In this note, we assess major telcos’ upcoming 3Q24F results (to be released end of Oct 2024). We present these assessments on a consolidated basis (not cellular specific). We also note the generally soft purchasing power that impacted cellular revenues in 3Q24F. We believe continued competition in the cellular space had made it difficult for operators to have clear price increases in 3Q24F. However, we think 4Q24 may improve (albeit slightly) iin part due to seasonality (regional election in Nov-24 as well as usual peak holiday periods in Dec-24).

Broadly, we expect to see diverging 9M24F result trends; both Indosat (ISAT IJ, Buy) and XL Axiata (EXCL IJ, Buy) to continue to deliver superior earnings trends than Telkomsel (TSEL; unlisted) and its parent Telkom (TLKM IJ, Buy). As shown in Fig. 1, we project the 9M24F earnings of ISAT / EXCL grew by ~50% y-y each, far above TSEL’s +3% y-y and TLKM’s -6% y-y. On a q-q basis, the earnings trends across these telcos likely remained soft with profits +0.2-1.0% q-q. Meanwhile, we forecast TLKM’s consolidated profit jumped ~+13% q-q, in part due to the absence of early retirement costs that took place in 2Q24.

At the operating level, the combined revenue of TSEL/ISAT/EXCL should record IDR51.7tn (+1% q-q) in 3Q24F with growth ranging between 0.2% and 1.0% q-q. We think cellular revenue would be supplanted with non-cellular (e.g., FBB and/or multimedia). Broadly, we also believe ISAT and EXCL continued to gain cellular-only revenue market share (specifically outside of Java) at the expense of TSEL in the quarter. We do not see much upward cellular package price adjustments. For TLKM at a consolidated basis, we see some upward revenue trend (+1% q-q). These should bring the YTD 9M24F combined revenue of TSEL / ISAT / EXCL to IDR153.8tn (+14% y-y), while for TLKM at IDR113.3tn (+2% y-y).

We project 3Q24F EBITDA of these telcos reached IDR25.0tn (+1% q-q) and YTD9M24F EBITDA reached IDR74.1tn (+9% y-y), implying an EBITDA margin of 48.2% (-220bp y-y). Growth in EBITDA should have predominantly come from both ISAT / EXCL, offsetting a likely margin decline at TSEL (refer to Fig. 1) which we attribute to the consolidation of indiHome (fixed broadband) services (have far lower margin than traditional cellular-only services at TSEL).

Based on our assessments of the above, we think both ISAT / EXCL would continue to have better growth visibility than TSEL. These may continue in the medium term (next 2-3 years) before we could potentially have better upward (cellular specific) price adjustments from these telcos. Meanwhile, we expect TLKM to remain attractive as a dividend stock given its elevated yield of >~5%.

Valuation and risks

TLKM: Our DCF-based TP of IDR4,800 assumes a risk-free rate of 6.5%, an equity risk premium of 7.8% and a terminal growth rate of 2.5%. At our TP, the stock would trade at 6.5x 2024F EV/EBITDA (compared with 5.1x at the current price). Risks are adverse macroeconomic conditions, 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: We derive our TP of IDR13,750 using DCF valuation. Key parameters: risk-free rate of 6.2%, 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 FY24F EV/EBITDA (compared with current price implied multiple of 5.0x). Key risks include adverse macroeconomic trends that could impact purchasing power, lower price increases or subscriber bases, higher opex due to slower post-merger network integration, and/or irrational competition leading to price cuts.

EXCL: Our TP of IDR2,600 is based on a DCF valuation, using a risk-free rate of 6.2%, an equity risk premium of 7.4%, a terminal growth rate of 2.5%, a net debt-to-equity ratio of 114%, and a WACC of 9.4%. At our TP, the stock would trade at 2024F EV/EBITDA of 4.4x (vs 3.5x at the current level). Downside risks include adverse macro conditions and lower customer spending. We reiterate our Buy rating.

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. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.

This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.

RESTRICTIONS ON DISTRIBUTION

By accepting this report, the recipient hereof represents and warrants that you are entitled to receive such report in accordance with the restrictions and agrees to be bound by the limitations contained herein. Neither this report nor any copy hereof may be distributed except in compliance with applicable Indonesian capital market laws and regulations. 

Nicholas Santoso (nicholas.santoso@verdhana.id)

Erwin Wijaya (erwin.wijaya@verdhana.id)