Equity Indonesia Telecommunication Telkom (TLKM IJ) HOLD (from Buy) Stock Data Target price (Rp) Prior TP (Rp) Shareprice (Rp) Rp4, Rp4,1 Rp3,72 Upside/downside (%) +7.5 Sharesoutstanding (m) 99,62 Marketcap. (US$ m) 25,364 Free float (%) 48.8 Avg. 6m dailyt/o (US$ m) 26.3 Price Performance 3M 6M 12M Absolute (%) 6.6 5.7-11.4 Relative to JCI (%) 7. 5.6-11.3 52w high/low (Rp) 4,44-3,27 115 11 15 1 95 9 85 8 75 7 Nov-17 Dec-17 Jan-18 Jan-18 Feb-18 Mar-18 Apr-18 TLKM-Rebase Major Shareholders Republic of Indonesia 52.1% Bank of New York Mellon 6.1% Public 41.8% Estimate Change; Vs. Consensus 18F 19F Latest EBITDA (Rp bn) 6,255 63,591 Vs. Prior EBITDA (%) 2% % Vs. Consensus (%) -3% -7% Source: Bloomberg Apr-18 May-18 Jun-18 Jun-18 Jul-18 Aug-18 Aug-18 Sep-18 Oct-18 JCI Index-Rebase Oct-18 Nov-18 Recovery mostly priced-in Post-SIM-card-registration recovery mostly priced in. More uncertainty in Telkomsel s long-term growth in outer Java TLKM group s EBITDA growth might remain moderate 28 November 218 Company Update Reduce TP to Rp4, (6% premium to +1STD) Downgrade to Hold We expect Telkomsel s growth to slow. We believe uncertainty in Telkomsel (Tsel) s long-term growth outlook in outer Java has increased as Indosat, accelerating forecast its capex spending in 4G network coverage (ISAT s target 18F 4G coverage in outer Java at 6% vs. 2Q18 27%) and is looking for ways to fund aggressive capex in 19F-21F. Although we expect Tsel would remain as market leader, but its declining competitive advantage in network coverage vs. peers in outer Java (XL already improve its outer Java s network earlier than Indosat) might affect the effectiveness of Telkomsel s cluster pricing strategy. Thus, we slightly reduced TLKM s EBITDA by 2-4% in 22F-28F. Modest EBITDA growth. We forecast moderate YoY growth in TLKM s revenue and EBITDA growth of +9%YoY and +6%YoY, respectively in 219F (vs. +4/- 7%YoY in 218F) due to: 1) Gradual decline in voice and SMS revenue; 2) Margin pressure from growing data business; 3) More limited pricing increase opportunity as more players expand 4G network coverage in outer Java. Limited contribution from fixed broadband. We still view TLKM s fixed broadband business (Indihome) as positive factor for TLKM, considering its market growth potential, its management and operational readiness to fulfill demand, and gradually increasing margin. However, we see limitation from Indihome s strong growth impact to TLKM Group in near-term as we estimate Indihome s revenue contribution at 9-11% in 18F/19F. Slightly decrease TP by 3% to Rp4, - Downgrade to Hold. Our DCFbased TP assume WACC of 1.2% (old: 1.1%; see Fig. 9). We slightly reduced TP by 3% as we revised down 22F-28F EBITDA by 2-4%. We downgrade to Hold and argue share price might be more volatile given: 1) Telkomsel in last earning call said further pricing increase might be limited (depend on competition); 2) Slightly more uncertainty in outer Java s long-term growth (slightly higher competition risk). Our TP translates to 19F EV/EBITDA of 9.4x, 6% premium to +1STD of 8-yr mean. TLKM trades at 19F EV/EBITDA of 8.6x, near +1STD. Risks (page 5). There might still be downslide risk from concern on Telkomsel s network gap (leadership strength) in outer Java vs. peers (depends on