Telco Stock Might have much Greater Appeal
Focus on Existing Clients; Price Competition Should be at Ease
Indonesia’s Big-3 telcos recorded data traffic jumped by 34.53% YoY in 1H20, led by EXCL IJ (+45% YoY) and TLKM IJ (+40% YoY). Most Indonesian telco operators would opt to monetize its existing customer base as the Covid-19 pandemic drives demand for telecom services. We also believe competition should be at ease supported by selective data prices that started to increase from Jun-2020 to Sep-2020 such as: 1) Telkomsel (TLKM IJ) Loop Internet OMG 4GB which increased 2.08%; 2) Smartfren (FREN IJ) 24 hours Unlimited FUP which increased by 15.94%. Though, the aggregate average price for industrial data packages is still on a downward trend -1.33% from Jun-2020 to Sep-2020. In addition, the recent government draft regulation on floor and ceiling data prices should prevent unhealthy pricing competition.
Internet Subsidy Program: Short-term Transitory Shock, Long-term Prospect
The government announced to allocate IDR7.2 trillion in phone credits and internet data packages (20-50GB/month) to support distance learning methods for the nation’s students and teachers in the next four months (Sep-2020 to Dec-2020). We note that revenue will potentially got hurt by lower data ARPU in the near future. On the flip side, operators can make it an opportunity to engaged new customers and offers more steady broadband as well as prioritizing quality. In addition, telco operators have already set several strategies to offset the potential declining data ARPU by setting a product mix (e.g. daily, weekly or bundling package) and pricing strategies. We see, despite its unlimited data offerings, some telco operators like TLKM IJ and ISAT IJ has also issued ‘sachets or ketengan’ quota at a more affordable prices. Obviously, TLKM IJ will maintain its premium pricing strategy compared with rivals as they have covered most of the population by 4G LTE network throughout the nation.
While the Foreign Selling Pressure Fairly Persist…
Indo telcos shares falling deeper at around 30%-45% YTD. Foreign investors turned to a net sell position in telco sector, which we deem a quite significant at –IDR10.37 trillion YTD, RTI data shows. We believe, Indonesian equity market is likely to endure a selling pressure by foreign investors especially on big caps stock i.e. banking and telco stocks as: 1) investors sell off riskier assets and seek safer instruments such as cash, gold or US T-bonds amid the prolonged Covid-19 pandemic and unfavorable geopolitical situations; 2) investors are prefer to secure the assets in developing market (North-East Asia) with a better health care system; 3) Big tech and pharmacy stocks in the US and China offers more attractive return. Besides, regional peers has also experience a downturn on telco stocks in YTD basis i.e. Telstra Corp-Australia (-23.63%), SingTel-Singapore (-37.28%), Axiata Group-Malaysia (-29.93%) and DTAC-Thailand (-39.44%) with 6.5x average EV/EBITDA, a premium relative to the Indo telcos level.
…The Fundamentals Supporting Growth and Valuation Remains Attractive
Based on some positive catalysts and potential risks, we maintain our Overweight recommendation for Indonesia’s telco sector. Valuation wise, telco operators currently trade at 2.55x-4.68x EV/EBITDA or -2 to -2.5STD of its 5-years mean. Our top picks are: 1)TLKM IJ (BUY; TP: IDR 3,600), thus TLKM being the market leader with the best network coverage, especially in the ex-Java region; 2) EXCL IJ (BUY; TP: IDR2,700) in line with strong 4G customer growth in the last two years and an increase in the portion of massive data services. Meanwhile, we note that FREN IJ (Not Rated) which offers unlimited 4G data packages, will intensified competition despite the sustainable growth will depend on its company’s ability to support continuing heavy investment. Risk to our call: 1) unfavorable regulation; 2) lower consumer pocket during the pandemic; 3) weaker than expected pick up in data yield.
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