Indonesia Industry Focus Indonesia Telecom Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 7 Oct 2019
JCI : 6,061.30 Exciting pair trade opportunity Analyst • XL Axiata has a 18-24-month window of opportunity Sachin MITTAL +65 66823699 to gain revenue share before Indosat catches up [email protected]
• Expect rational competition with focus on profitability in Java; network expansion outside Java will come with higher losses for Indosat, Hutch and Smartfren STOCKS 12-mth Performance • BUY XL Axiata – SELL Telkom Indonesia has generated Price Mkt Cap Target (%) ~17% returns since 12 July 2019 and presents an Rp US$m Price (Rp) 3 mth 12 mth Rating opportunity for another ~40% returns potentially Telekomunikasi 18-24 months window of opportunity for XL Axiata Indonesia 4,190 29,367 3,610 (2.1) 16.4 FULLY VALUED (EXCL) to gain revenue share from Telkomsel. Network Indosat 2,810 1,080 2,640 3.7 0.4 HOLD charts from nPerf shows a big improvement in Indosat’s (ISAT) XL Axiata 3,350 2,533 4,180 15.5 17.1 BUY Source: DBS Bank, Bloomberg Finance L.P. 4G network in Java over the last 12 months. ISAT is in the first Closing price as of 4 Oct 2019 year of the 3-year high-capex cycle and will take another 18-24
months to catch up with EXCL in network coverage and TLKM’s 35% premium to EXCL’s valuation is unsustainable quality. This presents a window of opportunity for EXCL to gain revenue share outside Java from Telkomsel. 12-month Forward EV/EBITDA
Expect rational competition in Java to continue as FY19F-21F 5.7% 8.0% 6.2% operators expand ex-Java network. ISAT’s improved 4G EBITDA CAGR network, coupled with lower-priced unlimited social media plans, is seeing some success. However, ISAT is likely to up-sell 9.0 higher-end price plans in Java going forward to avoid competitive reaction from others as it needs to be wary of its 5.9 5.5 rising losses from ex-Java region over the next three years. EXCL, on the other hand, will see narrower losses from the ex- Java region due to its early mover advantage. TLKM* EXCL ISAT
TLKM* - EV/EBITDA adjusted for Singtel's 35% stake in Telkomsel Potential merger between EXCL-Hutch faces many
hurdles. Axiata Group is unlikely to relinquish the majority
control of EXCL (~66% stake currently) as EXCL is expected to EXCL should trade near +1SD given buoyant outlook reap the rewards of its high-capex over the last 3-years. EXCL may not be keen to acquire Hutch either after its bitter EXCL - 12 Month Forward EV/ EBITDA (X) experience with Axis a few years back. On top of this, there are 8.1 regulatory challenges regarding spectrum acquisition. 7.6 +2sd: 7.5x 7.1 +1sd: 6.8x BUY EXCL – Sell Telkom Indonesia (TLKM) has generated 6.6 17% returns since we initiated the idea on 12 July 2019. 6.1 Avg: 6x EXCL is likely to trade near +1SD 12-month forward EV/EBITDA 5.6 -1sd: 5.3x of 6.8x vs. 5.9x currently, backed by continued ex-Java revenue 5.1 share gains from Telkomsel and an improving margin profile in 4.6 -2sd: 4.6x ex-Java region. TLKM’s 35% premium to EXCL at 9x forward 4.1 EV/EBITDA vs. its own 8.6x historical average is hard to justify Oct-15 Oct-16 Oct-17 Oct-18 given its slower growth prospects. We resume coverage of Source: DBS Bank ISAT with HOLD rating
ed: CK/ sa: MA , PY, CS Industry Focus Indonesia Telecom Sector
ISAT catching up on 4G network coverage years, with Rp10tr expected to be spent annually. Our channel checks with the tower operators also indicate an improvement ISAT’s network shows a marked improvement from 2018. in order flows from ISAT for ex-Java coverage, with ISAT Network data collected from the network data aggregator, accounting for ~60% of the tower lease order book of PT “nPerf” shows a marked improvement in ISAT’s 4G network Sarana Menara Nusantara, the largest tower operator in in Java from 2018, with a large part of the island now Indonesia. However, we trust the data from OpenSignal more enjoying 4G+ coverage. Data collected from another provider due to its higher credibility, which shows that EXCL is still “OpenSignal”, shows that while coverage is expanding, ISAT’s ahead of ISAT in its network coverage and quality in both Java network still remains weaker than EXCL’s. ISAT has set aside and outside Java. US$2bn (~Rp30tr) for network expansion over the next three
Network coverage of ISAT shows the biggest improvement over 2019 (2G in blue, 3G in green, 4G in orange, 4G+ in red) ISAT – Network coverage in Java (October 2018)
ISAT – Network coverage in Java (October 2019)
EXCL – Network coverage in Java (October 2019)
Source: nPerf for all three charts
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Industry Focus Indonesia Telecom Sector
At the current phase of expansion and capex, we estimate that and EXCL. However, we do point out that ISAT remains highly it may take ~18-24 months for ISAT to match the coverage levered with a net debt to 1H19 annualised EBITDA of 2.4x (vs. and quality of EXCL in ex-Java territories, along with 1.2x at EXCL and a debt covenant of 4x) and has a relatively establishment of adequate sales and marketing channels. This short average debt tenor of three years. As investments outside presents a window of opportunity for EXCL to keep gaining Java are likely to show higher losses over the next 2-3 years, market share from Telkomsel in ex-Java territories before the ISAT needs to show profits from the Java region. entry of ISAT in to cities amid the presence of both Telkomsel
OpenSignal charts shows that EXCL’s 4G network is superior to EXCL in Java and outside Java
Source: OpenSignal
ISAT maintains an aggressive stance in Java after recent network poor network quality and download speeds of ISAT’s 4G upgrades. The comparison of prepaid packages between ISAT network. However, with the recent network upgrades, ISAT’s and EXCL indicates that ISAT is maintaining an aggressive stance plans seem to be gaining good traction given its cheaper pricing in Java, promoting its packages that entitle users to unlimited and very attractive offering of unlimited data for popular social data on social media and video streaming applications. The plans media applications. launched in 2018 failed to gain traction immediately owing to
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Industry Focus Indonesia Telecom Sector
ISAT’s pricing remains aggressive vs. EXCL on the data front Indosat Unlimited data plans Price Rp25k* Rp40k Rp50k Rp75k Rp100k Validity 30 days 30 days 30 days 30 days 30 days 1GB with data 2GB with data 3GB with data 7GB with data 10GB with rollover rollover rollover rollover data rollover Unrestricted Data
A range of social media (Whatsapp, Facebook and Instagram) and streaming apps (YouTube Restricted Data and Spotify) have unlimited data quota Rp25K package is not entitled to unlimited quota on YouTube and Instagram
EXCL New XTRA Combo Plans Price Rp59k Rp89k Rp129k Rp179k
Validity 30 days Unrestricted Data 5GB 10GB 15GB 20GB
Restricted Data (YouTube) 5GB 10GB 15GB 20GB Any Operator Talk Time (Mins) 20 30 40 60 * Unlimited YouTube from 1AM to 6AM Source: Companies, DBS Bank
EXCL likely to respond to ISAT if ISAT continues to rake in EXCL’s subscriber additions in Java, which may prompt EXCL market share in 2Q-3Q19F. ISAT has recovered from the pre- to respond to ISAT’s unlimited offerings. paid SIM registration exercise, posting its first quarterly gain of subscribers since 4Q17 over 2Q19. ISAT has also managed to However, we do not expect to see a major escalation in gain ~0.7% market share since 4Q18 – the bulk of which we competition between the operators as ISAT wants to expand its believe stemmed from Telkomsel as the carrier lost ~1.9% coverage in ex-Java regions which will come with higher losses revenue market share over the same period. Aggressive over the next 2-3 years. Hence, ISAT would look for higher pricing and an improving network for ISAT pose threats to profits in the more established Java territory to fend off losses from ex-Java region.
