Indonesia telecoms - Dual tailwinds

Dual tailwinds

We reiterate our positive outlook for the Indonesia telecom sector, as we see two tailwinds acting as key catalysts for the major telcos – Telkom (TLKM IJ, Buy), Indosat (ISAT IJ, Buy), and XLSMART (EXCL IJ, Neutral). These telcos have become increasingly profit oriented, which we believe is key to sustain the quality of services in the sector. After all, telecommunications play a key role in deepening a country’s digitalization footprint, which has the potential to bring positive contribution to economic growth, particularly benefiting the mass segments.

We have so far seen early signs of a broad market repair underway, which is evident across all major cellular operators’ 3Q25 results. We believe this will persist in 4Q25F-1Q26F. 3Q25 saw market repairs (that started in 2Q25) translate into broad-based q-q ARPU improvement across the major cellular companies (by ~4% q-q) as well as data-related ARPUs. In 4Q25F, we could see further increment in ARPU of ~1.5-2.5% q-q. We think there are two key catalysts that may contribute to an increasein 4Q25F ARPU: (1) improvement in business activities in Nov-Dec 2025 and/or (2) increased government spending (including cash handouts). Moreover, the upcoming holiday season should contribute to positive seasonality on cellular spending. Heading into 2026, we believe the Eid holiday season (in March 2026), the government’s front-loading of spending as well as minimum wage increases (estimated to mid-to-high single digits) should contribute to another round of ARPU increase.

A second tailwind for the sector could come from monetization of passive assets across these telcos. While it is difficult to ascertain the timing of any asset divestment, we think such asset sales could further enhance the sector’s TSR (total shareholder return). The first tailwind would translate into improvement in core earnings where companies such as EXCL and ISAT would be primary beneficiaries from market repairs (followed by Telkomsel [TSEL, unlisted]). For reference, core profit margins at these telcos range from 6% to 20%. Consequently, even small improvements in ARPU would go a long way to increase the profitability of these telcos, in our view.

We believe asset divestment/monetization will provide significant dividend yields for shareholders/investors. There could potentially be several asset monetization events in 2026.

Telkom: This involves potentially two key assets: fiber and land bank. The company has been in the process of transferring fiber assets into a subsidiary whereby it will invite investors to participate as strategic shareholder(s). We think its parent company (Danantara) could be a potential strategic investor in the fiber assets. The second asset class involves Telkom’s sizable property assets (given its extensive (legacy) fixed line infrastructure). The combined valuation for these two assets could exceed USD8bn, if realized. Meanwhile, Telkom is an under-leveraged company with net debt to Ebitda of ~0.6x. Management could choose to increase the gearing ratio to an optimal level, which would mean a potentially elevated dividend payout for the 2026F-27F period, we believe.

Indosat: The company has been in the process of divesting its fiber assets (as has been highlighted in its earnings calls). Overall, we estimate that fiber assets could fetch an enterprise valuation of more than USD1bn for the company. Any successful divestment would translate into material special dividends for shareholders, we believe.

XLSmart: After having successfully divested its treasury shares recently (fetching ~IDR2.5tn in proceeds), EXCL has embarked on divesting its 18% stake in Linknet (LINK IJ, Not rated). The value may not be material, but this could further improve the company’s balance sheet, further enhancing its merger synergies. Whilst EXCL may see the least proceeds from asset divestments among the three telcos, the company would benefit the most from market repair.

Based on the above, we remain positive about Indonesia telcos. The impact on their earnings from the market repair can be substantial, in our view. Assuming all costs remain unchanged, a 1% ARPU uplift could improve earnings by ~5-15% given steady-state margins of 6-20%. And if market repair persists, EXCL and ISAT could benefit more than TLKM. And these will be complemented with asset divestments that could take place in 2026F-27F. Within the sector, EXCL and ISAT should benefit more than TLKM from market repairs. But all things considered (particularly daily trading liquidity), TLKM remains our preferred telecom stock primarily due to its superior liquidity position.

Valuation and risks

TLKM – We derive our TP of IDR4,500 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 to 5.1x 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 getting new sites for network expansion.

ISAT – We derive our DCF-based TP of IDR3,300 (down from 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 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 bases, higher opex due to slower post-merger network integration, and/or irrational competition leading to price cuts.

EXCL – Our DCF-based TP of IDR3,000 assumes a risk-free rate of 6.2%, equity risk premium of 7.4%, and terminal growth rate of 2.5%. This results in a WACC of 9.4%. At our TP, the stock would trade at 2026F EV/EBITDA of 5.6x. 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
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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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Research Analysts

Erwin Wijaya (erwin.wijaya@verdhana.id)

Tags: TELECOMS, Indonesia telecoms, Erwin Wijaya

Indonesia telecoms - Dual tailwinds

Dual tailwinds

Fig. 1: Indonesia telecom quarterly ARPU trend (IDR‘000)

Fig. 2: Data ARPU trend 4Q19-3Q25 (IDR/month)

Fig. 3: Data revenue trend 4Q19-3Q25 (IDRbn)

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Indonesia telecoms - Dual tailwinds

Fig. 1: Indonesia telecom quarterly ARPU trend (IDR‘000)

Fig. 2: Data ARPU trend 4Q19-3Q25 (IDR/month)

Fig. 3: Data revenue trend 4Q19-3Q25 (IDRbn)

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