PT Telekomunikasi Indonesia Tbk (TLKM IJ)
Telecommunication Sector
1H20 Result: As Expected from a Market Leader
1H20 Revenue: Staying Strong at Hard Times
TLKM IJ remained resilient in 1H20, reporting revenue of IDR66.86 trillion, which is a slight -3.59% YoY decrease from 1H19 revenue of IDR69.35 trillion. This revenue is reflected as 47.43%/48.19% of FY20E MNCS/consensus estimates. Data, internet, and IT services continue to contribute to the majority of the revenue at 52.86% or IDR35.34 trillion, a 6.80% YoY growth. This is followed by their legacy business attributing to 19.48% of revenue or IDR13.03 trillion. Unfortunately, this legacy business faced a substantial revenue decline, decreasing by -27.48% YoY due to cannibalization from instant messaging applications and tighter competition among mobile operations. On the better side, TLKM’s IndiHome business continued strong momentum, with revenue growing by 19.10% YoY to IDR10.4 trillion, driven by new subscribers that reached 7.45 million, a 24.2% YoY jump, and successful add-ons.
Successful Cost Efficiency for Higher Net Profit Margin
Despite the slight revenue decrease, TLKM saw an 8.91% YoY increase in EBITDA, reaching IDR36.08 trillion. EDBITA margin also grew from 47.8% in 1H19 to 54.0% in 1H20 as a result of cost efficiency as total expenses decreased by -5.4% YoY to IDR44.60 trillion. Operation, maintenance and telecommunication (O&M) expenses dropped by -25.5% YoY to IDR16.23 trillion due to the impact of PSAK 73 and PSAK 72 accounting adoption. Another expense that reduced significantly is marketing expenses that declined by -26.9% YoY to IDR1.46 trillion, since the company utilizes more online channels for mobile product distribution and less physical promotional events for IndiHome. In the end, net profit decreased slightly by -0.8% YoY in 1H20 to IDR10.99 trillion, but net profit margin grew from 16.0% in 1H19to 16.4% in 1H20. This net profit is reflected as 57.79%/52.90% of FY20E MNCS/consensus estimates.
The ground-breaking 5G, but still unsure when
TLKM is currently preparing the infrastructure for the trial launch of 5G. The company has finished small pilot trials, such as during the 2018 Asian Games and several events at the end of 2019. However, even when it is ready to invest in 5G, an obstacle is government regulation, as it is still waiting for the government’s frequency allocation auction of 2,300 MHz. TLKM and FREN are frontrunners as both are the only companies that own 2,300 MHz, while other competitors like EXCL, ISAT, and Hutch only own up to 2,100 MHz. Even after winning the auction, infrastructure still takes one to two years, and capex and operational fees will be extremely high. Management is keeping details of capex and timeline for 5G network confidential as it is still assessing the impact of Covid-19. Nonetheless, TLKM has strong cash at IDR28.24 trillion at the end of June 30, 2020. Furthermore, even if it uses loans, its debt to equity ratio is relatively low at 58.3%. Aside from 5G infrastructure plans, TLKM has prepared a capital expenditure of around IDR27.67 trillion for FY20E, with the majority from internal cash and only a small portion of bank loans. 40-50% will be used to finance 4G network expansion, and the remaining will be used for the development of consumer, enterprise, and wholesale business lines. So far, TLKM spent IDR3.5 trillion in 1Q20, and IDR8.3 trillion in 2Q20, spending a total of IDR11.8 trillion or 35.76% of their capex budget.
An Industry that Benefits from the Pandemic
In 1H20, TLKM saw an increase in data demand due to PSBB that causes new normal activity such as work and school from home. In 1Q20, total mobile traffic is 1,996,842 TB, a 3.48% QoQ increase. 2Q20 saw an even higher increase at 13.10% QoQ to 2,259,408 TB, which is also a 39.12% YoY increase. Despite the increase in demand, the data yield has also been decreasing. In 2Q20, data yield is IDR7.102/GB, a -10.40% QoQ and -179.70% YoY decrease. This is caused by the intense price war due to a highly concentrated industry. Still, total traffic increase outweighs the data yield decrease and MNCS estimates that total data revenue in FY20E will be IDR104.33 tn, an 18% YoY increase. Recently, the government revealed that it will subsidize free data access to online learning, potentially giving TLKM a revenue of IDR1.70 trillion.
Valuation and Recommendation: BUY at TP: IDR3,600
We maintain a BUY position for TLKM with TP at IDR3,600 based on FY20E EV/EBITDA of 5.09x (-2.5 STD of its 5-years mean). Downside risks to our call: 1) Prolonged PSBB will hurt consumer spending even more; 2) possible merger of competitors.
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