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Industry Focus Indonesia Telecom Sector
EXCL & ISAT have gained revenue share over the last three quarters – raised by 1.4% & 1.2% respectively
Revenue market share 80% 68.1% 70.3% 69.8% 70.7% 69.9% 68.4% 68.0%
60%
40% 15.4% 15.5% 16.0% 15.4% 15.7% 16.6% 16.8% 20%
0% 16.6% 14.2% 14.2% 13.9% 14.4% 15.0% 15.1% 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
Telkomsel XL Axiata Indosat
Source: Companies, DBS Bank
Indosat’s capex to revenue ratio will remain elevated over 2019-21F while others are likely to see much lower ratio
Indonesia - Capex to Revenue
37% 34% 30% 30% 27% 27% 28% 25% 25% 24% 23% 22%
Indosat Telekomunikasi Indonesia XL Axiata
FY18 FY19F FY20F FY21F
Source: Companies, DBS Bank
Data revenue growth to remain stellar in Indonesia in 2019/20. data for their data needs, and 2) improving penetration of data Indonesia is likely to witness double-digit expansion in data subscribers, particularly from ex-Java territories. With competition revenues over 2020, driven by rapid growth in the usage of data set to remain intense, we believe there would be more room for services with stabilising data yields. With average data usage still downward revisions in pricing within the sector albeit slower hovering around 4.2GB, much below peer averages such as India than the declines witnessed in the past as operators focus on (10GB) and Thailand (11.5GB), we believe Indonesia is likely to delivering higher profits from Java as they focus on expanding see usage growth growing twofold over the next 1-2 years. This their ex-Java operations. would be backed by 1) low penetration of fixed broadband services provides little choice for subscribers but to use wireless
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Industry Focus Indonesia Telecom Sector
Indonesia is the fastest growing mobile data market in the region
Data Revenue Growth Non-Data Revenue Growth Service Revenue Growth Data as a % of Rev FY17 FY18 1H19 FY17 FY18 1H19 FY17 FY18 1H19 FY17 FY18 1H19 Singtel- SG 9.5% -0.6% -3.0% -17.9% -12.5% -11.1% -2.8% -5.2% -6.0% 62% 64% 65% StarHub N/A N/A -1.5% -8.1% -7.7% N/A
Telkomsel* 28.2% 16.4% 32.4% -2.2% -17.0% -14.8% 7.5% -4.3% 5.5% 42% 53% 62% XL Axiata 60.4% 12.9% 28.7% -35.3% -35.2% -32.2% 10.3% -1.9% 15.3% 69% 80% 87%
AIS** 23.1% 11.3% 14.4% -15.0% -11.2% -14.1% 2.9% 1.5% 3.2% 56% 62% 67% DTAC** 21.9% N/A -26.6% N/A 0.2% -2.8% -1.6% 67% N/A
Celcom N/A N/A 0.5% -0.4% -4.1% N/A Maxis N/A N/A -3.0% -3.1% -3.2% N/A DiGi.com 16.5% 19.9% 11.2% -17.7% -16.4% -21.9% -5.0% 0.2% -4.1% 46% 55% 62% Telkomsel* - Data revenue contribution includes contribution from Digital businesses ** - Pre-TFRS 15 Revenues Source: Companies, DBS Bank
Data yields continue to decline: Further declines likely in the near term albeit at a slower pace
Rp per MB19 Revenue per MB - Indonesia 20 15 14 15 15 13 10 12 9.6 9.3 8.9 8.4 10 11 7.7 11 10 8 6.0 9 6.5 6.5 6.5 6.1 6.5 5 7.1 6.5 5.1 5.6
0 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Telkomsel XL Axiata Indosat Source: Companies, DBS Bank
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Industry Focus Indonesia Telecom Sector
Data usage in Indonesia still remains well below regional averages
Data consumption in Asia - Average MBs per User
12,495 11,500 10,794
9,567 8,900 7,328 7,587 6,848 5,300 5,610 5,171 4,939 4,730 4,200 4,232 4,275 3,891 3,500 2,150 2,408 2,305 1,607 1,715 1,245
Singapore* Malaysia India* Indonesia Thailand* China** Philippines* Hong Kong*** 2Q17 2Q18 2Q19 *Singtel for Singapore, Bharti Airtel for India, AIS for Thailand, Globe Telecom for Philippines. ** - 1H data for China. *** - Data consumption per capita for Hong Kong Source: Companies, DBS Bank
Potential consolidation between Hutch and EXCL faces legal and improving ex-Java profitability should underpin a 12-month operational barriers. With the proposed merger between Axiata forward EV/EBITDA valuation of 6.8x, near +1SD of the last 4- group and Telenor called off, Axiata is unlikely to relinquish year mean vs. 5.9x currently. EXCL is also trading at a ~35% majority control of EXCL in the near term, as EXCL is in the discount to Telkom Indonesia’s (TLKM) 12-month forward harvesting phase of its extensive network investments. EXCL is EV/EBITDA adjusted for Singtel’s share in Telkomsel of 9x, despite likely to see better profitability and moderate capex in the near offering vastly superior growth (FY19F-21F EBITDA growth of 8% term with investments in ex-Java regions bearing fruit. EXCL may for EXCL vs. 5.7% for TLKM). not be keen to acquire a struggling Hutch either after its bitter experience of integration with Axis a few years back. Besides, the Boosted by mild competition in Java but high capex limits the lack of clarity around spectrum transfer regulations in the event upside potential. ISAT’s improving 4G network, coupled with its of a merger can further dent the case for a merger between the low-priced unlimited social media and streaming plans, is proving two operators. While amendments to the regulations were to be popular currently. However, the long-term sustainability of proposed in February 2019, there is no clarity if or when the the low-priced unlimited data plans is questionable due to the proposed amendments would be implemented. strain on ISAT’s network capacity. We expect competition to remain rational as ISAT will have to rely on (1) cash flows from Stock Picks Java, and (2) its ability to divest towers and raise debt to fund network expansion outside Java. ISAT is 2-3 years behind EXCL in EXCL is likely to trade above historical averages. Expect a +1SD network coverage and capacity and hence its capex is likely to EV/EBITDA valuation. EXCL has rallied over ~75% YTD, driven by remain elevated over FY18-21. Besides, most cities in ex-Java are ex-Java market share gains that bode well for its growth. We do already occupied by Telkomsel and EXCL, making it quite difficult not expect EXCL to see a slowdown in market share gains, as the for ISAT to secure market share and profitability in these regions. telco remains focused on expanding its presence in ex-Java ISAT is trading at a fair 12-month forward EV/EBITDA of 5.5x, in territories and maintains a discount of over 20% to Telkomsel’s line with its 4-year average of 5.5x. ISAT deserves to trade at a pricing. Ex-Java market share gains coupled with below average discount to EXCL’s 5.9x given that ISAT is likely to remain free exposure to legacy services (~12% of EXCL’s topline vs. 37% for cash flow negative over the near term and have a slower pace of Telkomsel), should allow EXCL to beat industry growth over growth than EXCL. FY19/20F. Revenue share gains and margin expansion from
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Industry Focus Indonesia Telecom Sector
Un-deserving premium valuation for Telkom Indonesia likely to contribution of the low-margin non-Telkomsel businesses. We contract in the near term. Telkom Indonesia is trading at a 12- believe a de-rating of the counter is likely in the near term and month forward EV/EBITDA, adjusted for Singtel’s stake in cite potential market share losses of Telkomsel over the next 2-3 Telkomsel, of 9x vs. 5.9x for EXCL despite a less buoyant growth quarters as a key catalyst. outlook. We believe a premium valuation is un-deserving given the slower growth prospects confronting TLKM over the next 2-3 years with the deceleration of Telkomsel and increasing
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Industry Focus Indonesia Telecom Sector
Company Guides
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Indonesia Company Guide Telekomunikasi Indonesia
Version 12 | Bloomberg: TLKM IJ | Reuters: TLKM.JK Refer to important disclosures at the end of this report
DBS Group Research . Equity 12 Jul 2019
No room for disappointments Undeserving premium valuation. After the recent surge in the (Downgrade from HOLD) FULLY VALUED share price, the counter is trading at a 12-month forward Last Traded Price ( 11 Jul 2019): Rp4,270 (JCI : 6,417.10) EV/EBITDA of 9.3x, adjusted for Singtel’s stake in Telkomsel, Price Target 12-mth: Rp3,610 (-15% downside) (Prev Rp3,570) versus 8.6x historical average and higher than any integrated
Analyst player in the region. Its forward PE of 19.6x is also higher than Sachin MITTAL +65 66823699 [email protected] 4-year historical average of 18.9x despite slower growth prospects stemming from Telkomsel’s market share loss over What’s New the next 2-3 quarters and increasing contribution of low-margin TLKM is expensive at an adjusted forward EV/EBITDA of non-Telkomsel businesses. There can be further downside from 9.3x and a PE of 19.6x vs. historical average of 18.9x any industry consolidation. Where we differ? Consensus is adjusting projections De-rating of the counter likely over the next 2-3 downwards, in line with our expectations. The gap between the quarters. Further downside if merger among mobile consensus’ and our expectations of FY19F EPS has now players is confirmed narrowed to 3% from 7% earlier as consensus factors market Downgrade to FULLY VALUED with new TP of Rp3,610 share losses in ex-Java regions and growing contribution of low- margin non-Telkomsel businesses. Potential catalysts: Changes in market share over the next 2-3 Price Relative quarters and industry consolidation. Signs of market share losses to EXCL could prompt investors to re-evaluate growth prospects. Confirmation of rumours surrounding consolidation within the telecom industry would also be negative for TLKM.
Valuation: Downgrade to FULLY VALUED with new TP of Rp3,610. We
downgrade the counter to FULLY VALUED from HOLD after Forecasts and Valuation the recent surge in the share price despite the dim outlook. FY Dec (Rpbn) 2018A 2019F 2020F 2021F We revise our DCF-based TP to Rp3,610 (WACC 9.1%, Revenue 130,784 142,457 154,297 167,001 terminal growth 1%) from Rp3,570 earlier as we revise down EBITDA 59,181 65,510 69,254 73,232 our cost of debt assumption to 5.5% from 6% earlier, the Pre-tax Profit 36,405 40,065 42,687 45,522 Net Profit 18,032 20,619 22,630 24,656 effect of which was partially offset by revisions to Telkomsel’s Net Pft (Pre Ex.) 18,032 20,619 22,630 24,656 FY19/20F growth forecasts. Net Pft Gth (Pre-ex) (%) (18.6) 14.3 9.8 9.0 EPS (Rp) 182 208 228 249 Key Risks to Our View: EPS Pre Ex. (Rp) 182 208 228 249 Bull-case valuation of Rp 4,880 if ex-Java share loss is minimal. EPS Gth Pre Ex (%) (19) 14 10 9 We project ~12%/15% FY19/20F cellular revenue growth for Diluted EPS (Rp) 182 208 228 249 Telkomsel if its ex-Java revenue market share loss is stifled. Net DPS (Rp) 137 156 171 187 BV Per Share (Rp) 998 1,009 1,018 1,028 PE (X) 23.5 20.5 18.7 17.2 At A Glance PE Pre Ex. (X) 23.5 20.5 18.7 17.2 Issued Capital (m shrs) 99,062 P/Cash Flow (X) 9.3 7.7 7.2 6.8 Mkt. Cap (Rpbn/US$m) 422,996 / 30,064 EV/EBITDA (X) 7.9 7.3 7.0 6.7 Major Shareholders (%) Net Div Yield (%) 3.2 3.7 4.0 4.4 Republic of Indonesia (%) 51.2 P/Book Value (X) 4.3 4.2 4.2 4.2 Bank of New York (%) 6.0 Net Debt/Equity (X) 0.2 0.2 0.2 0.2 ROAE (%) 18.8 20.7 22.5 24.3 Free Float (%) 3m Avg. Daily Val (US$m) 27.7 Earnings Rev (%): 0 (3) (5) ICB Industry : Telecommunications / Fixed Line Telecommunications Consensus EPS (Rp): 220 236 250 Other Broker Recs: B: 25 S: 0 H: 5 Bloomberg ESG disclosure score (-)^ Source of all data on this page: Company, DBS Bank, Bloomberg - Environmental / Social / Governance - / - / - Finance L.P ^ refer to back page for more information
ed: CK/ sa: MA, PY, CS Company Guide
Telekomunikasi Indonesia
WHAT’S NEW Dim outlook does not warrant a premium valuation
Telkomsel faces growing competitive pressures both within our FY19/20F growth assumptions for Telkomsel to and outside Java. Telkomsel faces rising competitive pressures 6.5%/6.2%, respectively, from 7.7%/7.6% before. outside Java, the most lucrative portion of Telkomsel’s Potential consolidation within the telecom sector is a negative business, with XL Axiata (EXCL) maintaining a pricing catalyst for Telkomsel. Factoring in existing mobile coverage, discount of ~30% to Telkomsel’s while expanding publicly announced plans for expansions and financial health, aggressively in the region, thus bridging its network deficits we believe that a merger involving EXCL and Hutch could be with Telkomsel. With EXCL’s ambition to double its market a likely scenario in the near term. Consolidation in the mobile share in ex-Java regions to 30%, EXCL is likely to remain sector is a negative catalyst for Telkomsel as consolidation aggressive over the medium term, snatching market share creates better funded and more formidable operators capable from Telkomsel. Telkomsel also faces growing competitive of effectively threatening Telkomsel’s dominance in the pressures in Java from smaller operators like Smartfren, which mobile sector. A consolidated entity like Hutch-EXCL may also operates a strong 4G and 4G+ network coupled with seek to expand their presence in the fixed broadband and aggressive pricing offers is gaining share within Java. To make enterprise segments, further pressurising TLKM’s topline matters worse, Telkomsel is also experiencing steep declines through potential market share losses in IndiHome and in legacy services, especially in ex-Java territories with the enterprise segments. TLKM’s expectations are likely to be improving availability of 4G networks and proliferation of revised down, if a consolidation within the mobile sector is cheap Chinese handsets. Factoring potential revenue share confirmed. losses both within and outside Java, we have revised down
Clear mismatch between the street’s forecasts (FY19F Net Income) and TLKM’s share price
Source: Reuters
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Company Guide
Telekomunikasi Indonesia
GSM Subscribers (m) CRITICAL DATA POINTS TO WATCH Critical Factors Slowdown in Telkomsel remains a key concern. Telkomsel, TLKM’s cellular arm, continues to be the key contributor to TLKM’s topline with ~68% contribution in FY18. Much of the double-digit growth recorded by TLKM over FY15-17A, was attributable to growth in Telkomsel, which expanded rapidly through market share wins and improving penetration of mobile services, especially in regions outside Java. However, growth in Telkomsel has eased over the past two quarters, largely owing to accelerating declines in legacy revenues, which still account for ~39% of Telkomsel’s topline and Data revenue competitive pressures outside Java as competitors like EXCL continue to expand coverage in the region, challenging the high pricing premiums commanded by Telkomsel in the region. Telkomsel recorded contracting data yields over the past two consecutive quarters, implying tightening competitive dynamics in ex-Java regions.
