We initiate coverage of Metrodata Electronics (MTDL) and Mastersystem Infotama (MSTI) with Buy ratings, supported by the IT industry’s strong growth, and their healthy balance sheets and good track records. The Indonesia IT sector is undergoing rapid expansion, driven by rising demand for hardware, digital solutions, cloud computing, and cybersecurity services. We believe MTDL, one of the country’s leading IT distributors and solutions providers, and MSTI, a key player in enterprise digital transformation, are well positioned to benefit from these secular trends.

Strong digitalization tailwind

We expect Indonesia’s IT sector to experience sustained growth across multiple verticals: 1) Hardware distribution: We project the consumer electronics market to record a +2.4% CAGR over 2024-26F, while MTDL should outperform with a +10% CAGR. Strong demand for laptops, PCs, and smartphones, especially with rising smartphone market penetration, should drive the upside. 2) Cloud & data centers: We estimate Indonesia’s annual data consumption increased by over 200% from 2019 to 2024F, fueling cloud adoption. MTDL's cloud business grew +43% y-y, and MSTI’s data center and cloud revenue surged +76% y-y in 9M24. 3) Cybersecurity: We project Indonesia’s cybersecurity market to expand significantly (20% CAGR in 2025-30F), benefiting cybersecurity solutions from both MTDL and MSTI.

Strong financials and balance sheets

Both companies have robust financials, underscoring their prudent capital management, in our view. We estimate MTDL will post a 10% sales CAGR over 2024-26F. For MSTI, we estimate revenue to reach IDR6.1tn in FY26F, driven by strong IoT, cybersecurity, and enterprise IT solutions. Both firms exhibit low leverage, strong cash positions, and efficient inventory management, enhancing their resilience against macroeconomic fluctuations.

Initiating coverage of MTDL and MSTI with Buy ratings

We initiate coverage of MTDL with a Buy rating and TP of IDR1,000, based on DCF, assuming a WACC of 11% and a risk-free rate of 7.1%. MTDL would trade at 15x 2025F P/E at our TP, above its historical average of 8.8x (excluding the COVID period). We also initiate coverage of MSTI with a Buy rating and DCF-based TP of IDR2,000, assuming a WACC of 13% and a risk-free rate of 7.1%. MSTI would trade at an 11x 2025F P/E at our TP. Key risks include: 1) market competition: increasing pressure from local/global IT vendors could compress margins; 2) tech disruption: rapid technological shifts may require accelerated adaptation; and 3) macroeconomic uncertainty: economic slowdown or reduced IT spending could impact growth.

Industry analysis – Indonesia IT services

Growing demand for data and data centers

We believe the growing consumption of data in Indonesia is a positive for the sector. In particular, Indonesia data consumption per year grew by more than 200% in five years, from 50GB/year in 2019 to 166GB per year in 2024, based our estimates. We believe this trend will benefit MTDL and MSTI, as both are system integrators and could directly benefit from the construction and operation of data centers.

According to MTDL, its cloud business revenue grew +43% y-y as of 9M24. For MSTI, its data center and cloud infrastructure revenue in 9M24 grew +76% y-y.

Fig. 2: Indonesia annual data consumption

Fig. 3: Data center capacity and revenue in Indonesia

Indonesia’s cybersecurity strategy

Indonesia has implemented a comprehensive action plan to enhance its cybersecurity in the IT sector, recognizing the growing importance of digital security in its rapidly expanding digital economy. The country's efforts are part of a broader strategy to position itself as a key player in the Southeast Asian digital landscape.

In July 2023, President Joko Widodo introduced Presidential Regulation No. 47 of 2023, which outlines Indonesia's national cybersecurity strategy. This regulation focuses on several key areas, including: 1) governance; 2) risk management; 3) preparedness and resilience; 4) protection of vital information infrastructure; 5) national cryptography independence; 6) capability and capacity enhancement; 7) cybersecurity policy development; and 8) international cooperation

The strategy emphasizes education and training for both the government workforce and the public, promoting cyber literacy and best practices.

Fig. 4: Indonesia monthly cybersecurity attacks – on the rise

Fig. 5: Indonesia cybersecurity market size – lucrative growth potential

Hardware – distribution business

The Indonesia consumer electronics market is expected to generate USD 19bn in revenues, according to Statista. “Consumer electronics” refer to electronic devices for personal/business use, such as televisions, phones, tablets and personal computer (PCs). We estimate the market will record a CAGR of +2.4% from 2024F to 2026F. We expect MTDL, which is one of Indonesia’s leading distributors in consumer electronics, particularly in the laptops/PCs/smartphones segments, to register a sales CAGR of +10% over the same period, reflecting its strong business franchise and distribution infrastructure.

Fig. 6: Consumer electronics and MTDL trading business size – MTDL growing faster than the industry

The main drivers of MTDL’s revenue growth, in our view, are the PC & laptop and smartphones segments. To illustrate, sales of Infinix Mobile phone grew +55% y-y in 2Q24, according to NairaMetrics. The market share of Infinix Mobile (unlisted) in Indonesia also improved to 15% from 9% in 2020, according to Media Indonesia.

Fig. 7: Upside from smartphone penetration – Indonesia is still below that of Malaysia and India

We believe there is further room for smartphone penetration to rise in Indonesia, given that the penetration rate is still below those of Malaysia and India. Indeed, as Indonesia is the fourth-most populous country in the world, according to Worldometer, it has significant potential for smartphone sales to grow further; thus raising the prospect of growth for MTDL.

Fig. 8: JCI companies’ capex growth – banks and financials lead growth at 11% CAGR, while others at 6% CAGR