realization progress of other telcos expansion to outer Java). Upside risk: If network roll-out (capex realization) from competitors, incl. Indosat, is significantly lower than its target; no sufficient funding (balance sheet limitation) for competitor(s) to support aggressive capex. Paula Ruth PT Indo Premier Sekuritas paula.ruth@ipc.co.id +62 21 5793 1168 Year To 31 Dec 216A 217A 218F 219F 22F Revenue (RpBn) 116,333 128,256 133,25 144,567 158,844 EBITDA (RpBn) 59,498 64,69 6,255 63,591 69,145 EBITDA Growth (%) 15.7 8.6 (6.7) 5.5 8.7 Net Profit (RpBn) 19,352 22,145 19,95 2,578 22,18 EPS (Rp) 195 224 21 28 222 EPS Growth (%) 24.9 14.4 (1.1) 3.4 7. Net Gearing (%) 1.9 9.2 19.5 27. 32.5 PER (x) 19.1 15.8 18.5 17.9 16.7 PBV (x) 4.4 4. 3.8 3.6 3.4 Dividend Yield (%) 3.7 4.5 4.1 4.2 4.5 EV/EBITDA (x) 9.5 8.7 9.1 8.6 7.9 Source: TLKM, IndoPremier Share Price Closing as of : 28-November-218
Fig. 1: Tsel s subscriber base and ARPU Fig. 2: Telkomsel s data traffic vs. effective data yield (mn) (Rp ) (PB) (Rp/MB) 25 2 15 1 5 3Q17 4Q17 1Q18 2Q18 3Q18 Telkomsel Subscribers (LHS) Telkomsel ARPU (RHS) 5 45 4 35 3 25 2 15 1 5 1,2 1, 8 6 4 2 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 2 18 16 14 12 1 8 6 4 2 We expect subscriber base still slightly decline in 4Q18F, but ARPU to increase as subscriber adjusting behaviour to operators marketing and pricing strategy postregistration of prepaid card. Data traffic (LHS) Effective yield (RHS) Fig. 4: TLKM s Indihome Subscribers and ARPU Fig. 5: TLKM s expenses excl. D&A (3Q18) Opex without D&A (mn) 5. 4. 3. (Rp ) 35 3 25 2 Marketing G&A Interconn ect Personnel 2. 15 1. 1 5. 3Q17 4Q17 1Q18 2Q18 3Q18 Indihome Subscriber Indihome ARPU O&M + telecom services Fig. 5: 215-2F Tsel s revenue based on service type Fig. 6: TLKM s hist-fw. EV/EBITDA (adj. to ownership in Tsel) (Rp tn) 7 6 5 4 12 11 1 9 8 7 3 2 6 5 4 1 215 216 217 218F 219F 22F Jan-15 Mar-15 May-15 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jul-15 TLKM Fw-EV/EBITDA Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Nov-17 Sep-17 Jul-17 May-17 Jul-18 May-18 Mar-18 Jan-18 Fw-EV/EBITDA avg (LHS) Sep-18 Nov-18 Voice Data SMS Digital service Others Fw-EV/EBITDA + 1 STD (LHS) 23 Nov 218 at 9.x Fw-EV/EBITDA - 1 STD (LHS) -2STD 4.6-1STD 6. Avg. 7.5 +1STD 8.9 +2STD 1.3, Bloomberg 2
Fig. 7: Forecast drivers Description 216A 217A 218F 219F 22F Voice Est. chargeable outgoing minutes (bn) 25 212 28 26 24 % change 7.1% 3.4% -2.% -.8% -.8% Voice revenue / est. outgoing minutes (Rp) 195 189 161 147 139 % change 2.7% -3.1% -15.% -8.9% -5.% Data Data traffic (petabyte) 959 2,168 4,418 8,361 12,78 % change 94.8% 126.2% 13.8% 89.3% 52.% Data Rate (Rp/MB) 29 16 1 6 5 % change -29.8% -43.3% -41.5% -35.% -2.% SMS Total SMS (bn) 183 135 81 63 48 % change -16.4% -25.9% -4.% -23.% -23.% Revenue / total SMS (Rp) 72 8 82 83 85 % change 15.6% 1.8% 2.% 2.% 2.% Gross revenue (Rp t) 97 14 99 15 115 Net revenue (Rp t) 87 93 89 94 13 EBITDA margin 57.4% 57.5% 52.3% 51.4% 5.6% Capex / revenue 14.8% 15.% 17.3% 17.7% 17.4% Telkom (ex-telkomsel) Indihome subs (m) 1.6 3. 5. 6.6 8.2 Indihome implied ARPU (Rp ) 34 298 257 244 232 Fixed line subs (m) 1.7 11. 1.9 1.9 1.9 Fixed line ARPU (Rp ) 59.6 51.7 47.6 43.7 38.5 Telkom Consolidated Revenues (Rp t) 116 128 133 145 159 EBITDA margin 51.1% 5.4% 45.2% 44.% 43.5% Capex/sales 25.1% 25.8% 25.% 25.% 24.% 3