We expect Telkomsel to record mid-single-digit growth in revenue from ex-Java (~60-65% of Telkomsel’s topline) in FY19 as legacy revenue declines in the region accelerate and Telkomsel’s pricing premiums come under attack from other operators. We also expect EBITDA Margin % Telkomsel to lose ~2-3% revenue market share in ex-Java regions to EXCL, as EXCL continues to invest in the region and maintain ~30% discount to Telkomsel’s data pricing. Competition within Java regions (~35-40% of Telkomsel’s topline), is also intensifying with Smartfren taking a more aggressive stance. Mid-single-digit growth in ex-Java regions coupled with high single-digit growth derived from Java, should allow Telkomsel to expand by ~6.5%/6.2% over FY19/20F, in our view.
Non-Telkomsel businesses continue on a strong growth trajectory. Revenue from non-Telkomsel businesses derived from IndiHome Net Capex (Rp tr) broadband service, enterprise and wholesale segments expanded 19% y-o-y in FY18, offsetting 4% y-o-y decline of Telkomsel. TLKM’s fixed broadband brand IndiHome continues to expand and added over 418k subscribers in 1Q19, with a 1Q19 annualised revenue run rate of Rp17t, on track to expand over 30% y-o-y in FY19. TLKM has not seen a major slowdown in growth despite its 5-10% price hike on selected customers instituted in 2H18, suggesting room for further improvements in revenues from IndiHome. As the leading telecom service provider, TLKM continues to perform well in the enterprise ICT and wholesale connectivity segments too. EBITDA (Rptn) However, the declining proportion of high-margin legacy services for Telkomsel and growing contribution from non-Telkomsel businesses, which inherently carry lower margins, could weigh on TLKM’s EBITDA margins over the medium term. We expect EBITDA margins to improve slightly over FY19, supported by price increments in non- Telkomsel segments, but we project for a 140bps decline in TLKM’s EBITDA margins over FY18A-21F.
Source: Company, DBS Bank
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Company Guide
Telekomunikasi Indonesia
Appendix 1: A look at Company's listed history – what drives its share price?
Market share of Telkomsel is a critical factor for TLKM. In our critical factor analysis, conducted to identify what drives the share price of a stock, we have seen share price movements of TLKM to follow mobile revenue share changes of Telkomsel closely.
TLKM share price movement with Telkomsel revenue share changes 250 72%
70%
200 68%
66%
150 64%
62%
100 60%
58%
50 56%
54%
- 52% 1/6/2012 1/6/2013 1/6/2014 1/6/2015 1/6/2016 1/6/2017 1/6/2018
PT Telkom Reuters Indo. Telecom Index TLKM Rev. Market share
Source: Reuters, DBS Bank
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Company Guide
Telekomunikasi Indonesia
Balance Sheet: Leverage & Asset Turnover (x) Strong balance sheet to support expansion. TLKM has the strongest balance sheet among its peers with ~95% of debt carried in Indonesian Rupiah. TLKM also boasts an FY18A net debt to EBITDA of 0.4x well below industry averages. We have projected for FY19/20F capex of ~Rp36tr each year (~24% of revenue) which TLKM should be able to fund comfortably through operating cash flows.
Share Price Drivers: Market share losses over the next 2-3 quarters. Signs of market share losses to EXCL could prompt investors to re-evaluate Capital Expenditure growth prospects of Telkomsel.
Industry consolidation. The confirmation of rumours surrounding consolidation within the telecom industry could also be a negative catalyst for TLKM.
Key Risks: Bull-case valuation of TLKM at Rp4,880. Under our bull case, we assume substantial improvements in industry yields supported by collaborative price revisions, as the telcos opt for territorial dominance in ex-Java regions. This should drive up ROE (%) Telkomsel’s FY19/20F growth to 12%/15% vs. 6.5%/6.2% under our base-case scenario.
Bear-case valuation of TLKM is Rp3,150. Under our bear case, we assume steep declines in industry yields as TLKM counters its key competitors outside Java and instigates price wars within Java. This would drive down Telkomsel’s FY19/20F revenue growth to just 5% vs. 6.5%/6.2% in our base-case scenario.
Environment, Social, Governance: Forward PE Band (x) TLKM has implemented all the basic principles of good corporate governance since the telco first listed its shares. In FY18, the costs incurred for the implementation of social and environmental responsibility activities reached Rp426bn with Rp280bn given under TLKM’s ‘Partnership Programme’ to ~7,500 development partners in various sectors and Rp106bn spent on environmental development initiatives.
Company Background TLKM Indonesia is the largest telecommunications and network provider in Indonesia. The company offers a wide range of PB Band (x) network and telecommunications services, including fixed line connection services, cellular services, network and interconnection services, as well as Internet and data communications services. TLKM also operates multimedia businesses such as content and applications, completing its business portfolio that spans Telecommunications, Information, Media, Edutainment and Services (TIMES).
Environment, Social, Governance Source: Company, DBS Bank
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Company Guide
Telekomunikasi Indonesia
Key Assumptions FY Dec 2017A 2018A 2019F 2020F 2021F
GSM Subscribers (m) 182 189 197 205 213 Data revenue 68.5 77.2 91.6 105 118 EBITDA Margin % 50.4 45.3 46.0 44.9 43.9 Net Capex (Rp tr) 33.3 34.8 35.6 36.2 36.6 EBITDA (Rptn) 64.6 59.2 65.5 69.3 73.2
Segmental Breakdown FY Dec 2017A 2018A 2019F 2020F 2021F
Revenues (Rpbn) Fixed Line 6,665 5,888 5,005 4,404 3,876 Wireless Voice 37,246 30,431 26,779 24,369 23,151 Interconnection 5,175 5,463 5,791 6,138 6,384 Data/Internet & SMS 68,535 77,153 91,646 104,863 117,968 Others 10,635 11,849 13,236 14,522 15,623 Total 128,256 130,784 142,457 154,297 167,001 Margins (%) Fixed Line 0.0 0.0 0.0 0.0 0.0 Wireless Voice 0.0 0.0 0.0 0.0 0.0 Interconnection 0.0 0.0 0.0 0.0 0.0 Data/Internet & SMS 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 Total 0.0 0.0 0.0 0.0 0.0
Income Statement (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Revenue 128,256 130,784 142,457 154,297 167,001 Cost of Goods Sold (63,647) (71,603) (76,947) (85,043) (93,769) Gross Profit 64,609 59,181 65,510 69,254 73,232 Other Opng (Exp)/Inc (20,446) (21,406) (22,463) (23,827) (25,009) Operating Profit 44,163 37,775 43,047 45,427 48,223 Other Non Opg (Exp)/Inc (230) 1,070 0.0 0.0 0.0 Associates & JV Inc 61.0 53.0 55.7 58.4 61.4 Net Interest (Exp)/Inc (1,335) (2,493) (3,038) (2,799) (2,762) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 42,659 36,405 40,065 42,687 45,522 Tax (9,958) (9,426) (9,816) (10,245) (10,925) Minority Interest (10,556) (8,947) (9,630) (9,812) (9,941) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 22,145 18,032 20,619 22,630 24,656 Net Profit before Except. 22,145 18,032 20,619 22,630 24,656 EBITDA margins could EBITDA 64,609 59,181 65,510 69,254 73,232 witness a contraction with Growth the growing proportion of Revenue Gth (%) 10.2 2.0 8.9 8.3 8.2 non-Telkomsel businesses
EBITDA Gth (%) 8.6 (8.4) 10.7 5.7 5.7 Opg Profit Gth (%) 7.8 (14.5) 14.0 5.5 6.2 Net Profit Gth (Pre-ex) (%) 14.4 (18.6) 14.3 9.8 9.0 Margins & Ratio Gross Margins (%) 50.4 45.3 46.0 44.9 43.9 Opg Profit Margin (%) 34.4 28.9 30.2 29.4 28.9 Net Profit Margin (%) 17.3 13.8 14.5 14.7 14.8 ROAE (%) 25.0 18.8 20.7 22.5 24.3 ROA (%) 11.7 8.9 9.7 9.9 10.2 ROCE (%) 22.1 16.9 18.5 18.5 18.7 Div Payout Ratio (%) 75.0 75.0 75.0 75.0 75.0 Net Interest Cover (x) 33.1 15.2 14.2 16.2 17.5 Source: Company, DBS Bank
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Company Guide
Telekomunikasi Indonesia
Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2018 2Q2018 3Q2018 4Q2018 1Q2019
Revenue 32,343 32,025 34,835 31,581 34,840 Cost of Goods Sold (16,227) (19,798) (18,266) (17,312) (17,310) Gross Profit 16,116 12,227 16,569 14,269 17,530 Other Oper. (Exp)/Inc (5,373) (4,958) (5,542) (5,533) (5,642) Operating Profit 10,743 7,269 11,027 8,736 11,888 Other Non Opg (Exp)/Inc 135 (47.0) 315 667 141 Associates & JV Inc 14.0 15.0 16.0 8.00 20.0 Net Interest (Exp)/Inc (360) (580) (875) (678) (720) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 10,532 6,657 10,483 8,733 11,329 Tax (2,554) (1,828) (2,603) (2,441) (2,825) Minority Interest (2,244) (1,865) (2,346) (2,492) (2,280) Net Profit 5,734 2,964 5,534 3,800 6,224 Net profit bef Except. 5,734 2,964 5,534 3,800 6,224 EBITDA 16,116 12,227 16,569 14,269 17,530
