sales channels.

Intense Competition And Down-trading Are Key Downside Risks For The Mobile Business

Apart from the decline in legacy revenue, intense competition and consumer-down-trading are the key downside risks for Telekomunikasi Indonesia's mobile business, Telkomsel going forward.

While mobile competition in Java has moderated and stabilized in 1H2020 vis-a-vis 2019, competition still remains intense in the ex-Java region. At the company's FY2019 earnings call on June 2, 2020, Telekomunikasi Indonesia noted that the company sees "increased competition in ex-Java because of the expansion of our competitors' network in ex-Java" and made reference to competitors playing "the price game to achieve revenue share" in the ex-Java region. In other words, Telkomsel is likely to either maintain or grow its market share in the Java region, which will help to partially offset competitive pressures in ex-Java.

Another concern for Telkomsel relates to consumer down-trading, which could exert downward pressure on its mobile ARPU (Average Revenue Per User). According to a June 25, 2020 article published in The Jakarta Post, approximately three million Indonesians are either retrenched or placed on temporary leave on absence as of late-May 2020, with expectations of 5.5 million Indonesians becoming jobless this year given the economic woes brought about by Covid-19.

A significant number of Indonesian consumers are likely to cut back on their mobile expenses by buying daily and weekly data packs which are less expensive than monthly data packs, or downgrading to cheaper mobile plans or packages. In response, Telkomsel introduced a new data package known as "Kuota Ketengan" in 1Q2020, which offers data that can be used for selected popular social networking and video apps (e.g. YouTube and Instagram) sold on a daily or weekly basis. Nevertheless, these new data packages are expected to relatively lower yielding, which implies pressure on Telkomsel's ARPU going forward.

Non-mobile Businesses Are Facing Headwinds As Well

Telekomunikasi Indonesia's non-mobile businesses are also facing headwinds, because of the coronavirus pandemic.

While Telekomunikasi Indonesia's fixed broadband business IndiHome was expected to be a beneficiary of an increased number of consumers working and studying at home, the company's FY2020 guidance for net subscriber additions tells a different story. Telekomunikasi Indonesia is guiding for net subscriber additions of 700,000 for IndiHome in FY2020, which is significantly lower than market expectations in excess of a million. Notably, the company sees increased broadband demand and new subscriber additions during Covid-19 as transitory in nature. Telekomunikasi Indonesia emphasized at the company's FY2019 earnings call that it is "anticipating that likely some of them (the new broadband customers) will either reduce their subscription or operation from the new subscription that they just sign up."

Separately, Telekomunikasi Indonesia's enterprise business is possibly the worst-hit by Covid-19 among the company's various businesses. PT Bank Mandiri (Persero) Tbk (OTCPK:PPERY) (OTCPK:PPERF) [BMRI:IJ] expects Indonesia's GDP to contract by -3.44% in 2Q2020, and Telekomunikasi Indonesia has already started to observe deferrals or cancellation of projects for the company's enterprise segment in recent months. For existing projects, Telekomunikasi Indonesia's enterprise business has either witnessed late payments or received requests to modify contractual terms.

Valuation And Dividends

Telekomunikasi Indonesia trades at 8.5 times trailing 12 months' EV/EBITDA and 8.7 times consensus forward next 12 months' EV/EBITDA based on its share price of IDR3,180 as of June 29, 2020. As a comparison, the stock's historical 5-year and 10-year average consensus forward next 12 months' EV/EBITDA multiples were 9.6 times and 8.7 times, respectively.

Telekomunikasi Indonesia is also valued by the market at consensus forward next 12 months' EV/EBIT and P/E multiples of 8.7 times and 15.2 times, respectively.

The stock offers consensus forward FY2020 and FY2021 dividend yields of 5.1% and 5.4%, respectively. Telekomunikasi Indonesia stands out from its Indonesian telecommunications peers with its attractive dividend yield in excess of 5%.

The company announced a dividend of IDR154.07 per share for FY2019 at its annual general meeting on June 19, 2020. This is equivalent to a dividend payout ratio of 82%, and Telekomunikasi Indonesia's dividend payout ratio has been consistently high in the 60%-90% range for the past seven years.

Market consensus expects Telekomunikasi Indonesia's dividends per share to grow by +7% and +4% YoY, to IDR164.67 and IDR170.92 in FY2020 and FY2021, respectively. Telekomunikasi Indonesia's future dividends are supported by the company's strong balance sheet with a relatively low net debt-to-equity ratio of 28.4% and a debt-to-EBITDA of 0.8 times as of December 31, 2019.

Peer Valuation Comparison For Telekomunikasi Indonesia

Stock Consensus Forward Next Twelve Months' EV/EBITDA Consensus Forward Next Twelve Months' EV/EBIT Consensus Forward Next Twelve Months' P/E Consensus Forward FY2020 Dividend Yield
PT XL Axiata Tbk 4.8 19.3 22.3 1.1%
PT Indosat Tbk 3.5 40.3 N.A. as the company is expected to be loss-making N.A. as the company is not expected to pay a dividend for FY2020

Source: Author

Risk Factors

The key risk factors for Telekomunikasi Indonesia include competition intensifying in the Indonesian mobile market (especially in ex-Java), further weakness in the enterprise segment due to economic woes brought about the coronavirus pandemic, and a cut in the company's dividend payout ratio in the future.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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