Nov 08, 2016 19:11:33

Telekomunikasi Indonesia ($TLKM): Leading The Pack

Telkom remains our Top Pick for Indonesia telco exposure, from its:

1. Strong commercial execution;

2. Superior balance sheet/ROIs;

3. Ex-Java dominance which, in our view, is unlikely to be severely compromised by the shift in regulatory stance.

Post 1 Nov results call (results announced on 25 Oct), we raise our FY16-18 core earnings forecasts by 8-12%, factoring in stronger service revenue growth and EBITDA. Our DCF-based TP (WACC: 10.7%, TG: 1.5%) is accordingly lifted to IDR5,200 (from IDR5,000, 24% upside).

¨ Strong subs growth reflects market activities. Telkomsel attributed the strong QoQ surge in subscriber (subs) net-additions to heightened acquisition activities during the quarter and its superior network. Its prepaid subs addition rose 4% QoQ to 6.2m – the highest quarterly addition since FY12. The legacy revenue growth of 7% YoY in 9M16 compares with the sharp 16.3% decline in XL Axiata (XL) (EXCL IJ, BUY, TP: IDR3,832), which is seeing a faster shift in smartphone adoption. Both voice revenue per minute (RPM) and revenue per SMS (RPSMS) grew 10% and 11% QoQ respectively in 3Q16, supported by the re-pricing of tariffs during Lebaran. Management has kept headline guidance:

i. Revenue growth to be better than industry growth which it projects at 10-11%;

ii. A slight decline in EBITDA margin;

iii. Capex/sales of 25% (with the focus on broadband investments).

Key risks are stronger-than-expected competition and higher-than-expected capex.

¨ Scope for higher data growth. Telkomsel’s below average smartphone penetration of 47% in 3Q16 (average pulled up by XL which has 60% of its subscribers on smartphone as at 3Q16) reflects the profile of its base which comprised largely of silver hair users and the Java concentration of its rivals. We see strong data growth opportunities going forward with the gap progressively narrowed, supported by its superior network.

¨ IC rates decision soon. Management expects a decision on the interconnect (IC) rates by the Indonesia Telecoms Regulatory Body soon. To recap, the new IC framework was initially slated for implementation in August but pushed back pending a further review. While the regulatory environment looks to be less favourable for Telekomunikasi Indonesia (Telkom)/Telkomsel (allowing peers to further encroach into its non-Java stronghold), management said the impact from the change in the IC rate would be minimal (IC revenue makes up only about 1% of group revenue) with 90% of its traffic ex-Java being on-net.

¨ IndiHome realignment. Telkom expects its IndiHome (triple play service) customer base to double-up in FY17 from 1.5m in 3Q16 with the focus on the more profitable subscribers. A deliberate attempt to remove low-paying subscribers led to higher churn in 3Q16. However, its ARPU improved sequentially to IDR313,000 from 2Q16’s IDR300,000.