Growth Revenue Gth (%) 3.5 (1.0) 8.8 (9.3) 10.3 EBITDA Gth (%) 10.7 (24.1) 35.5 (13.9) 22.9 Opg Profit Gth (%) 22.1 (32.3) 51.7 (20.8) 36.1 Net Profit Gth (Pre-ex) (%) 35.8 (48.3) 86.7 (31.3) 63.8 Margins Gross Margins (%) 49.8 38.2 47.6 45.2 50.3 Opg Profit Margins (%) 33.2 22.7 31.7 27.7 34.1 Net Profit Margins (%) 17.7 9.3 15.9 12.0 17.9
Balance Sheet (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 130,171 143,248 156,400 168,771 180,368 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 20,752 19,680 19,736 19,794 19,855 Cash & ST Invts 27,318 18,743 18,881 19,100 20,545 Inventory 631 717 771 852 939 Debtors 9,222 11,414 12,433 13,466 14,575 Other Current Assets 10,390 12,394 12,664 13,041 13,446 Total Assets 198,484 206,196 220,883 235,023 249,729
ST Debt 7,498 10,339 10,784 10,784 10,784 Creditor 15,574 14,766 15,868 17,538 19,337 Other Current Liab 22,304 21,156 24,020 26,233 28,671 LT Debt 27,974 33,748 33,303 32,858 32,413 Other LT Liabilities 13,004 8,884 8,884 8,884 8,884 Shareholder’s Equity 92,713 98,910 100,001 100,891 101,865 Minority Interests 19,417 18,393 28,023 37,835 47,776 Total Cap. & Liab. 198,484 206,196 220,883 235,023 249,729
Non-Cash Wkg. Capital (17,635) (11,397) (14,020) (16,413) (19,048) Net Cash/(Debt) (8,154) (25,344) (25,206) (24,542) (22,652) Debtors Turn (avg days) 23.6 28.8 30.5 30.6 30.6 Creditors Turn (avg days) 122.9 110.3 102.6 99.6 97.9 Inventory Turn (avg days) 5.1 4.9 5.0 4.8 4.8 Asset Turnover (x) 0.7 0.6 0.7 0.7 0.7 Ample headroom to raise Current Ratio (x) 1.0 0.9 0.9 0.9 0.8 debt for expansions Quick Ratio (x) 0.8 0.7 0.6 0.6 0.6 Net Debt/Equity (X) 0.1 0.2 0.2 0.2 0.2 Net Debt/Equity ex MI (X) 0.1 0.3 0.3 0.2 0.2 Capex to Debt (%) 93.9 79.0 80.8 82.9 84.7 Z-Score (X) 4.3 4.2 4.2 4.2 NA
Source: Company, DBS Bank
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Company Guide
Telekomunikasi Indonesia
Cash Flow Statement (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 42,659 36,405 40,065 42,687 45,522 Dep. & Amort. 20,446 21,406 22,463 23,827 25,009 Tax Paid (13,788) (13,809) (8,542) (10,138) (10,755) Assoc. & JV Inc/(loss) (61.0) (53.0) (55.7) (58.4) (61.4) Chg in Wkg.Cap. 2,192 (3,811) 1,349 2,285 2,465 Other Operating CF (2,043) 5,533 0.0 0.0 0.0 Net Operating CF 49,405 45,671 55,280 58,602 62,180 Capital Exp.(net) (33,292) (34,834) (35,614) (36,198) (36,607) Other Invts.(net) (1,003) 545 0.0 0.0 0.0 Operating cash Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 flows adequate to Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 fund expansions Other Investing CF 1,288 (801) 0.0 0.0 0.0 Net Investing CF (33,007) (35,090) (35,614) (36,198) (36,607) Div Paid (9,289) (27,113) (19,528) (21,740) (23,683) Chg in Gross Debt 542 18,755 0.0 (445) (445) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (12,305) (10,100) 0.0 0.0 0.0 Net Financing CF (21,052) (18,458) (19,528) (22,185) (24,128) Currency Adjustments 32.0 171 0.0 0.0 0.0 Chg in Cash (4,622) (7,706) 138 219 1,446 Opg CFPS (Rp) 477 500 544 569 603 Free CFPS (Rp) 163 109 199 226 258 Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Sachin MITTAL
Page 17
Indonesia Company Guide Indosat
Version 9 |Bloomberg: ISAT IJ| Reuters: ISAT.JK Refer to important disclosures at the end of this report
DBS Group Research . Equity 7 Oct 2019
Playing catch-up with market leaders HOLD Boosted by mild competition in Java but high capex limits the Last Traded Price( 4 Oct 2019): Rp2,810(JCI : 6,061.30) Price Target 12-mth:Rp2,640 (-6% downside) (Prev Rp2,050) upside potential. Indosat’s (ISAT) improving 4G network, coupled with the its low-priced unlimited social media and Analyst streaming plans is proving popular currently. However, Sachin MITTAL+65 [email protected] sustainability of these plans is questionable due to the strain on
ISAT’s network capacity. ISAT is 2-3 years behind XL Axiata
What’s New (EXCL) in network coverage and capacity and hence its capex is likely to remain elevated over FY18-21. Meanwhile, ISAT is • 18-24 months to catch up with EXCL’s network trading at a 12-month forward EV/EBITDA of 5.5x versus EXCL’s coverage and quality 5.9x given ISAT’s expectations of negative free cash flow • Likely to benefit from mild competition in Java (EBITDA-Capex) over the 2-years.
• Maintain HOLD with higher TP of Rp2,640 Where we differ: Excluding accounting related changes, we expect consensus to cut ISAT’s FY19F/20F earnings before interest, taxes, depreciation and amortisation (EBITDA) by Price Relative 2.7/13% because; (a) ex-Java network expansion will come with Rp Relative Index higher EBITDA losses over the next 2-years; (b) ISAT’s unlimited 7,480.5 206 186 6,480.5 166 data packages which are quite popular currently, could be de- 5,480.5 146 126 4,480.5 106 emphasized going forward. 3,480.5 86 66 2,480.5 46 1,480.5 26 Potential catalyst: Changes in market share over the next 2-3 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 quarters. Further gains in market share could prompt investors Indosat (LHS) Relative JCI (RHS) to re-evaluate growth prospects of ISAT Forecasts and Valuation Valuation: FY Dec (Rpbn) 2018A 2019F 2020F 2021F Maintain HOLD with revised TP of Rp2,640. We raised Revenue 23,140 24,793 26,617 28,009 discounted cash flow (DCF)-based target price (TP) from Rp EBITDA 6,626 7,988 8,406 9,017 2,050 to Rp2,640 in light of ISAT’s success in attracting Pre-tax Profit (2,664) (2,591) (2,739) (2,775) Net Profit (2,404) (2,379) (2,303) (2,367) subscribers and mild competition in Java. Net Pft (Pre Ex.) (3,329) (2,379) (2,303) (2,367) Net Pft Gth (Pre-ex) (%) nm 28.5 3.2 (2.8) Key Risks to Our View: EPS (Rp) (442) (438) (424) (436) Bear-case valuation of Rp 2,150. ISAT is likely to be the most EPS Pre Ex. (Rp) (613) (438) (424) (436) affected if competitive dynamics take a turn for the worse. If EPS Gth Pre Ex (%) nm 29 3 (3) EXCL responds to ISAT’s ‘Unlimited’ data packages in 4Q19F, Diluted EPS (Rp) (442) (438) (424) (436) Net DPS (Rp) 0.0 0.0 0.0 0.0 ISAT may see ~1% growth in cellular service revenue in FY20F BV Per Share (Rp) 2,056 1,619 1,195 759 vs. ~7.2% growth under our base-case scenario PE (X) nm nm nm nm PE Pre Ex. (X) nm nm nm nm At A Glance P/Cash Flow (X) 3.7 2.6 2.4 2.4 Issued Capital (m shrs) 5,434 EV/EBITDA (X) 6.1 5.5 5.6 5.5 Mkt. Cap (Rpbn/US$m) 15,269 / 1,080 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.4 1.7 2.4 3.7 Major Shareholders (%) Net Debt/Equity (X) 2.0 2.7 3.7 5.1 Ooredoo Asia Pte Ltd (%) 65.0 ROAE (%) (19.1) (23.8) (30.1) (44.6) Republic of Indonesia (%) 14.3 Earnings Rev (%): (5) (2) (2) Free Float (%) 20.7 Consensus EPS (Rp): (349) (282) (206) 3m Avg. Daily Val (US$m) 2.2 Other Broker Recs: B: 11 S: 7 H: 9 GIC Industry :Communication Services / Telecommunication Services Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Bloomberg ESG disclosure score (2017)^ 32.5 - Environmental / Social / Governance 15.4 / 43.8 / 57.1
^ refer to back page for more information
ed: KK/ sa: MA, PY, CS Company Guide
Indosat
WHAT’S NEW Tough playing catch-up with EXCL
Ramping up ex-Java 4G coverage. ISAT has set aside US$2bn ISAT was hit hard by the government’s SIM registration push (~Rp30tr) for network expansion over the next three years. in 2H18, with its mobile connections dropping from ~110m US$700m (~Rp10tr) will be utilised in FY19F to expand ISAT’s in 4Q17 to 57m in 2Q19. Even with this extensive expansion nationwide 4G network coverage from 81% to 90% of the plan, we do not expect any material improvement in revenue population by the end of 2019. ISAT has already completed flow from ex-Java regions until the end of 2019. It will take the overlay of its existing 3G base stations with 4G time to ramp up coverage, launch marketing campaigns and equipment. It will be adding ~18,000 base transceiver establish distribution channels. Moreover, the tier 2 and 3 stations (BTS) primarily in ex-Java areas. To boost its 4G cities targeted by ISAT are competitive markets, with offering and close the gap on its competitors following years significant presence by EXCL and Telkomsel. of inadequate investment, ISAT are in talks with tower
companies (towercos) for the purchase of ~3,000 telco towers for ~US$300-400m at an average value of ~US$100- 200k per tower.
