Telekomunikasi Indonesia: Positive On 5G And Profitability Improvement

Summary

  • Telekomunikasi Indonesia is the first to introduce commercial 5G services in Indonesia, and it has an advantage over its competitors as it owns spectrum in the 2.3GHz frequency.
  • The profitability of Telekomunikasi Indonesia and the industry at large could potentially improve going forward, with the roll-out of 5G and industry consolidation.
  • Telekomunikasi Indonesia trades at consensus forward FY 2022 EV/EBITDA and P/E multiples of 4.5 times and 12.9 times, respectively, and it boasts a forward FY 2022 dividend yield of 5.9%.
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Elevator Pitch

I upgrade my rating on PT Telekomunikasi Indonesia Tbk (NYSE:TLK) [TLKM:IJ] from Neutral to Bullish.

I previously published an update on the company on February 5, 2021, and Telekomunikasi Indonesia's stock price has declined marginally by -1% from IDR3,290 as of February 4, 2021 to IDR3,250 as of June 24, 2021 following my prior article.

Telekomunikasi Indonesia is the first to introduce commercial 5G services in Indonesia, and it has an advantage over its competitors as it owns spectrum in the 2.3GHz frequency. Also, the profitability of Telekomunikasi Indonesia and the industry at large could potentially improve going forward, with the roll-out of 5G and industry consolidation.

Telekomunikasi Indonesia is valued by the market at consensus forward FY 2022 EV/EBITDA and P/E multiples of 4.5 times and 12.9 times, respectively, and the stock boasts a forward FY 2022 dividend yield of 5.9%. Its valuations are reasonably attractive, which supports my Bullish rating for the stock.

Note that Telekomunikasi Indonesia's shares listed on the Indonesia Stock Exchange have a three-month average daily trading value of $20 million, which is higher than the average daily trading value of $7 million for its US-listed ADRs in the past three months. Hong Kong's Monex Boom Securities is one of the international brokerages which offers trading access for the Indonesian stock market.

Introduction Of 5G Services In Indonesia

Telekomunikasi Indonesia, via its mobile business subsidiary Telkomsel, introduced "the first commercial 5G service in Indonesia" in late-May 2021 with an initial launch in "Jakarta and South Tangerang", according to a May 31, 2021 The Jakarta Post news article. Telekomunikasi Indonesia's peer and competitor, PT Indosat Tbk (OTCPK:PTITF) [ISAT:IJ] subsequently also had its initial roll-out of its commercial 5G services in Surakarta, Java this month. The other players are either still applying for a 5G license, or in the midst of preparing for the launch of commercial services.

This represents the start of the 5G era for the Indonesian telecommunications industry. Spectrum, or the lack of it, is the single biggest constraint that affects the roll-out of 5G services in the country. However, it is expected that the launch of 5G services in Indonesia will be accelerated next year. This is because the country is targeting to transition from analogue to digital TV by November 2022, and the 700MHz analogue TV spectrum is very likely to be released by the Indonesian authorities for bidding by telecommunications companies in a subsequent spectrum auction.

The lack of spectrum actually favors market leader Telekomunikasi Indonesia in the initial 5G race, and the company already had a head-start by virtue of being the first among its peers to roll out commercial 5G services as highlighted earlier. Telekomunikasi Indonesia has an edge over its peers, because 5G requires spectrum in higher frequency ranges and the company has 50MHz bandwidth in the 2.3GHz frequency.

In contrast, Telekomunikasi Indonesia's key competitors and the other two major players in the Indonesian telecommunications market, PT Indosat Tbk and PT XL Axiata Tbk (OTCPK:PTXKY) (OTC:PTXAF) [EXCL:IJ] , do not have any spectrum in the 2.3GHz frequency. In other words, Telekomunikasi Indonesia could have a first-mover's advantage in securing new 5G subscribers.