Fig. 8: Change in estimates TLKM Consolidated YE 31 Dec (Rp bn) 218E 219E Tsel YE 31 Dec (Rp bn) 218E 219E Revenues - Current 133,25 144,567 Subscribers - Current (mn) 171 179 Revenues - Old 131,351 144,865 Subscribers - Old (mn) 171 179 % change 1.4% -.2% % change.%.% EBITDA - Current 6,255 63,591 ARPU - Current (Rp ) 4 45 EBITDA - Old 59,227 63,554 ARPU - Old (Rp ) 4 45 % change 1.7%.1% % change.% -1.6% EBITDA margin - Current 45.2% 44.% Voice Revenues - Current 33,414 3,2 EBITDA margin - Old 45.1% 43.9% Voice Revenues - Old 33,414 3,2 % change.%.% Net interest exp - Current 1,88 2,359 Net interest exp - Old 1,88 2,372 SMS Revenues - Current 6,635 5,211 % change.% -.5% SMS Revenues - Old 6,635 5,211 % change.%.% Core Profit - Current 19,95 2,619 Core Profit - Old 19,152 2,381 Data Revenues - Current 42,342 52,86 % change 3.9% 1.2% Data Revenues - Old 42,342 53,53 % change.% -2.7% Capex - Current 33,313 36,142 Capex - Old 32,838 36,216 EBITDA margin - Current 52.3% 51.4% % change 1.4% -.2% EBITDA margin - Old 52.3% 51.4% Net debt - Current 22,142 32,271 EBITDA - Current 46,431 48,369 Net debt - Old 32,838 36,216 EBITDA - Old 46,43 49,28 % change -32.6% -1.9% % change.% -1.7% Capex to sales - Current 25.% 25.% Core Profit - Current 24,656 24,87 Capex to sales - Old 25.% 25.% Core Profit - Old 24,656 25,438 % change.% -2.5% Capex - Current 15,39 16,625 Capex - Old 15,39 16,625 % change.%.% Capex to sales - Current 17.3% 17.7% Capex to sales - Old 17.3% 17.4% 4
Fig. 9: Risk-free-rate and terminal EV/EBITDA assumptions Risk-Free rate 8.% Equity market risk premium 6.% Beta.8 (old.77) Cost of equity 12.8% (old 12.6%) Post-tax cost of debt 6.% Debt/Capital ratio 38% WACC 1.2% (old. 1.1%) Terminal EV/EBITDA Note: If we use old WACC of 1.1%, our TP would increase by 2% to Rp4,2, assuming all else the same., Bloomberg Telkomsel: 8x Non-Telkomsel: 6x Risks Upside risk: Data revenue growth (traffic and pricing); Telkomsel s Java monetization; Indihome s productivity and monetization; cost saving; if aggressive (capex realization) network roll-out from competitors, incl. Indosat, is significantly lower than those competitors target; no sufficient funding available (balance sheet limitation) for competitor(s) to support aggressive capex. Downside risk: Concern on outer Java s network gap (leadership) vs. peers (depends on realization progress of other telcos expanstion to outer Java); Competition; lag until TLKM s EBITDA YoY growth turned positive; long-term EBITDA margin; one-off expenses; if TLKM s forex gain (from USD asset) cannot offset impact from Rupiah depreciation; other non-telkomsel s business. 5
Year To 31 Dec (RpBn) 216A 217A 218F 219F 22F Income Statement Net Revenue 116,333 128,256 133,25 144,567 158,844 Cost of Sales Gross Profit 116,333 128,256 133,25 144,567 158,844 SG&A Expenses (75,367) (84,93) (93,14) (12,822) (113,382) Operating Profit 4,966 44,163 4,236 41,745 45,462 Net Interest (1,94) (1,335) (1,88) (2,414) (3,174) Forex Gain (Loss) (52) 51 Others-Net (1,631) (22) Pre-Tax Income 38,189 42,659 38,356 39,331 42,288 Income Tax (9,17) (9,958) (9,821) (1,71) (1,828) Minorities (9,82) (1,556) (8,63) (8,682) (9,442) Net Income 19,352 