ISAT playing catch-up after years of inadequate investment
4G BTS Additions
9,000
8,000 7,000 6,000 5,000
4,000 3,000
2,000
1,000 - 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 TLKM Indosat EXCL
Source: Companies
Network charts from nPerf shows significant improvement in expenditure (capex) cycle and will take at least another 18-14 ISAT’s 4G network in Java over the last 12-months. Charts months to catch up with EXCL’s network coverage and from OpenSignal show that ISAT’s Java network is still inferior quality. This presents a window of opportunity for EXCL to to EXCL’s. ISAT is in the first year of a 3-year high-capital gain revenue share ex- Java from a monopolistic Telkomsel.
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Company Guide
Indosat
Network charts from nPerf shows significant improvement in ISAT’s 4G network in Java (2G in Blue, 3G in Green, 4G in Orange, 4G+ in Red)
ISAT
EXCL
Source: nPerf
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Company Guide
Indosat
OpenSignal charts shows that ISAT’s 4G network in Java is still inferior to EXCL’s.
Source: OpenSignal
ISAT much more aggressive than EXCL on data. ISAT posted bulk of these gains were likely at the expense of Telkomsel its first quarterly gain of subscribers since 4Q17 in 2Q19 and which lost ~1.9% revenue market share over the same also managed to gain ~0.7% market share since 4Q18. The period. ISAT has gained market share over the past 3 quarters
Revenue market share
80% 68.1% 70.3% 69.8% 70.7% 69.9% 68.4% 68.0%
60%
40% 15.4% 15.5% 16.0% 15.4% 15.7% 16.6% 16.8% 20% 16.6% 0% 14.2% 14.2% 13.9% 14.4% 15.0% 15.1% 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
Telkomsel XL Axiata Indosat
Source: Companies
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Company Guide
Indosat
ISAT’s unlimited social media and streaming data packages data packages currently offered are likely to stretch ISAT’s are much more aggressively priced compared to similar network capacity. In our view, it is likely that ISAT will offerings from EXCL. However, ISAT has only just recovered monetise its network investments by promoting its premium from the pre-paid SIM registration exercise and is highly data package ‘Freedom’ in the long term rather than the unlikely to initiate a price war. Furthermore, the unlimited lower-priced ‘Unlimited’ data packages.
ISAT maintains aggressive pricing vs. EXCL on data plans
ISAT Unlimited data plans Price Rp25k* Rp40k Rp50k Rp75k Rp100k Validity 30 days 30 days 30 days 30 days 30 days 1 GB with data 2 GB with data 3 GB with data 7 GB with data 10 GB with rollover rollover rollover rollover data rollover Unrestricted Data
A range of social media (Whatsapp, Facebook and Instagram) and streaming apps (YouTube Restricted Data and Spotify) have unlimited data quota Rp25K package is not entitled to unlimited quota on YouTube and Instagram
EXCL New XTRA Combo Plans Price Rp59k Rp89k Rp129k Rp179k
Validity 30 days Unrestricted Data 5GB 10GB 15GB 20GB
Restricted Data (YouTube) 5GB 10GB 15GB 20GB Any Operator Talk Time (Mins) 20 30 40 60
Source: Companies, DBS Bank * Unlimited YouTube from 1AM to 6AM
FY20F revenue revised upwards. In light of ISAT’s aggressive network expansion plans and mild competition in Java, we revise our FY20F mobile revenue projections upwards for ISAT
from 6.0% to 7.6%. Despite ISAT’s plans to expand its network footprint ex-Java in FY19 with as much as Rp 10tn investment, any material improvement in revenue flow from these regions is likely only at the end of 2019. It will take time to ramp up coverage, launch marketing campaigns and establish distribution channels. Competition within Java
remains healthy, further supporting growth for ISAT which generates ~90% of its top line from Java. Our FY20F EBITDA is largely in line with our previous forecast.
Page 5 22
Company Guide
Indosat
Subscribers (m) 110 CRITICAL DATA POINTS TO WATCH 111.3
95.4 82.9 85.8 Critical Factors 77.9 79.5 ISAT’s revenue market share likely to stabilise over FY20F. 63.6 58 Between 1Q17-3Q18, ISAT lost ~4% revenue market share 47.7 owing to accelerating legacy declines and lack of exposure to opportunities in the flourishing ex-Java market. Over the past 31.8 three quarters, ISAT managed to buck the trend and gain 15.9 0.0 ~1.2% market share. The bulk of these gains were likely at the 2017A 2018A 2019F 2020F 2021F expense of Telkomsel which lost ~1.9% revenue market share over the same period. Blended ARPU (Rp k)
24.1 23.6 21.5 21.6 Despite ISAT’s plans to expand its network footprint ex-Java in 20.3 18.7 FY19 with as much as Rp 10tn investment, any material 19.3 improvement in revenue flow from these regions is likely only at 14.5 the end of 2019. It will take time to ramp up coverage, launch marketing campaigns and establish distribution channels. The 9.6 tier 2 and 3 cities targeted by ISAT are competitive markets, 4.8 with significant presence by EXCL and Telkomsel. We revise our 0.0 FY20F mobile revenue projections upwards for ISAT from 6.0% 2017A 2018A 2019F 2020F 2021F to 7.6% due to expectation of mild competition in Java. EBITDA Margin % ISAT gains revenue market share for the third consecutive 43.37 42.5 quarter 34.69 32.2 31.6 32.2 28.6 Revenue market share 26.02 80% 17.35 68.1% 70.3% 69.8% 70.7% 69.9% 68.4% 68.0% 8.67
60% 0.00 2017A 2018A 2019F 2020F 2021F 40% Capex (Rp tn) 9.17 9.3 9.05 8.4 15.4% 15.5% 16.0% 15.4% 15.7% 16.6% 16.8% 20% 7.4 5.83 5.46 16.6% 14.2% 14.2% 13.9% 14.4% 15.0% 15.1% 5.6 0% 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3.7
1.9
Telkomsel XL Axiata Indosat 0.0 2017A 2018A 2019F 2020F 2021F
Source: DBS Bank EBITDA (Rpbn)
12724 12851.1
10280.9 9017 8406 7988 7710.7 6626
5140.4
2570.2
0.0 2017A 2018A 2019F 2020F 2021F
Source: Company, DBS Bank
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Company Guide
Indosat
Appendix 1: A look at Company's listed history – what drives its share price?
Revenue share is a critical factor in share price movements for Indonesian telcos. In our critical factor analysis, these telcos’ share prices have moved in tandem with mobile revenue share. For example, when ISAT lost significant market share in FY13 the counter underperformed its peers significantly.
ISAT’s share price movement and revenue share
200 25%
180
160 20%
140
120 15%
100
80 10%
60
40 5%
20
0 0%
2012 2013 2014 2015 2016 2017 2018
Indosat Reuters Indo. Telecom Index ISAT Rev. Market share
Source: Reuters, DBS Bank
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Company Guide
Indosat
Balance Sheet: Issues bonds to expand network coverage. ISAT plans to issue bonds totalling up to Rp 10t (USD706.5m) in three phases over Leverage & Asset Turnover (x) 0.6 the next two years to fund its network coverage plans. The telco 5.00 0.6 issued Rp 2t worth bonds in January 2019 in the first phase. It 0.6 would need to raise an estimated ~Rp3t in debt over the next 4.00 0.5 0.5 two years to fund its aggressive network expansion plans. 3.00 0.5 0.5 2.00 Share Price Drivers: 0.5 Counter likely to be range-bound. We believe that ISAT’s share 1.00 0.4 0.4 price is likely to remain range-bound until clear signs of 0.00 0.4 sustainable improvements in revenue market share emerge. 2017A 2018A 2019F 2020F 2021F Gross Debt to Equity (LHS) Asset Turnover (RHS) Currently, ISAT’s unlimited social media and streaming data packages are much more aggressively priced compared to Capital Expenditure Rp bn similar offerings from EXCL, leading to market share gains. 10,000.0 However, the long term sustainability of these unlimited data 9,000.0 8,000.0 packages is questionable given the strain on ISAT’s network 7,000.0 capacity. 6,000.0 5,000.0 4,000.0 Key Risks: 3,000.0 2,000.0 Bull-case valuation of Rp 2,940. ISAT would benefit if 1,000.0 operators such as Telkomsel achieve substantial improvements 0.0 2017A 2018A 2019F 2020F 2021F in data yields, pushing industry growth above our base-case of Capital Expenditure (-) ~6% growth in industry top line. Faster growth in data yields would increase ISAT’s FY20F cellular revenue growth to 8.9% ROE (%) vs. our base-case of 7.2% growth. 8.0% 7.0% Bear-case valuation of Rp 2,150. ISAT is likely to be the most 6.0% affected if competitive dynamics take a turn for the worse. If 5.0% EXCL responds to ISAT’s ‘Unlimited’ data packages in 4Q19F 4.0% and intense competition ensues, we foresee ISAT recording 3.0% 2.0% ~1.0% growth in cellular service revenue in FY20F vs. ~7.2% 1.0% growth under our base-case 0.0% 2017A 2018A 2019F 2020F 2021F
