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Telekomunikasi Indonesia Persero (TLKM IJ) (Buy) - Dividend play; cut TP to IDR 4,100

Telekomunikasi Indonesia Persero (TLKM IJ) (Buy) - Dividend play; cut TP to IDR 4,100

Telco NS EW 266 27th Dec, 2024

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Dividend play; cut TP to IDR 4,100

Weak earnings growth (~1.5% CAGR in FY24-26F) on the back of persistent competitive dynamics  

Over the past 18 years (i.e. since the start of intense cellular sector competition in Indonesia; 2007-2024), TLKM has seen its earnings CAGR declining from a high of ~5.6% (2007-2017) to ~1.5% (2017-24F). We expect this to persist into 2030F, with a similar CAGR of ~1.5%. We argue that without an improvement in the competition dynamics (i.e. price increases across segments which should translate into ARPU uplift) combined with cost and capex efficiencies, it would be difficult to see a recovery in earnings CAGR that would mimic nominal GDP growth. While we think it is difficult to assume that the intense competition would subside, we think cost and capex efficiencies are more visible. Operations and maintenance (O&M) expense (which is the single-largest cost item) is the key potential efficiency that TLKM can deliver. Over the past decade, O&M has accounted for ~26-27% of revenue – near-zero improvement. Also, we think the current capex to sales ratio of ~25% is rather high considering largely-muted revenue growth trajectories that we have seen so far.

Maintain Buy rating and cut TP to IDR4,100 (from IDR4,800), implying 55% upside

We think TLKM is increasingly deemed as a dividend stock. TLKM and its cellular subsidiary Telkomsel (TSEL – not listed) remain the market leaders within the Indonesia telecom space and TLKM has the highest profitability margin of ~15-16% and ROAE of ~15%. The company continues to churn decent cash flows which can be used as dividend. We maintain our Buy rating for the stock, though we believe in the near-term TLKM’s share price would underperform the broader Indonesian index. We slightly cut earnings by ~0.1-0.4% for FY24-26F (refer to tables inside for details). We also raise our dividend payout estimate to 75% for the near-term. At the current share price, the implied dividend yield for TLKM would be ~7% - which we believe is decent, though in recent months we have seen rising government bond yields.

Valuation and risks: Following earnings revisions, we lower our TP to IDR4,100. We derive our TP based on 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% (down from 2.5% previously; Fig. 6). 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.

 

Year-end 31 DecFY23FY24FFY25FFY26F
Currency (IDR)ActualOldNewOldNewOldNew
Revenue (bn)149,216152,423152,423156,826156,826160,280160,280
Reported net profit (bn)24,56024,56624,57925,52825,49325,48025,518
Normalised net profit (bn)24,56024,56624,57925,52825,49325,48025,518
FD normalised EPS247.92247.99248.12257.70257.34257.22257.59
FD norm. EPS growth (%)18.30.00.13.93.7-0.20.1
FD normalised P/E (x)10.7–10.7–10.3–10.3
EV/EBITDA (x)4.3–4.0–3.8–3.7
Price/book (x)1.9–1.6–1.5–1.5
Dividend yield (%)6.3–6.7–7.0–7.3
ROE (%)18.516.516.515.415.314.714.7
Net debt/equity (%)16.73.33.51.51.21.61.3
Source: Company data, Verdhana estimates

