Indonesia Telecom - Path to (better) profitability

Path to (better) profitability

We believe that market repair efforts have been evident across all our covered major cellular operators in their respective 3Q25 results, and we think this will persist in 4Q25-1Q26F. Indeed, we note that in 3Q25, market repairs (that started in 2Q25) translated into broad-based q-q ARPU improvements across our covered major cellular companies (by ~4%q-q). We believe 4Q25F could potentially see a continuation of market repairs, and we estimate 4Q25F ARPU could improve by ~1.5-2.5% q-q. In our view, the two key catalysts that may contribute to 4Q25F ARPU improvements are: 1) improved business activities in Nov-Dec25 and/or 2) increased government spending (including cash handouts). Moreover, the upcoming holiday seasons would contribute to positive seasonality on cellular spendings. Into 2026F, combined with the Eid holiday season (in Mar 2026), we believe that the government’s front-loading spending as well as minimum wage increases (estimated at mid-to-high single digits) would contribute to another round of ARPU uplifting.

Long-term, we expect an upward trend in ARPUs across our covered operators (q-q), driven by:

Reduction in sales of starter packages (SPs). This could result in increased subscriber stickiness (as well as reduction in churn rates).
Upward price adjustments for SPs, albeit we still think that SP price hikes for Fren (unlisted) brand may be slower given the brand’s positioning which leans more towards price-sensitive users.
Efforts to upgrade lower segments of the recurring user base (i.e., raising ARPUs in the lower segment to be, at least, IDR30,000 compared with blended ARPUs of IDR40,000). This may have to be implemented in stages, given that still a large portion of users (estimated at ~25-30% of the total subscriber base) would have ARPUs of less than IDR30,000. Nevertheless, in our opinion, gradual upward price increases (e.g., an ARPU increase of ~1.0-2.0% per quarter) would be adequate to drive earnings. If the above measures continue, they would act as the main catalysts for telco stocks in the coming quarters.

Based on the above, we remain positive on our covered Indonesia telcos. Impact on earnings could be substantial. Assuming all costs are unchanged, we estimate that a 1% ARPU uplift could improve earnings by ~5-15% given steady-state margins of 6-20%. And, if market repair persists, XLSmart (EXCL IJ, Neutral) and Indosat (ISAT IJ, Buy) could benefit more than Telkom (TLKM IJ, Buy). However, all things considered, TLKM remains our preferred telecom name primarily given it is a more liquid stock.

Valuation and risks

TLKM – Our TP of IDR3,650 is based on DCF methodology, in which 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 5.6x 2025F EV/EBITDA (compared with 5.1x at the current price). Risks: adverse macroeconomic conditions, lower data traffic growth, irrational competition, lower ARPUs, declining cellular revenue market share from outside Java and challenges in getting new sites for network expansion.

ISAT – Our DCF-based TP of IDR3,300 is based on 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 5.4x FY25F EV/EBITDA (vs 4.5x at the current price). Key risks include adverse macroeconomic trends that could impact purchasing power, lower price increases or subscriber base, higher opex due to slower post-merger network integration, and/or irrational competition leading to price cuts.

EXCL – Our TP of IDR3,000 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 a 2026F EV/EBITDA of 5.2x (compared with 4.7x at the current price). Upside/downside risks include better/adverse macro conditions, higher/lower customer spending, more/less service price hikes leading to higher/lower data prices, and/or lower/higher opex.

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.

Research Analysts

Erwin Wijaya (erwin.wijaya@verdhana.id)

Tags: TELECOMS, Indonesia Telecom, Erwin Wijaya

Indonesia Telecom - Path to (better) profitability

Path to (better) profitability

Fig. 1: ARPU trends

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Indonesia Telecom - Path to (better) profitability

Fig. 1: ARPU trends

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