Environmental, Social, Governance: Since 2006, ISAT’s corporate social responsibility (CSR) Forward PE Band (x) (x) +2sd: programmes have benefited over 1.6m people. In 2018, ~700k 175.1 +1sd:1365.9x-1sd: 673x - Avg:- 2sd:-19.9x - Oct-15 Oct-16 Oct-17 Oct-18 712.8x individuals benefited from the three pillars of ISAT’s CSR 1405.7x programme - women empowerment, education & innovation -4824.9 and health. -9824.9 Company Background ISAT is a telecommunications and information service provider -14824.9 in Indonesia that provides cellular services (both prepaid and -19824.9 postpaid), fixed data services or MIDI (Multimedia, Internet &
Data Communication) and fixed voice, including fixed wireless PB Band (x) access services. (x)
3.2 +2sd: 3.26x
2.7 +1sd: 2.67x
2.2 Avg: 2.07x
1.7 -1sd: 1.48x 1.2 -2sd: 0.88x 0.7 Oct-15 Oct-16 Oct-17 Oct-18
Source: Company, DBS Bank
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Company Guide
Indosat
Key Assumptions FY Dec 2017A 2018A 2019F 2020F 2021F
Subscribers (m) 110 58.0 77.9 82.9 85.8 Blended ARPU (Rp k) 20.3 18.7 23.6 21.5 21.6 EBITDA Margin % 42.5 28.6 32.2 31.6 32.2 Capex (Rp tn) 5.80 5.50 9.20 9.00 8.40 EBITDA (Rpbn) 12,724 6,626 7,988 8,406 9,017
Segmental Breakdown FY Dec 2017A 2018A 2019F 2020F 2021F
Revenues (Rpbn) FWA & IDD 913 729 700 672 659 Improved 4G network Cellular 24,496 18,027 19,271 20,738 21,831 and lower-priced MIDI 4,518 4,383 4,822 5,207 5,520 unlimited social media plans to drive revenue
growth. Others 0.0 0.0 0.0 0.0 0.0 Total 29,926 23,140 24,793 26,617 28,009
Income Statement (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Revenue 29,926 23,140 24,793 26,617 28,009 Cost of Goods Sold (25,914) (24,621) (25,150) (26,743) (27,906) Gross Profit 4,012 (1,482) (357) (126) 104 Other Opng (Exp)/Inc 0.0 0.0 1.00 1.00 1.00 Operating Profit 4,012 (1,482) (357) (126) 104 Other Non Opg (Exp)/Inc (15.1) (136) 15.0 15.6 16.2 Associates & JV Inc 0.0 118 123 128 133 Net Interest (Exp)/Inc (2,057) (2,089) (2,372) (2,756) (3,027) Exceptional Gain/(Loss) 0.0 925 0.0 0.0 0.0 Pre-tax Profit 1,940 (2,664) (2,591) (2,739) (2,775) Tax (639) 579 563 822 832 Minority Interest (166) (319) (351) (386) (424) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,136 (2,404) (2,379) (2,303) (2,367) Net Profit before Except. 1,136 (3,329) (2,379) (2,303) (2,367) EBITDA 12,724 6,626 7,988 8,406 9,017 Growth Revenue Gth (%) 2.5 (22.7) 7.1 7.4 5.2 Revenue growth driven by EBITDA Gth (%) (0.4) (47.9) 20.6 5.2 7.3 aggressive network expansion Opg Profit Gth (%) 1.7 (136.9) (75.9) (64.7) (182.1) plans and mild competition in Net Profit Gth (Pre-ex) (%) 2.8 nm 28.5 3.2 (2.8) Java. Margins & Ratio Gross Margins (%) 13.4 (6.4) (1.4) (0.5) 0.4 Opg Profit Margin (%) 13.4 (6.4) (1.4) (0.5) 0.4 Net Profit Margin (%) 3.8 (10.4) (9.6) (8.7) (8.4) ROAE (%) 8.3 (19.1) (23.8) (30.1) (44.6) ROA (%) 2.2 (4.6) (4.4) (4.1) (4.2) ROCE (%) 6.8 (3.8) (0.9) (0.3) 0.2 Div Payout Ratio (%) 0.0 N/A N/A N/A N/A Net Interest Cover (x) 2.0 (0.7) (0.2) 0.0 0.0 Source: Company, DBS Bank Quarterly / Interim Income Statement (Rpbn) FY Dec 2Q2018 3Q2018 4Q2018 1Q2019 2Q2019
Revenue 5,373 5,704 6,370 6,046 6,245 Cost of Goods Sold (4,766) (6,054) (8,061) (6,136) (5,941) Gross Profit 607 (350) (1,691) (89.3) 304 Other Oper. (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 607 (350) (1,691) (89.3) 304 Other Non Opg (Exp)/Inc (67.1) (62.1) 1,080 333 249 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (524) (508) (563) (632) (643) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
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Company Guide
Indosat
Pre-tax Profit 15.7 (919) (1,173) (388) (89.7) Tax 14.1 102 341 108 48.9 Minority Interest (218) (28.2) 605 (12.0) 1.40 Net Profit (188) (845) (227) (293) (39.4) Net profit bef Except. (188) (845) (227) (293) (39.4) EBITDA 1,560 1,642 1,355 2,157 2,276
Growth Revenue Gth (%) (5.6) 6.2 11.7 (5.1) 3.3 EBITDA Gth (%) (19.7) 5.2 (17.5) 59.1 5.5 Opg Profit Gth (%) (919.3) (157.6) 383.6 (94.7) (440.6) Net Profit Gth (Pre-ex) (%) (62.8) 349.6 (73.1) 28.7 (86.5) Margins Gross Margins (%) 11.3 (6.1) (26.5) (1.5) 4.9 Opg Profit Margins (%) 11.3 (6.1) (26.5) (1.5) 4.9 Net Profit Margins (%) (3.5) (14.8) (3.6) (4.8) (0.6)
Balance Sheet (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 35,892 36,899 37,587 37,963 37,311 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 5,290 8,334 8,315 8,302 8,294 Cash & ST Invts 1,675 1,045 1,790 2,984 2,937 Inventory 87.8 47.9 47.9 51.9 54.1 Debtors 3,846 2,926 3,135 3,499 3,822 Other Current Assets 3,871 3,888 3,940 4,191 4,330 Total Assets 50,661 53,140 54,814 56,990 56,748
ST Debt 5,178 7,060 6,510 6,510 6,510 Creditor 872 803 817 886 924 Other Current Liab 10,151 13,178 12,917 12,942 12,604 LT Debt 17,458 17,886 22,386 26,386 28,386 Other LT Liabilities 2,187 2,077 2,077 2,077 2,077 Shareholder’s Equity 13,997 11,174 8,795 6,492 4,125 Minority Interests 819 962 1,313 1,699 2,123 Total Cap. & Liab. 50,661 53,140 54,814 56,990 56,748
Non-Cash Wkg. Capital (3,218) (7,119) (6,612) (6,086) (5,322) Net Cash/(Debt) (20,961) (23,901) (27,106) (29,912) (31,958) Debtors Turn (avg days) 40.0 53.4 44.6 45.5 47.7 Creditors Turn (avg days) 18.2 18.5 17.6 17.1 17.4 Inventory Turn (avg days) 1.8 1.5 1.0 1.0 1.0 Asset Turnover (x) 0.6 0.4 0.5 0.5 0.5 Raising debt to fund Current Ratio (x) 0.6 0.4 0.4 0.5 0.6 aggressive network Quick Ratio (x) 0.3 0.2 0.2 0.3 0.3 expansion plans over Net Debt/Equity (X) 1.4 2.0 2.7 3.7 5.1 the next two years. Net Debt/Equity ex MI (X) 1.5 2.1 3.1 4.6 7.7 Capex to Debt (%) 25.8 21.9 31.7 27.5 24.1 Z-Score (X) 0.5 0.5 0.5 0.5 NA Source: Company, DBS Bank Cash Flow Statement (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 1,940 (2,664) (2,591) (2,739) (2,775) Dep. & Amort. 8,994 8,390 8,627 8,814 9,196 Tax Paid (936) (678) 157 692 827 Assoc. & JV Inc/(loss) 0.0 (118) (123) (128) (133) Chg in Wkg.Cap. (738) 3,914 (102) (396) (759) Other Operating CF (299) (4,684) 0.0 0.0 0.0 Net Operating CF 8,961 4,162 5,968 6,244 6,357 Capital Exp.(net) (5,831) (5,458) (9,173) (9,050) (8,403) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
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Other Investing CF (941) 6.40 0.0 0.0 0.0 Net Investing CF (6,773) (5,452) (9,173) (9,050) (8,403) Div Paid 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt (1,601) 1,101 3,950 4,000 2,000 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (511) (441) 0.0 0.0 0.0 Net Financing CF (2,112) 660 3,950 4,000 2,000 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 75.9 (630) 745 1,194 (46.3) Opg CFPS (Rp) 1,785 45.6 1,117 1,222 1,309 Free CFPS (Rp) 576 (239) (590) (516) (377) Source: Company, DBS Bank
Target Price & Ratings History
Rp 12-mth Date of Closing S.No. T arget Rating Report Price 3562 Price 1: 19 Nov 18 2160 2000 HOLD 2: 13 May 19 1965 2050 HOLD 3062 3: 28 May 19 1975 2050 HOLD 4 4: 12 Jul 19 2700 2050 HOLD
2562
2062 2 1 3 1562 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19
Note : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank Analyst: Sachin MITTAL
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Indonesia Company Guide XL Axiata
Version 11 | Bloomberg: EXCL IJ | Reuters: EXCL.JK Refer to important disclosures at the end of this report
DBS Group Research . Equity 6 Sep 2019
Rally to continue as 35% discount is unsustainable BUY XL Axiata’s (EXCL) rally to continue as 35% discount to Telkom Last Traded Price ( 5 Sep 2019): Rp3,520 (JCI : 6,306.80) Price Target 12-mth: Rp4,180 (19% upside) (Prev Rp3,850) Indonesia is too high to sustain. The stock has rallied 75% YTD, driven by revenue share gains and margin improvement from Analyst narrowing of losses in the ex-Java region. This coupled with Sachin MITTAL +65 66823699 [email protected] high exposure to data revenue (~87% of EXCL’s topline vs.