Key data on Telekomunikasi Indonesia Persero

Income statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Revenue
147,306
149,216
152,423
156,826
160,280
Cost of goods sold
-95,715
-98,201
-102,927
-106,202
-108,470
Gross profit
51,591
51,015
49,496
50,624
51,809
SG&A
-5,854
-6,099
-6,660
-6,836
-6,974
Employee share expense
Operating profit
45,737
44,916
42,836
43,788
44,835
EBITDA
78,992
77,579
76,902
78,886
80,779
Depreciation
-33,255
-32,663
-34,066
-35,100
-35,945
Amortisation
0
0
0
1
1
EBIT
45,737
44,916
42,836
43,788
44,835
Net interest expense
-3,155
-3,591
-2,487
-2,338
-2,304
Associates & JCEs
Other income
-6,243
-531
250
500
0
Earnings before tax
36,339
40,794
40,599
41,950
42,531
Income tax
-8,659
-8,586
-8,711
-8,989
-9,130
Net profit after tax
27,680
32,208
31,888
32,961
33,400
Minorities
-6,927
-7,648
-7,309
-7,468
-7,883
Other items
Preferred dividends
Normalised NPAT
20,753
24,560
24,579
25,493
25,518
Extraordinary items
Reported NPAT
20,753
24,560
24,579
25,493
25,518
Dividends
-14,856
-16,602
-17,683
-18,434
-19,120
Transfer to reserves
5,897
7,958
6,896
7,059
6,398
Valuations and ratios
Reported P/E (x)
12.6
10.7
10.7
10.3
10.3
Normalised P/E (x)
12.6
10.7
10.7
10.3
10.3
FD normalised P/E (x)
12.6
10.7
10.7
10.3
10.3
Dividend yield (%)
5.7
6.3
6.7
7.0
7.3
Price/cashflow (x)
3.2
3.6
3.7
3.3
3.4
Price/book (x)
2.0
1.9
1.6
1.5
1.5
EV/EBITDA (x)
4.1
4.3
4.0
3.8
3.7
EV/EBIT (x)
7.0
7.4
7.2
6.9
6.8
Gross margin (%)
35.0
34.2
32.5
32.3
32.3
EBITDA margin (%)
53.6
52.0
50.5
50.3
50.4
EBIT margin (%)
31.0
30.1
28.1
27.9
28.0
Net margin (%)
14.1
16.5
16.1
16.3
15.9
Effective tax rate (%)
23.8
21.0
21.5
21.4
21.5
Dividend payout (%)
71.6
67.6
71.9
72.3
74.9
ROE (%)
16.5
18.5
16.5
15.3
14.7
ROA (pretax %)
19.0
18.0
16.6
16.7
16.7
Growth (%)
Revenue
2.9
1.3
2.1
2.9
2.2
EBITDA
4.3
-1.8
-0.9
2.6
2.4
Normalised EPS
-16.2
18.3
0.1
3.7
0.1
Normalised FDEPS
-16.2
18.3
0.1
3.7
0.1
Source: Company data, Verdhana estimates
Cashflow statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
EBITDA
78,992
77,579
76,902
78,886
80,779
Change in working capital
798
-1,735
8,307
-153
-4,330
Other operating cashflow
1,530
-3,796
-14,178
1
1
CF from operations
81,320
72,048
71,031
78,734
76,450
Capital expenditure
-38,397
-36,418
-38,750
-39,750
-39,750
Free cashflow
42,923
35,630
32,281
38,984
36,700
Reduction in investments
Net acquisitions
Dec in other LT assets
Inc in other LT liabilities
Adjustments
69,506
59,871
59,833
67,408
65,015
CF after investing acts
112,429
95,501
92,114
106,392
101,716
Cash dividends
-14,856
-16,602
-17,683
-18,434
-19,120
Equity issue
302
-58
0
0
0
Debt issue
Convertible debt issue
Others
-103,383
-81,469
-63,188
-84,357
-82,846
CF from financial acts
-117,937
-98,129
-80,871
-102,792
-101,966
Net cashflow
-5,508
-2,628
11,243
3,600
-250
Beginning cash
38,804
33,296
30,668
41,911
45,511
Ending cash
33,296
30,668
41,911
45,512
45,261
Ending net debt
16,009
22,606
5,653
2,053
2,303
Balance sheet (IDRbn)
As at 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Cash & equivalents
33,296
30,668
41,911
45,511
45,261
Marketable securities
Accounts receivable
8,634
10,667
9,396
10,741
13,174
Inventories
1,144
997
1,552
1,601
4,356
Other current assets
11,983
13,281
13,281
13,281
13,281
Total current assets
55,057
55,613
66,140
71,135
76,071
LT investments
8,653
8,162
8,162
8,162
8,162
Fixed assets
173,329
180,755
185,439
190,089
193,894
Goodwill
8,302
8,731
7,704
6,797
5,998
Other intangible assets
Other LT assets
29,851
33,781
33,781
33,781
33,781
Total assets
275,192
287,042
301,225
309,965
317,906
Short-term debt
21,974
25,501
5,370
5,370
5,370
Accounts payable
18,457
18,608
11,333
11,929
12,314
Other current liabilities
29,957
27,459
28,147
28,793
29,264
Total current liabilities
70,388
71,568
44,849
46,091
46,948
Long-term debt
27,331
27,773
42,194
42,194
42,194
Convertible debt
Other LT liabilities
28,211
31,139
31,091
31,091
31,091
Total liabilities
125,930
130,480
118,134
119,377
120,233
