Across major telcos, we anticipate growing efforts to foster a healthier market environment. This stems from broadly subdued 4Q24 results across major cellular companies, which showed potentially flattening growth in data traffic. Thus, without upward price adjustments, we believe achieving top-line growth will become increasingly challenging for these major telcos. Meanwhile, subscriber penetration rate is over 100% of the total population, of which ~10% of the subscriber base is deemed to be price sensitive. Typically, these price-sensitive users are associated with Starter Package (SP) buyers. They take advantage of attractive price offerings for SPs, which are generally cheaper than renewal packages.

As part of a healthier market environment, we expect upward pricing for these SPs before renewal package rates increase. In the upcoming peak Eid holiday season (end of Mar- early April), we expect telcos to make some upward price adjustments for SPs and renewal packages. While this may be positive for these companies, we believe the new equilibrium continues to be fragile.

7-not-3

Contrary to market perceptions, we believe competition in the cellular space would involve the seven (7) brands that these three major telcos own (assume post the agreed merger between XL Axiata [EXCL IJ, Buy] and Fren [FREN IJ, Not rated] and not just limited to these three operators as brand awareness among consumers remain high. This could potentially complicate efforts towards a healthier market environment. Telkomsel (TSEL, unlisted) as a market leader owns TSEL LITE and By.U, while Indosat (ISAT IJ, Buy) has IM3 and Tri brands. Additionally, post-merger, XL Axiata will own three brands XL, Axis and FREN. Each of these brands have a different market positioning, and thus different pricing levels. Typically, one brand from each operator would be assigned as a fighting brand. With the XL-FREN merger, the FREN brand is considered the cheapest. Post-merger (expected to be completed by the end of 1H25), it could offer the best value for price-sensitive users, given the anticipated network improvements for FREN services. Thus, in the near to medium term, we believe that the FREN brand could gain market share from other brands. Additionally, subject to regulatory approval, post-merger XL will have a substantial low-band (850-900MHz) spectrum of 37MHz bandwidth (compared to TSEL’s 30Hz and ISAT’s 25MHz). This low band spectrum bandwidth could enable XL to expand beyond the Java network while also improving the overall network quality. These could potentially hinder other brands’ abilities to raise prices for their respective services (either SPs and/or renewal packages). Consequently, until the pricing gap between the FREN brand and its two sibling brands (XL and Axis) is narrowed, the cellular market will continue to experience a fragile equilibrium, in our view. Obviously, competition from other fixed broadband services would further complicate the competition landscape, and thus efforts for price increases.

Given the above, without tangible market repairs, the Indonesia telecom sector is likely to continue underperforming the broader Indonesia index.

Valuation and Risks

TLKM – We derive our TP of IDR4,100 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%. 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 beyond Java and difficulties in securing new sites for network expansion.

ISAT – We derive our DCF-based TP of IDR3,600 using 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 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 2025F EV/EBITDA of 4.1x (compared to 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, and/or higher opex.

Fig. 1: Plateauing data traffic PB?

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)