63% for Telkomsel), should underpin a 12-month forward
What’s New EV/EBITDA valuation of 6.8x, +1SD of its last 4-year average of 6.0x. EXCL is still trading at a 35% discount to Telkom • EXCL’s rally is likely to continue as EXCL’s valuation Indonesia’s (TLKM’s) forward EV/EBITDA of 9.3x (adjusted for discount is still 35% to Telkom Indonesia, which is Singtel’s stake in Telkomsel), despite offering FY19F-21F EBITDA unsustainable in our view CAGR of 8% vs. 5.7% for TLKM). • Competitive environment has improved as operators shift their focus from Java to ex-Java market share gains Where we differ? We are in line with consensus expectations now as Huawei contract is renewed already. We were • Maintain BUY with higher TP of RP 4,180 previously expecting a fall in EXCL’s EBITDA margin over FY19F,
led by higher costs attached to the renegotiated managed services contract with Huawei. With improving profitability in Price Relative
Rp Relative Index ex-Java regions and rational competitive environment in Java,
203 4,075.0 EXCL’s margins could rise improve further. 183 3,575.0 163 143 3,075.0 123 2,575.0 103 Potential catalyst: Changes in market share over the next 2-3 83 2,075.0 63 quarters. Further gains in market share from Telkomsel could 1,575.0 43 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 prompt investors to re-evaluate growth prospects of EXCL. XL Axiata (LHS) Relative JCI (RHS)
Valuation: Forecasts and Valuation BUY with higher TP of Rp4,180. We lift our DCF-based TP to FY Dec (Rpbn) 2018A 2019F 2020F 2021F Rp4,180 from Rp3,850 before, as we trim our WACC to 9.2% Revenue 22,939 25,010 26,855 28,355 EBITDA 8,512 9,473 10,303 11,052 from 9.3% (terminal growth of 1%) with updates to our beta Pre-tax Profit (4,396) 786 1,261 1,662 assumption to factor in lesser volatility attached with EXCL and Net Profit (3,297) 590 946 1,247 as we roll forward our valuation to blended FY19/20F. Net Pft (Pre Ex.) 893 590 946 1,247 Net Pft Gth (Pre-ex) (%) 138.0 (34.0) 60.4 31.8 EPS (Rp) (308) 55.2 88.5 117 Key Risks to Our View: EPS Pre Ex. (Rp) 83.6 55.2 88.5 117 Bear-case valuation of Rp3,200 if other operators disrupt EPS Gth Pre Ex (%) 138 (34) 60 32 status quo. Under this scenario, we assume only 6/5% growth Diluted EPS (Rp) (308) 55.2 88.5 117 Net DPS (Rp) 0.0 33.1 53.1 70.0 in FY19/20F cellular revenues vs. +11/8% under our base-case. BV Per Share (Rp) 1,716 1,771 1,827 1,890 At A Glance PE (X) nm 63.8 39.8 30.2 Issued Capital (m shrs) 10,688 PE Pre Ex. (X) 42.1 63.8 39.8 30.2 Mkt. Cap (Rpbn/US$m) 37,622 / 2,666 P/Cash Flow (X) 4.0 7.6 4.4 4.1 Major Shareholders (%) EV/EBITDA (X) 6.9 6.5 5.9 5.4 Axiata Investment (indo) Sdn Bhd (%) 66.36 Net Div Yield (%) 0.0 0.9 1.5 2.0 Elisalat Intl 13.3 P/Book Value (X) 2.1 2.0 1.9 1.9 Parkmix Ltd Net Debt/Equity (X) 1.2 1.3 1.2 1.1 13.3 ROAE (%) (16.5) 3.2 4.9 6.3 Free Float (%) 7.0 3m Avg. Daily Val (US$m) 2.4 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 47.3 92.0 144 ICB Industry : Telecommunications / Mobile Telecommunications Other Broker Recs: B: 27 S: 0 H: 2 Bloomberg ESG disclosure score (2017)^ 28.1 Source of all data on this page: Company, DBS Bank, Bloomberg - Environmental / Social / Governance 11.6 / 36.8 / 57.1 Finance L.P ^ refer to back page for more information
ed: CK/ sa: MA, PY, CS Company Guide
XL Axiata
WHAT’S NEW EXCL’s market share gains unlikely to lose steam in the near term
EXCL expanded 15% over 1H19 vs. 5.5% of Telkomsel. among mobile operators. While amendments to the EXCL’s cellular revenue expanded 15% over 1H19, driven by regulations were proposed in February 2019, there is no ex-Java market share gains from Telkomsel and strong clarity if or when the proposed amendments would be growth in data services, which accounted for ~87% of EXCL’s implemented. topline and continued to expand in mid-to high-single digits Hutch is likely to take on an aggressive stance on expanding on a q-o-q basis. We believe there is still room for ample its network after its ~US$3bn debt-to-equity swap. Hutch is growth in data revenue in Indonesia as average per user data the fourth largest operator in terms of subscribers and is well usage of 4.2GB per month is below peer averages such as behind both EXCL and other telcos in terms of coverage in India (10GB) and Thailand (11.5GB). Besides, EXCL will stick ex-Java regions. The telco also holds only 50MHz of spectrum to its aggressive stance in ex-Java regions with plans to (in 1.8MHz and 2.1MHz bands) much lower than the top maintain ex-Java capex at an elevated level and focus on three operators. With the proposed funding plans and expanding coverage and capacity. With EXCL’s pricing Hutch’s seeming ambition to become a top mobile operator discount of over 20% to Telkomsel’s and strong promotion of in the country, we believe Hutch is the strongest candidate in data services in ex-Java territories, we believe EXCL would the Indonesian mobile sector to look for an acquisition. continue to register market share gains from Telkomsel over FY19/20F, pushing up EXCL’s growth profile ahead of the EXCL fits in well with Hutch’s ambitions, having recently sector. embarked on an aggressive network expansion plan focusing on ex-Java territories. EXCL’s ex-Java network is arguable Competitive environment has improved as operators shift second only to that of Telkomsel’s and EXCL controls ~15% their focus from Java to ex-Java market share gains. market share in ex-Java regions (vs. ~80% by Telkomsel). Competitive intensity has improved as market share gains in EXCL also intends to double its market share in ex-Java Java are not a priority for smaller operators anymore who territories to 30% over the next 4-5 years through a have begun to care more about profits from Java now. Most combination of aggressive network expansions, data-centric telcos wants to deploy profits from Java into ex-Java network service offerings and aggressive pricing. EXCL is also the most expansion. Telkomsel maintained an aggressive stance within data-centric operator in the country, generating ~88% of its Java in 1H18 to discourage smaller operators from expanding topline from data services much higher than the 63% derived into the ex-Java region but reversed its position in the second by Telkomsel. EXCL’s network, spectrum resources and its go- half of 2H18 to become more rational. to market strategy fits in well with Hutch’s ambition to Case for a merger between EXCL and Hutch but lack of become a top mobile operator in the country. clarity on spectrum transfers is a barrier. EXCL and Hutch are In our estimation, the Axiata Group acquired its 66.4% stake strong candidates for a merger with Smartfren in the in EXCL for ~US$1.1bn. At current price levels, Axiata’s stake background. Factoring in existing mobile coverage, publicly in EXCL is worth ~US$1.7bn. One can’t rule out Axiata announced plans for expansions and financial health, we divesting its stake in EXCL at the right price. Historically such believe that a merger involving EXCL and Hutch would be the acquisitions come at 20-30% premium to the market price. most likely scenario. However, the current regulations in We believe there is a strong case for a merger between these Indonesia do not allow the spectrum to be shared by two two operators. operators, thus denting the business case for consolidation
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Indonesia has one of the highest population per 1MHz of spectrum bolstering the case for a merger
Population per 1MHz among major operators
584,100
203,100
53,200 10,200
Singapore Malaysia Thailand Indonesia
Source: IMDA, MCMC, Companies, DBS Bank
Spectrum Holdings by Indonesian operators Indonesia 850MHz 900MHz 1800MHz 2100MHz 2300MHz Total (In MHz) Telkomsel 15MHz x 2 22.5MHz x 2 15MHz x 2 45MHz 150 ISAT 2.5MHz x 2 10MHz x 2 20MHz x 2 15MHz x 2 15MHz* 110 EXCL 7.5MHz x 2 22.5MHz x 2 15MHz x 2 90
Hutchison 10MHz x 2 15MHz x 2 50
Smartfren 11MHz x 2 30MHz 52
Source: ISAT, DBS Bank
EXCL may trade near +1SD supported by market share gains and margin improvements EXCL Forward EV/ EBITDA (X) 8.1
7.6 +2sd: 7.5x
7.1 +1sd: 6.8x 6.6
6.1 Avg: 6x
5.6 -1sd: 5.3x 5.1
4.6 -2sd: 4.6x
4.1 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Source: ISAT, DBS Bank
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Company Guide
XL Axiata
CRITICAL DATA POINTS TO WATCH All eyes on ex-Java. EXCL is aggressively expanding coverage Subscribers (m) outside Java with plans to double its revenue market share in 56.5 the ex-Java region to ~30% in 4-5 years. EXCL strives to 57.0 53.2 54.8 48.3 maintain a ~20-30% discount to Telkomsel’s pricing, increasing 48.9 47.1 the appeal of EXCL to price sensitive subscribers in ex-Java 40.7 territories. EXCL’s management reiterated that it still sees 32.6 significant opportunity to expand coverage outside Java, 24.4 suggesting that EXCL would continue to invest on coverage in 16.3 ex-Java regions, continuously bridging its network gaps with 8.1
Telkomsel. Improving coverage further buttressed by aggressive 0.0 2017A 2018A 2019F 2020F 2021F pricing plans should have supported the upticks in revenue market share recorded by EXCL in the previous two quarters, Prepaid ARPU (Rp K) which we believe largely stemmed from ex-Java regions. We 33 33.7 31.5 32.5 expect EXCL to snatch ~2-3% revenue share outside Java in 30 30.9
FY19/20F, the bulk of which would be at the expense of 26.9 Telkomsel, helping EXCL secure high double-digit growth from ex-Java regions. This coupled with EXCL’s strong footing in Java 20.2 and below average exposure to declining legacy revenues 13.5 (~12% for EXCL vs. ~37% for Telkomsel) should allow EXCL to expand its cellular revenues by 10.6/8.2%% over FY19F/20F – 6.7 superior to the projected 5-6% expansion of the industry. 0.0 2017A 2018A 2019F 2020F 2021F
EXCL likely to have expanded market share gains in 2Q19 EBITDA margins (%)
39.76 37.9 38.4 39 Revenue market share 36.4 37.1
31.80 80% 68.1% 70.3% 69.8% 70.7% 69.9% 68.4% 68.1%
23.85 60% 15.90 40% 7.95
20% 0.00 2017A 2018A 2019F 2020F 2021F 15.4% 15.5% 16.0% 15.4% 15.7% 16.6% 16.9% 0% 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Capex (Rp tn) 7.5 Telkomsel XL Axiata 7.6 7.41 7.19 6.7 6.27 EBITDA margins to expand as ex-Java profitability improves. 6.1 EXCL expects a payback period of c.3-4 years on ex-Java 4.5 investments. While the bulk of the ex-Java territories remain EBIT negative, certain clusters that EXCL entered early on are 3.0 already seeing profitability according to management. As 1.5 EXCL’s aggressive ex-Java expansions started over 2014-2015, we believe investments made over 2015-2017 would reach EBIT 0.0 2017A 2018A 2019F 2020F 2021F breakeven over the next 2-3 years, helping EXCL improve its blended margin profile. EXCL will see a significant portion of its EBITDA (Rpbn) tower leases coming up for renewal over the next 2-3 years – 11052 11162.0 10303 the bulk of which we believe would be renewed at lower rates. 9473 This coupled with improvements in the margin profile of ex-Java 8929.6 8321 8512 territories should provide room for margin expansion going 6697.2 forward. We expect EXCL’s EBITDA margins to expand ~190bps over 2018A-2021F. 4464.8
2232.4
0.0 2017A 2018A 2019F 2020F 2021F
Source: Company, DBS Bank
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Appendix 1: A look at Company's listed history – what drives its share price?
Revenue market share and EBITDA are critical factors driving the share price movements of EXCL. In our critical factor analysis over the past ~6 years, we have seen share price movements to follow mobile market share changes of EXCL. This was clearly observable during the revenue share drop in FY15. Investors value EXCL on EV/EBITDA metric owing to greater variability in EXCL’s profitability and the current expansionary pace of EXCL’s operations. Changes in EBITDA hence are closely reflected in EXCL’s share price movements.
