EXCL and FREN (FREN IJ, Not rated) had in 2024 officially announced a definitive agreement for a proposed merger, resulting in a combined pre-synergy enterprise value of approximately IDR104tn (~USD6.5bn). Management expects the merger to be completed by 1H25 (refer to Fig. 3). In our previous report, we highlighted the details of the merger plan where we argued that the merger could bring positive values and could enhance EXCL's market positioning.

While we believe the merged entity would be in a better position, it would not materially alter the competitive landscape (i.e., intense competition both in Java and outside Java). Still, on a relative basis, Telkomsel (TSEL, unlisted) would be likely at risk from the planned merger, in our view, particularly as we believe the competitive dynamics in Java will remain intense. Outside Java, TSEL is facing continued pressure, in our view given its premium pricing position (which would potentially erode its market share).

We also understand that post-merger, the merged entity will maintain its three brands (XL, Axis and FREN). Each brand will have different positioning in the already intense competitive market in the country, in our view. Currently, the FREN brand is the cheapest within the Indonesia cellular sector, with it competing with a total of seven brands. Post-merger, it is still unknown whether the merged entity would be required to return some frequencies to the government. This could be a key concern to investors.

Still, in the long term, we think there are some merger synergies that XLSmart could enjoy. The company estimates that upon completion of the integration, annual synergy benefits would be around USD300-400mn. Still, there would be some quick-win synergies that XL Smart could realize, according to management. In the table below, we provide a pro-forma analysis assuming some likely quick synergies from: 1) revenue uplift for ex-FREN subscriber base reflecting better network infrastructure from the merger, 2) personnel efficiencies, 3) marketing synergies, and/or 4) network infrastructure (part of operations & maintenance). As mentioned in the assessments below, using 9M24 numbers for reference, we estimate some earnings uplift of ~USD150mn, bringing implied ROAE to ~7-8% (from ~7.0% on pre-merger). In the long-term, we think the synergies should improve accordingly towards annual pretax profit uplift of USD300-400mn).

After strong FY24 results, EXCL intends to disburse annual dividend of IDR1,120bn, or IDR85.7 of dividend per share; the implied dividend payout ratio is ~61.6% (+11% from the previous year), yielding ~3.8% (based on last closing share price for previous calendar year). The dividend disbursement is planned to be conducted at XL Axiata’s next annual GMS (general meeting of shareholders), which will likely be in 1H25.

Valuation and risks

We maintain our Buy rating and TP of IDR2,600, which 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 behavior, and/or higher opex.

Fig. 1: Shareholding structure before and after merger

Fig. 2: 3Q24 pro-forma results (in IDR)

Fig. 3: Merger process

Fig. 4: Indonesia— Telco spectrum holding

Fig. 5: Proforma as of Sept'24

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)