Minority interest
20,004
20,818
20,470
20,157
20,159
Preferred stock
Common stock
17,361
17,303
17,303
17,303
17,303
Retained earnings
111,897
118,441
145,318
153,128
160,211
Proposed dividends
Other equity and reserves
Total shareholders' equity
129,258
135,744
162,621
170,431
177,514
Total equity & liabilities
275,192
287,042
301,225
309,965
317,906
Liquidity (x)
Current ratio
0.78
0.78
1.47
1.54
1.62
Interest cover
14.5
12.5
17.2
18.7
19.5
Leverage
Net debt/EBITDA (x)
0.20
0.29
0.07
0.03
0.03
Net debt/equity (%)
12.39
16.65
3.48
1.20
1.30
Per share
Reported EPS (IDR)
209.49
247.92
248.12
257.34
257.59
Norm EPS (IDR)
209.49
247.92
248.12
257.34
257.59
FD norm EPS (IDR)
209.49
247.92
248.12
257.34
257.59
BVPS (IDR)
1,304.82
1,370.29
1,641.61
1,720.44
1,791.95
DPS (IDR)
149.97
167.60
178.51
186.09
193.01
Activity (days)
Days receivable
21.2
23.6
24.1
23.4
27.2
Days inventory
3.7
4.0
4.5
5.4
10.0
Days payable
67.9
68.9
53.2
40.0
40.8
Cash cycle
-43.0
-41.3
-24.6
-11.1
-3.5
Source: Company data, Verdhana estimates
Company profilePT Telkom Indonesia (Persero) Tbk, also simply known as Telkom, is an Indonesian multinational telecommunications conglomerate. Telkom has major businesses in fixed-line telephony, internet, and data communications. It operates as the parent company of the Telkom Group, which is engaged in a broad range of businesses including telecommunications, multimedia, property and finance services.
Valuation MethodologyWe derive our TP of IDR4,100 based on DCF methodology, with key parameters rf (risk-free rate) of 6.5%, k (equity risk premium) of 7.8% and terminal growth (TG) of 1.5%. At our TP, the stock would trade at 5.4x 25F EV/EBITDA. Benchmark index for the stock is JCI.
Risks that may impede the achievement of the target priceDownside risks for TLKM are adverse macroeconomic trends, faster migration from legacy towards data, which could lower revenue growth, asymmetrical regulation, which could be more detrimental to TLKM, irrational competition in data, lower subscriber spending and difficulties in securing new sites, which are necessary for network expansion.
ESGAs a leading business in the Indonesian telecommunications industry, Telkom Group also carries out social responsibility towards its stakeholders. With the paradigm of “Telkom exists for Indonesia, grows and develops together with the Indonesian people,” Telkom believes that increasing the welfare of stakeholders, including society, and environmental sustainability will also impact the sustainability of the Company. Therefore, Telkom Group is committed to carrying out social responsibility by applying the principle of “profit-people-planet” (“3P”) or often referred to as “environmental, social, and governance” (“ESG”), as well as contributing to the Sustainable Development Goals (SDGs). Telkom Group’s commitment to social responsibility is based on the principles of good corporate governance or GCG, as well as a Company code of ethics that all Telkom and its subsidiaries’ employees must comply with. This commitment is also stated in various Telkom policies, one of them is the Board of Directors Regulation No.PD.701.00/1.00/PR/000/ COP-A3000000/2014 dated 14 October 2014, regarding Management of Telkom Corporate Social Responsibility (Telkom CSR). Furthermore, Telkom as a state-owned enterprise is also required to carry out the Partnership and Community Development Program (PKBL) following the resolution of the Ministry of State-Owned Enterprises (Ministry of SOE). This is stated in the last revision of the Ministry of State-Owned Enterprises’ Regulation of Indonesia Number PER-02/ MBU/04/2020 regarding the Third Amendment to the Ministry of State-Owned Enterprises’ Regulation Number PER09/MBU/07/2015 regarding Partnership Programs and Community Development Programs of State-Owned Enterprise. Under this regulation, Telkom Group is obliged to carry out various programs to improve socio-economic, community welfare, and nature conservation.