I view 5G as a positive for the Indonesian telecommunications industry and Telekomunikasi Indonesia in the long run, as it could take more time for a compete roll-out for 5G services in the country. Fitch Ratings has cautioned that "insufficient access to crucial 5G spectrum" is "likely to delay the (complete) 5G commercial launch (in Indonesia) by two years."

A key concern relates to the capital requirements of future 5G investments. But Telekomunikasi Indonesia has the financial capacity to support new spectrum payments and higher capital expenditures, as its financial position is the strongest among the listed peers, as highlighted in the "Valuation And Risk Factors" section below.

Potential For Improved Profitability With 5G And Industry Consolidation

I am also positive on Telekomunikasi Indonesia and the telecommunications sector in Indonesia in general, given expectations of an improvement in profitability over time.

Notably, Telekomunikasi Indonesia's peers in South Korea and Hong Kong have witnessed an increase in their respective Average Revenue Per User or ARPUs, after they came up with new 5G plans which are more expensive. The same could happen for Telekomunikasi Indonesia in time to come, as the company expands its 5G roll-out across the country. Also, when Telekomunikasi Indonesia previously launched commercial 4G services in 2014, its mobile business' (Telkomsel) ARPUs grew significantly in subsequent years as per the chart below. History might repeat itself for Telekomunikasi Indonesia's 5G roll-out in the coming years.

Telkomsel's Historical ARPU

Source: CEIC

Another factor potentially contributing to Telekomunikasi Indonesia's profitability improvement is lower competitive intensity in the Indonesian telecommunications market. In my prior February 2021 update, I had highlighted that "two of Telekomunikasi Indonesia's competitors are proposing to merge", that might "lead to benign competition and higher mobile tariff rates for the industry." The potential merger between PT Indosat Tbk and PT Hutchison 3 Indonesia is still currently under discussion. There are hopes that price competition will be less intensive, when only the Indonesian telecommunications market consolidates.

Valuation And Risk Factors

Based on the company's last traded price of IDR3,250 as of June 24, 2021, Telekomunikasi Indonesia is valued by the market at 4.9 times consensus forward FY 2021 EV/EBITDA and 4.5 times consensus forward FY 2022 EV/EBITDA. The stock also trades at consensus forward FY 2021 and FY 2022 P/E multiples of 14.5 times and 12.9 times, respectively. It offers consensus forward dividend yields of 5.2% and 5.9% for the current year and the next year, respectively.

Telekomunikasi Indonesia's forward FY 2022 EV/EBITDA valuation is roughly on par with the other two Indonesian telecommunication companies, while its forward FY 2022 P/E multiple is much lower than its peers. More importantly, Telekomunikasi Indonesia boasts the best profitability and the strongest financial position in the peer group. Telekomunikasi Indonesia's gross debt-to-equity ratio is relatively healthy at 64%, and market consensus sees the company delivering ROEs of 20.1% and 21.5% for FY 2021 and FY 2022, respectively based on S&P Capital IQ data.

Telekomunikasi Indonesia's Peer Valuation Comparison

Stock Consensus Forward FY 2022 EV/EBITDA Multiple Consensus Forward FY 2022 P/E Multiple Consensus Forward FY 2022 Dividend Yield Consensus Forward FY 2022 ROE Gross Debt-to-Equity As Of Most Recent Financial Period
PT XL Axiata Tbk 4.0 23.3 1.6% 6.1% 166%
PT Indosat Tbk 4.6 146.3 0.2% 1.2% 242%

Source: S&P Capital IQ

The key risks for Telekomunikasi Indonesia include a slower-than-expected 5G roll-out in Indonesia, a failure to increase ARPUs in the 5G era, and competition in the industry remaining intense notwithstanding industry consolidation.

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Asia Value & Moat Stocks is a research service for value investors searching for attractive Asia-listed investment opportunities  with a huge gap between price and intrinsic value, leaning towards both deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like "Magic Formula" stocks, high quality businesses, hidden champions and wide moat compounders).


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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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