Equity Research

Telco

Tuesday,22 December 2020 Telco OVERWEIGHT Maintain Matchmaking in the air

TLKM relative to JCI Index A Bloomberg note suggests Hutch3 and Indosat shareholders to be mulling a xxxx deal that entails cash and stocks exchange. Deciphering further, we take the view scenario that Qatar may exit gradually by submitting control but keeping a substantial stake in a merged telco that would help the shareholder realize gains of its ongoing coverage rollout cycle and benefits from the elimination of one telco from the market.

Explaining the assumed deal. Intense competition, Covid19, school subsidy, future 5G resources requirements should be key motives for a deal. Both conglomerates have endured long capex cycles in 2G, and lately 4G. As we

are approaching the 5G cycle, it is commonly perceived the next capex cycle can only be executed by reducing competition and improving monetization, as well as increasing resources further. Hutch3 appears to have more reason to

strengthen presence in with business interests in ports. There is also strong pressure from government to rapidly enter 5G, a national agenda to push country’s productivity, industrialization & IoT, following China’s paradigm. EXCL relative to JCI Index Is Qatar Ooredoo rushing and/or rushed? Operationally, Indosat is in midst of xxxx turnaround revamping its organization with employee redundancies and setting a clear direction towards network modernization with 4G. We believe there is a good 6-9 months period where Indosat may improve further operationally and financially. However a well-engineered transaction may serve

and protect both interests by capturing future performance upside in a merged telco, and allow gradual control transfer. (See exhibit 3 for the key aspects) A potential gradual exit by Ooredoo Qatar. Based on the additional motive by

Hong-Kong based Hutchison, we can venture a gradual exit of Indosat. As per the note, it advises both telco to remain significant shareholders in merged telco. Thus, we expect Ooredoo to hold a 20-25% stake with remaining 20-25% partition value to be redeemed with stock of the merged telco. The structure is not an outright cash buyout transaction of Indosat, because we believe Indosat Source : Bloomberg

will likely wish to see through the completion of its 3yr 4G capex realization

program and realize its benefits. Holding stocks in the merged telco will help

Ooredoo realize the gains from its 4G capex and any returns from the potential

use of its historically high cash position currently in Indosat. We believe a

valuation at this point 5.14x EV/EBITDA 2021 is logical for a potential deal, from

currently trading at 3.6x considering that if Indosat improves, the other peers

valuation would have to improve.

Hutch potentially becomes the key principal shareholder in the new telco with

partial redemption of Ooredoo Qatar ownership. We remind that Hutch3 was

a default winner of 10MHz block in the recent 2300MHz spectrum, without

previous infrastructure in that frequency. We understand also that corresponds

to 5Mhz spectrum for each downlink and uplink, very limited even for 4G.

Nevertheless we understand Hutch3 acted in good faith firstly to the

government so that the merged telco is viewed favorably when authorities

decide on the spectrum retention post merger, and secondly on the potential

partnerships that can be borne with the implementation of Omnibus Law.

What to buy? Above Rp4600/sh for Indosat cannot be justified currently. x Niko Margaronis Reasonably there is a room for speculation in terms where Indosat valuation (62-21) 5091 4100 ext. 3512 should land. With the elimination of one operator makes it easier to implement [email protected] data price floors, thus TLKM and EXCL should benefit. The ball is in EXCL and terrain, to determine their future alliances ahead of 5G undertakings.

Target Market Price Cap. P/E (x) P/BV (x) ROE (%) Company Ticker Rec (Rp) (RpBn) 2020F 2021F 2020F 2021F 2021F Telkom TLKM IJ BUY 4,600 357,614.6 15.6 15.2 3.4 3.4 22.6 XLwww.danareksa.com Axiata EXCL IJ BUY 3,500 30,995.1 See important30.1 disclosure21.3 at the back1.5 of this report1.5 7.0 Indosat Ooredoo ISAT IJ HOLD 4,600 29,886.6 n/m n/m 2.5 2.5 (0.2)

Exhibit 2. Bloomberg note on Hutch3 and Indosat Ooredoo Merger

See important disclosure at the back of this report 2 www.danareksa.com

Exhibit 3. Simulation of potential new merged telco with Hutch3 & Indosat Indosat Owners Ooredoo Asia Pte Ltd 65.0% Indonesia Government 14.3% Public 20.7% *implementation of IFRS 16 Indosat Ooredoo FY18 FY19* 9M20 FY20F 2021E 2022E Revenues 23,140 26,118 20,592 27,457 29,549 30,505 EBITDA 6,500 9,856 8,466 11,502 12,604 13,604 EBITDA margin 28% 38% 41% 42% 43% 45% Operating profit -1,749 286 1,755 1,006 1,489 1,877 Net profit (Loss) -2,404 1,569 -458 -664 -18.95 388 Normalized Net profit (Loss) -3,329 -1,998 -863 -900 capex 9,289 10,146 5,949 9,000 8,800 8,274

Cash & Cash equivalent 1,045 5,881 4,347 4,347 Gross debt 21,430 21,607 17,447 17,447 Net debt 20,385 15,726 13,101 13,101 Share Price 5500 Market Cap (Rp bn) 29,887 EV 42,987 EV/EBITDA 6.61 4.36 3.81 3.74 3.41 3.16

Scenario share price ISAT (Rp) 5000 5500 6000 7000 8000 9000 10000 11000 12000 13000 14000 Assumed market cap (RP bn) 27,170 29,887 32,604 38,038 43,471 48,905 54,339 59,773 65,207 70,641 76,075 EV (Rp bn) 40,270 42,987 45,704 51,138 56,572 62,006 67,440 72,874 78,308 83,742 89,176 EV/EBITDA 2021 (x) 3.2065% 3.41 3.63 4.06 4.49 4.92 5.35 5.78 6.21 6.64 7.08 65% Ooredoo stake 17,660 19,426 21,192 24,724 28,256 31,789 35,321 38,853 42,385 45,917 49,449 14.29% govt. stake 3,883 4,271 4,659 5,436 6,212 6,989 7,765 8,542 9,318 10,095 10,871 Public 5,627 6,190 6,752 7,878 9,003 10,128 11,254 12,379 13,504 14,630 15,755

Hutch3 (Rp bn) FY18 FY19 1H20 FY20F 2021E 2022E Revenues 13,295 14,085 7,535 16,198 17,817 19,599 EBITDA 2,974 4,658 1,701 4,049 4,811 5,880 EBITDA margin 22% 33% 23% 25% 27% 30%

Combined telco 2021E 2022E Revenues 47,366 50,104 EBITDA 17,414 19,483 EBITDA margin 37% 39%

Synergized telco 2021E 2022E Revenues 48,550 51,949 EBITDA 18,935 21,299 EBITDA margin 39% 41%

Indosat shareholders expected investment value Qatar Ooredoo 33,555 Govt stake 7,377 Public stake 10,691

30% premium for Indosat spectrum, brand-market position. Qatar Ooredoo 43,621 Govt stake 9,590 Public stake 13,898

Post telco combination/merger metrics Merged telco EBITDA 2022 21,299 applied avg. EV/EBITDA (x) 5.14 EV 109,375 Net debt 13,101 Merged telco Equity value 96,275 Qatar Ooredoo stake 45% Government stake 10% Public stake 14% Hutch 3 stake 30% Expect Qatar Ooredoo to sell 20-25% stake in merged telco for cash in exchange for management control.

See important disclosure at the back of this report 3 www.danareksa.com

See important disclosure at the back of this report 4 www.danareksa.com