Since the introduction of data services in the Indonesia telecom sector, we have seen three stages in ARPU trends across major telcos. Today, blended (weighted average) ARPUs across these major telcos (TLKM / ISAT / EXCL IJ – all rated Buy) have hovered around IDR43,000 per month (with average data traffic of ~12GB per user per month). This is a significant increase from average ARPUs of IDR33,000 in 2013 (the onset of data services). However, the latest blended ARPUs (2Q24) show a slight decline from the peak ARPUs of ~IDR44,000 in 4Q23. We attribute the recent drop to: 1) ongoing competition, particular outside Java; 2) soft purchasing power in the low-ARPU mass segments; and 3) seasonality due to the election period in 4Q23-1Q24, as well as the fact that peak holiday season had moved earlier to April 2024.

Among these telcos, both EXCL and ISAT (in order) have clearly demonstrated improvements in their respective ARPUs, most notably EXCL, whereby its ARPUs has seen the biggest jump, and today its ARPUs are very much similar to Telkomsel’s (TSEL; unlisted). ISAT has shown improvement post merger, but it has slowed in recent quarters. Meanwhile, TSEL showed a visible decline between 4Q23 and 2Q24.

Going forward, we think the broad trend in ARPUs across telcos should be positive, although we expect improvements will vary across operators. We think both EXCL and ISAT may continue to outperform relative to TSEL, driven by a gradual uptick in market shares outside Java, as well as feeling less of an impact from the shift awayfrom legacy services in its revenue mix. Ideally, we also wish to see more upward price adjustments for price-insensitive subscribers, which are typically high-ARPU users. After all, for these segments, data services are predominantly for productive purposes as opposed to consumption activities, we think.

Consequently, combined with outlook for lower interest rate environment in the medium term, we see limited downside risks for Indonesian telcos. Bottoming-out ARPU trends for these telcos would be one of the key catalysts for upward trends in FCF, and thus future dividends. For these reasons, we reiterate our Buy calls on these telcos.

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 include 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 FY24F EV/EBITDA (compared with the 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.

Fig. 1: Average ARPU vs total subs

Fig. 2: Opereator ARPU & subs