Telecommunication Sector Updates - 15 April 2021

 MNO Consolidation to Win the Scale Deals

2,300 Mhz Auction: TLKM  potentially win the race

•  The Ministry of Communication and Informatics (KemKominfo) has relaunched the selection of 2.3 GHz mobile spectrum, especially in the 2,360–2,390MHz range, having canceled the outcome of the previous tender in Jan-2021.
•  We estimate that TLKM has the potential to win the auction supported by: 1) Strong cash flow (IDR17.42 tn in 9M20) with a capex allocation of around IDR35.9 tn in FY21E (25% of total revenue); 2) TLKM already has a 30Mhz frequency in the 2,300Mhz spectrum; 3) Management committed to fulfilling the obligations set by the KemKominfo in utilizing these frequencies for 5G technology.
•  We believe that TLKM might become a single winner, considering that TLKM previously has 30Mhz on 2.3 GHz, followed by a higher subscriber market share (170.1 mn subscriber in 9M20).  Besides, to get additional spectrum allocation, operators must have a sufficiently large budget: three times of the value offered for upfront fee and spectrum fee. Thus, we consider that only TLKM is capable of getting funds through internal cash, considering that TLKM's net income is in the position of IDR16.68tn in 9M20.

Upscaling the Business through M&A while waiting for Regulatory Approval

•  Ooredoo Group has entered into an exclusive and non-legally binding MoU with CK Hutchison Holdings Ltd in Dec-2020, seeking a possible transaction to combine their Indonesian telecom subsidiaries, ISAT and H3I.
•  We observed if the consolidation happened, ISAT-H3I would become the 2^nd-largest MNO in terms of subscriber (100.4 mn subs); standing above EXCL (57.9 mn subs) and tailing the market leader, TLKM (170.1 mn subs). If MNO allows retaining the spectrum holding post-merger, ISAT-H3I potentially owned 34.4% spectrum market share (145Mhz), and become the largest spectrum ownership, exceeding TLKM (135Mhz). Hence, we estimate EV would be increased by +28.72% to IDR59.69 tn (EBITDA: IDR15.91 tn), translating into target price of IDR8,100 for ISAT, which implies 3.75x EV/EBITDA.
•  However, several downside risks might be coming from: 1) unfavorable government regulation on M&A; 2) potential return of overlap spectrum; 3) subscriber’s elimination post-merger; 4) increased in post-merger integration cost.

Lines up Tower Sale to cover Capex hike

•  We expects the average capex to revenue for the big 3 MNO’s to remain high at around 25% in FY21E, driven by network coverage and fiber-optic expansion. TLKM to set capex of IDR35.9 tn for FY21E. EXCL sets IDR7 tn in FY21E capex, slightly higher from IDR6.2 tn spent in FY20 and sourced from internal cash and debt refinancing.
•  Meanwhile, ISAT is allocating IDR8 tn capex in FY21E to improve 4G and video-grade network. To meet the capex needed and lowering costs, ISAT has agreed to sell and lease-back of 4,247 towers (USD750 mn/IDR10.8 tn) to PT EPID Menara AssetCo, owned by Digital Colony, a global digital infrastructure company. Digital Colony also reportedly is in exclusive talks with Northstar Advisors Pte regarding the plan to acquire CENT IJ.

OVERWEIGHT Recommendation with Top Picks:TLKM and EXCL

We maintain our OVERWEIGHT recommendation for Indonesia’s telco sector as we believe data traffic to continue to grow and data yield seems likely to normalized.  Meanwhile, market will focused on the 2,300MHz spectrum auction and MNO consolidation story this year. Our top picks are: 1) TLKM IJ (BUY; TP:IDR4,000), thus TLKM being the market leader with the best network coverage and potentially win the auction; 2) EXCL IJ (BUY; TP:IDR2,700), given an undemanding valuation with strong 4G customer growth; while 3) ISAT IJ (HOLD; TP:IDR5,650), we did not taking into account of the completed consolidation with H3I. Risk to our call: 1) any capex delay; 2) unfavorable regulation, and 3) lower-than-expected pick up in data yield.

TLKM EXCL ISAT