2024 was a challenging year for the major telcos (as well as for the passive infrastructure companies such as tower and fibre cos). We attribute the same to the persistently intense competition in the cellular space that, we believe, has negative implications towards passive infrastructure providers such as tower and/or fiber cos. Without market repair (i.e., no more irrational competitive behavior, which translates into intense price competition) in the cellular space, we believe it would be challenging to sustainably improve both wireless internet and/or fixed broadband infrastructures.

The below charts provide comparisons on: 1) ARPUs vs cellular spending as a percentage of GDP, 2) fixed broadband speed (Mbps), and 3) mobile internet speed (Mbps) across several countries in the regions. Based on these parameters, we observe Indonesia is trailing its peers. Moreover, a look at cellular companies’ returns on investments (in this note, we use EBITDA-to-Asset ratio for reference). Telkomsel (TSEL, unlisted) experienced a consistent drop; whereas XL Axiata (EXCL IJ, Buy) faced a flattening trend. So far, only Indosat (ISAT IJ, Buy) has had an upward trend. However, we see signs that, even for Indosat, the ratio could start plateauing in the medium term.

Without any improvement of profitability ratios, we think it would be challenging to improve the quality of fixed broadband and/or mobile internet services in Indonesia further. For these reasons, we think ‘market repair’ of the Indonesia cellular space would be increasingly imperative. In our opinion, for market repair to be realized, we need to see the following (amongst others):

1. Focus on return on investments. We think operators should focus more on profitability as opposed to market share. This applies to both Java and non-Java regions. We think a larger (and growing) revenue base would be more positive to stakeholders as opposed to market share.

2. Focus on increasing ARPU to drive revenue growth (not subscriber additions). As shown in the chart below (Fig. 1), average ARPU for Indonesia is one of the lowest in the region. India has a lower ARPU than Indonesia among the selective countries in the chart. However, in terms of GP per capita, Indonesia appears to be relatively inexpensive than India (from an affordability perspective). The ability to raise ARPU would be the most inexpensive way to improve profitability profiles for our covered telcos/cellular cos.

3. Raising prices for starter packages in order to reduce churn rates particularly of price-sensitive users. Intense competition has also worsened with ‘ultra cheap’ starter packages that promote high churn rates for those price sensitive users. In addition, we have seen multiple data packages embedded in SPs that would complicate the competition landscape. Based on our channel checks, some ultra cheap packages can offer 10-12GB for ~USD1. These prices are far lower than the average ARPU across major telcos, and hence such ultra cheap packages promote high churn rates in the industry. We think, as part of market repair, operators should reduce the number of SP variations, as well as raise SP prices to be similar to existing ARPU (which should be IDR30,000 - 40,000 per SP with embedded data quota of 3-5GB). By raising SP prices, it could discourage churn behavior, particularly for price-sensitive subscribers (which we estimate could account for ±10-15% of the total subscriber base).

4. Simplification of data packages in terms of offers as well as reducing the number of zone-based pricings. Too many variations in renewal data packages as well as SPs have contributed to creating a complex competition landscape in the cellular space, thus making it challenging to have a sustainable market environment. Ultimately, this may have also contributed to the irrational pricing behavior across major telcos.

5. Narrowing pricing premiums between market leaders and the other two operators. At present, TSEL is the de-facto market leader in the Indonesia cellular industry. However, in the Java region, we think market characteristics are more distributed; although in some areas (e.g., Greater Jakarta areas) Indosat is the market leader. In general, market leaders tend to command a pricing premium. However, specifically outside Java, we think the pricing premium that TSEL commands may be too high. Perhaps, in our view, a healthy pricing premium for market leaders should be ±15-20%. This would imply potentially higher prices outside Java region. Thus, whilst TSEL may continue to see lower market share outside Java regions, it would be compensated with higher prices.

Given the above, without tangible market repair, we believe the Indonesia telecom sector will likely continue to underperform the broader Indonesian index.

Valuation and risks

TLKM: Our TP of IDR4,100 is based on a DCF methodology, where we assume a risk-free rate of 6.5%, an equity risk premium of 7.8% and a terminal growth rate of 1.5%. At our TP, the stock would trade at 5.4x 2025F EV/EBITDA (vs. 3.8x at the current price). Risks are adverse macroeconomics, lower data traffic growth, irrational competition, lower ARPUs, declining cellular revenue market share from outside Java and difficulties in securing new sites for network expansion.

ISAT: Our DCF-based TP of IDR3,600 assumes the following key parameters: a risk-free rate of 6.2%, an equity risk premium of 7.4%, beta of 1.2x and a terminal growth rate of 2.5%. At our TP, the stock would trade at 7.0x FY25F EV/EBITDA (vs 4.0x at the current price). Key risks include adverse macroeconomic trends that could impact purchasing power, lower price increases or subscriber bases, higher opex due to slower post-merger with Hutchison network integration, and/or irrational competition leading to price cuts.

EXCL: Our TP of IDR2,600 is based on a DCF analysis, using a risk-free rate of 6.2%, an equity risk premium of 7.4%, and a terminal growth rate of 2.5%. This results in a WACC of 9.4%. At our TP, the stock would trade at a 2025F EV/EBITDA of 4.1x (compared with 3.9x at the current price). Downside risks include adverse macro conditions, lower customer spending, less service price hikes leading to lower data prices, irrational competition behavior, and/or higher opex.

Fig. 1: ARPUs vs Cellular revenue % of GDP Comparison

Fig. 2: Fixed broadband speed Mbps

Fig. 3: Mobile internet speed Mbps

Fig. 4: EBITDA-to-Asset %, 1Q17-4Q24

Fig. 5: Plateuing data traffic PB?

Fig. 6: 12MMA TSEL relative data yield premium (disc) %

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Erwin Wijaya (erwin.wijaya@verdhana.id)