22,145 19,95 2,578 22,18 Balance Sheet Cash & Equivalent 31,238 27,318 22,138 2,173 18,333 Receivable 7,9 9,564 9,741 1,568 11,612 Inventory 584 631 656 711 781 Other Current Assets 7,979 1,48 1,283 1,991 12,9 Total Current Assets 47,71 47,561 42,817 42,443 42,734 Fixed Assets - Net 114,498 13,171 144,746 16,495 176,56 Goodwill Non Current Assets 15,565 18,64 29,292 37,15 47,923 Total Assets 179,611 198,484 219,352 242,993 27,596 ST Loans 911 2,289 1,41 1,744 1,916 Payable 13,69 15,791 17,711 19,46 Other Payables 2,64 22,87 22,574 24,393 26,722 Current Portion of LT Loans 4,521 5,29 6,46 3,53 4,284 Total Current Liab. 39,762 45,376 47,268 46,91 52,382 Long Term Loans 26,367 27,974 37,568 49,515 56,231 Other LT Liab. 7,938 13,4 15,56 2,41 26,427 Total Liabilities 74,67 86,354 1,397 116,457 135,4 Equity 7,769 7,817 8,31 8,31 8,31 Retained Earnings 76,615 84,896 88,192 93,842 1,426 Minority Interest 21,16 19,417 22,732 24,663 27,99 Total SHE + Minority Int. 15,544 112,13 118,955 126,535 135,555 Total Liabilities & Equity 179,611 198,484 219,352 242,993 27,596 Source: TLKM, IndoPremier 6
Year to 31 Dec 216A 217A 218F 219F 22F Cash Flow Net Income (Excl.Extraordinary&Min.Int) 29,172 32,71 28,535 29,261 31,46 Depr. & Amortization 4,628 3,479 18,738 2,393 22,58 Changes in Working Capital 4,154 (336) 78 93 1,788 Others (1,123) (9,29) (6,746) (7,38) (7,181) Cash Flow From Operating 27,831 26,554 41,235 43,23 48,125 Capital Expenditure (18,237) (22,191) (44,) (44,1) (48,895) Others 3,23 431 3,77 69 453 Cash Flow From Investing (15,214) (21,76) (4,923) (43,392) (48,442) Loans (2,813) 3,673 9,93 8,937 8,119 Equity 1,996 (2,541) Dividends (13,547) (16,69) (14,929) (15,434) (16,513) Others 3,291 414 6,456 3,97 5,784 Cash Flow From Financing (11,73) (12,522) (1,11) (2,527) (2,61) Changes in Cash 1,544 (7,728) (799) (2,715) (2,928) Financial Ratios Gross Margin (%) 1. 1. 1. 1. 1. Operating Margin (%) 35.2 34.4 3.2 28.9 28.6 Pre-Tax Margin (%) 32.8 33.3 28.8 27.2 26.6 Net Margin (%) 16.6 17.3 14.9 14.2 13.9 ROA (%) 11.2 11.7 9.5 8.9 8.6 ROE (%) 19.5 2.3 17.2 16.8 16.8 ROIC (%) 18.6 19.3 15.7 14.5 14. Acct. Receivables TO (days) 24.7 24.9 26.4 25.6 25.5 Acct. Receivables - Other TO (days)..... Inventory TO (days)..... Payable TO (days)..... Acct. Payables - Other TO (days)..... Debt to Equity (%) 3.1 31.6 38.1 42.9 46.1 Interest Coverage Ratio (x).1.1.1.1.1 Net Gearing (%) 1.9 9.2 19.5 27. 32.5 Source: TLKM, IndoPremier 7
Head Office PT INDO PREMIER SEKURITAS Wisma GKBI 7/F Suite 718 Jl. Jend. Sudirman No.28 Jakarta 121 - Indonesia p +62.21.5793.1168 f +62.21.5793.1167 INVESTMENT RATINGS BUY : Expected total return of 1% or more within a 12-month period HOLD : Expected total return between -1% and 1% within a 12-month period SELL : Expected total return of -1% or worse within a 12-month period ANALYSTS CERTIFICATION. The views expressed in this research report accurately reflect the analysts personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. DISCLAIMERS This research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendations contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. PT. Indo Premier Sekuritas or its affiliates may seek or will seek investment banking or other business relationships with the companies in this report.