Fig. 1: TLKM— Consolidated earnings CAGR

Source: Company data, Verdhana estimates

 

Fig. 2: TLKM Consolidated - P&L profile, IDRbn

Source: Company data, Verdhana estimates

 

Fig. 3: TLKM - Elevated dividend yield

Source: Company data, Verdhana estimates

 

Fig. 4: TLKM – Earnings changes

Source: Company data, Verdhana estimates

 

Fig. 5: TSEL— P&L

Source: Company data, Verdhana estimates

 

Fig. 6: TLKM— valuation

 TLKM - DCF IDRbn 31-Dec-2431-Dec-2531-Dec-2631-Dec-2730-Dec-2830-Dec-2930-Dec-30
        
 Cash from existing ops 71,03178,73476,45081,99885,02586,92187,751
 Tax paid (8,711)(8,989)(9,130)(9,175)(9,653)(9,839)(9,920)
 Capex (38,750)(39,750)(39,750)(40,250)(42,250)(42,250)(42,750)
 Change in working capital (5,871)(153)(4,330)355224606457
 Free Cash Flow to Firm       17,699      29,843      23,240      32,928      33,346      35,438      35,538
 NPV for FCF in 2011-2015F              -               -               -               -               -               -               -  
 NPV for FCF in 2022F-Onwards            407,021
 After deducting minority interest       15,720      26,686      20,870      29,668      30,133      32,159    402,986
        
  NewOldRemarks   
 Risk-free rf  6.5%6.5%  
 Equity risk premium  7.8%7.8%  
 WACC  10.2%9.5%  
 Terminal growth  1.5%2.5%  
 Terminal Multiple x            11.5          14.3    
 Disc rate  10.2%9.5%    
        
 Present Value        
 NPV of core business       441,254     518,542    
 Less net debt (cash)        35,173      35,173    
 NPV Equity       406,081     483,369    
        
 NPV per share IDR          4,099        4,800 TP Rounded to IDR4,100 (from IDR4,800) 
Source: Company data, Verdhana estimates


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.


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Rating Table

Rating
Remains
Buy
Target price
Reduced from IDR 4,800
IDR 4,100
Closing price
23 December 2024
IDR 2,650
Implied upside+54.7%
Market Cap (USD mn)16,234.7
ADT (USD mn)20.3

Relative performance chart

Source: LSEG, Verdhana
M cap (USDmn)
16,234.7
Free float (%)
52.1
3-mth ADT (USDmn)
20.3
(%)
1M
3M
12M
Absolute (IDR)
-3.6
-16.4
-33.1
Absolute (USD)
-5.4
-21.4
-35.9
Rel to Jakarta Stock Exchange Composite Index
-2.3
-7.7
-31.1

Research Analysts

Nicholas Santoso (nicholas.santoso@verdhana.id) 

Erwin Wijaya (erwin.wijaya@verdhana.id)

Tags: TELECOMS, TLKM, TLKM JK, TLKM IJ, Nicholas Santoso, Erwin Wijaya
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