EXCL share price movement with revenue share changes and EBITDA
Indexed share price XL Axiata - EBITDA Rp b
350 3,000
300 2,500
250 2,000 200 1,500 150 1,000 100
50 500
- - Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018 Jan-2019
Reuters Indo. Telecom Index XL Axiata EBITDA (Rp b)
Indexed Share Price XL Axiata - Revenue Market Share Rev. Mkt Share 350 25%
300 20% 250
15% 200
150 10%
100 5% 50
- 0% Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018 Jan-2019
XL Axiata Reuters Indo. Telecom Index Rev. Market share
Source: Reuters, Company, DBS Bank
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Balance Sheet: Operating cash flow to support capex. We have projected for an Leverage & Asset Turnover (x) average capex spend of Rp7.4tr over FY19F-21F, which EXCL should 0.5 be able to finance with its operational cash flows. EXCL has fully paid 1.20 0.5 0.5 down its USD denominated debt, eliminating the risk of adverse 1.00 0.5 movements in USD/IDR. 0.80 0.5 0.5 0.60 Share Price Drivers: 0.4 0.40 0.4 Market share wins over the next 2-3 quarters. We expect EXCL to 0.4 0.20 snatch market share from Telkomsel over the next 2-3 quarters 0.4 through EXCL’s pricing discount. Signs of market share gains could 0.00 0.4 2017A 2018A 2019F 2020F 2021F prompt investors to re-evaluate the growth prospects of EXCL. Gross Debt to Equity (LHS) Asset Turnover (RHS)
Capital Expenditure Key Risks: Rp bn Bull-case valuation of EXCL at Rp4,600. Under our bull-case scenario, 14,000.0 we assume substantial improvements in industry yields would be 12,000.0 supported by collaborative pricing revisions by Telkomsel and EXCL, 10,000.0 as the telcos opt for territorial dominance in ex-Java regions. This 8,000.0 should drive up EXCL’s FY19/20F cellular revenue to 16/10% vs. 6,000.0 11/8% under our base-case scenario. Sustained revenue growth, 4,000.0 should allow the carrier to record a FY18A-21F EBITDA CAGR of 2,000.0 0.0 11% vs. 9% under our base case. 2017A 2018A 2019F 2020F 2021F Capital Expenditure (-) Bear-case valuation of EXCL at Rp3,200. Under our bear-case ROE (%) scenario, we assume steep declines in industry yields as Telkomsel , 6.0% Smartfren and other telecom operators become more aggressive. This would lead to only 6/5% growth in FY19/20F cellular revenues 5.0% vs. +11/8% growth in our base-case scenario. Should intense 4.0% competition persist through FY20-21F, EXCL would record an FY18A- 3.0% 21F EBITDA CAGR of just 6% vs. 9% under our base case. 2.0%
Environment, Social, Governance: 1.0%
In FY18, EXCL’s ESG responsibilities revolved around the theme 0.0% 2017A 2018A 2019F 2020F 2021F “Embracing Digitisation for our Future”. For instance, EXCL contributed to the Indonesian fishing industry through a digital app Forward PE Band (x) called ‘Laut Nusantara’ that provides real-time maritime digital (x) solutions. In addition, EXCL donated over US$1.8m in digital services 126.3 +2sd: 118.1x to connect customers after three disasters struck Indonesia during 106.3 FY18. 86.3 +1sd: 90.4x
66.3 Company Background Avg: 62.6x EXCL provides a wide range of mobile telecommunication services in 46.3 -1sd: 34.8x Indonesia. EXCL is owned by Axiata Group Berhad through Axiata 26.3
Investments (Indonesia) Sdn Bhd (66.5%) and the public (33.5%). 6.3 -2sd: 7.1x Sep-15 Sep-16 Sep-17 Sep-18
PB Band (x) (x) 3.2
2.7 +2sd: 2.65x
2.2 +1sd: 2.19x
1.7 Avg: 1.72x
1.2 -1sd: 1.26x
0.7 -2sd: 0.79x Sep-15 Sep-16 Sep-17 Sep-18
Source: Company, DBS Bank
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Key Assumptions FY Dec 2017A 2018A 2019F 2020F 2021F
Subscribers (m) 47.1 48.3 53.2 54.8 56.5 Prepaid ARPU (Rp K) 33.0 30.0 30.9 31.5 32.5 EBITDA margins (%) 36.4 37.1 37.9 38.4 39.0 Capex (Rp tn) 6.70 6.30 7.50 7.40 7.20 EBITDA (Rpbn) 8,321 8,512 9,473 10,303 11,052 Margins likely to improve Segmental Breakdown with accelerating revenue FY Dec 2017A 2018A 2019F 2020F 2021F growth and improvements in ex-Java profitability Revenues (Rpbn) GSM Revenue 20,443 20,086 22,216 24,028 25,496 GSM interconnect 1,383 1,318 1,252 1,277 1,302 Other GSM 0.0 0.0 0.0 0.0 0.0 Others 1,050 1,535 1,543 1,550 1,556 Total 22,876 22,939 25,010 26,855 28,355
Income Statement (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Revenue 22,876 22,939 25,010 26,855 28,355 Cost of Goods Sold (2,459) (2,421) (2,627) (2,794) (2,894) Gross Profit 20,416 20,518 22,383 24,061 25,461 Other Opng (Exp)/Inc (19,046) (19,437) (20,142) (21,345) (22,345) Operating Profit 1,370 1,081 2,241 2,716 3,116 Other Non Opg (Exp)/Inc 249 (28.6) (200) (200) (200) Associates & JV Inc (103) 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (1,295) (1,259) (1,254) (1,254) (1,254) Exceptional Gain/(Loss) 0.0 (4,190) 0.0 0.0 0.0 Pre-tax Profit 221 (4,396) 786 1,261 1,662 Tax 154 1,099 (197) (315) (416) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 375 (3,297) 590 946 1,247 Net Profit before Except. 375 893 590 946 1,247 EBITDA 8,218 8,512 9,473 10,303 11,052 Growth Revenue Gth (%) 7.2 0.3 9.0 7.4 5.6 EBITDA Gth (%) 2.0 3.6 11.3 8.8 7.3 Opg Profit Gth (%) 11,111.9 (21.1) 107.3 21.2 14.8 Net Profit Gth (Pre-ex) (%) 0.0 138.0 (34.0) 60.4 31.8 Margins & Ratio Gross Margins (%) 89.2 89.4 89.5 89.6 89.8 Opg Profit Margin (%) 6.0 4.7 9.0 10.1 11.0 Net Profit Margin (%) 1.6 (14.4) 2.4 3.5 4.4 ROAE (%) 1.8 (16.5) 3.2 4.9 6.3 ROA (%) 0.7 (5.8) 1.0 1.6 2.1 ROCE (%) 3.1 2.4 3.7 4.3 4.9 Div Payout Ratio (%) 60.0 N/A 60.0 60.0 60.0 Net Interest Cover (x) 1.1 0.9 1.8 2.2 2.5 Source: Company, DBS Bank
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Company Guide
XL Axiata
Quarterly / Interim Income Statement (Rpbn) FY Dec 2Q2018 3Q2018 4Q2018 1Q2019 2Q2019
Revenue 5,545 5,846 6,047 5,967 6,290 Cost of Goods Sold (613) (694) (629) (446) (516) Gross Profit 4,932 5,153 5,417 5,521 5,774 Other Oper. (Exp)/Inc (4,786) (4,901) (9,061) (5,014) (5,063) Operating Profit 146 251 (3,644) 507 711 Other Non Opg (Exp)/Inc (21.8) (51.5) (21.4) 162 129 Net Interest (Exp)/Inc (208) (318) (457) (586) (508) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (84.1) (119) (4,122) 83.9 332 Tax (13.1) 55.6 970 (26.7) (106) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit (97.2) (63.1) (3,152) 57.2 225 EXCL posted cellular revenue Net profit bef Except. (97.2) (63.1) (3,152) 57.2 225 growth of 15% over 1H19 ahead EBITDA 2,000 2,176 2,351 2,279 2,471 of Telkomsel’s 5.5% expansion
Growth Revenue Gth (%) 0.8 5.4 3.4 (1.3) 5.4 EBITDA Gth (%) 0.7 8.8 8.1 (3.1) 8.4 Opg Profit Gth (%) 5.8 72.1 (1,550.6) (113.9) 40.1 Margins on a quarterly basis Net Profit Gth (Pre-ex) (%) (729.7) (35.1) 4,897.8 (101.8) 293.8 expanded vs. our Margins expectations of a decline Gross Margins (%) 88.9 88.1 89.6 92.5 91.8 Opg Profit Margins (%) 2.6 4.3 (60.3) 8.5 11.3 Net Profit Margins (%) (1.8) (1.1) (52.1) 1.0 3.6
Balance Sheet (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 34,934 36,760 37,030 36,855 36,113 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 14,207 13,796 13,796 13,796 13,796 Cash & ST Invts 2,455 1,047 329 1,145 2,467 Inventory 143 189 46.9 50.0 52.4 Debtors 565 569 600 671 709 Other Current Assets 4,017 5,253 5,253 5,253 5,253 Total Assets 56,321 57,614 57,055 57,770 58,390
ST Debt 4,207 2,578 1,895 1,895 1,895 Creditor 7,476 9,106 6,455 6,604 6,628 Other Current Liab 3,544 4,050 3,735 3,709 3,625 LT Debt 15,191 19,825 22,325 22,325 22,325 Other LT Liabilities 4,273 3,713 3,713 3,713 3,713 Shareholder’s Equity 21,631 18,343 18,933 19,525 20,204 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 56,321 57,614 57,055 57,770 58,390
Non-Cash Wkg. Capital (6,294) (7,144) (4,289) (4,338) (4,239) Net Cash/(Debt) (16,942) (21,355) (23,891) (23,074) (21,753) Debtors Turn (avg days) 9.6 9.0 8.5 8.6 8.9 Creditors Turn (avg days) (568.0) (604.0) (616.6) (497.2) (479.0) Inventory Turn (avg days) (12.4) (12.1) (9.4) (3.7) (3.7) Asset Turnover (x) 0.4 0.4 0.4 0.5 0.5 Current Ratio (x) 0.5 0.4 0.5 0.6 0.7 Quick Ratio (x) 0.2 0.1 0.1 0.1 0.3 Net Debt/Equity (X) 0.8 1.2 1.3 1.2 1.1 Net Debt/Equity ex MI (X) 0.8 1.2 1.3 1.2 1.1 Capex to Debt (%) 34.1 (58.6) 31.0 30.6 29.7 Z-Score (X) 1.2 0.9 1.1 1.2 1.3
Source: Company, DBS Bank
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Company Guide
XL Axiata
Cash Flow Statement (Rpbn) FY Dec 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 221 (4,396) 786 1,261 1,662 Dep. & Amort. 6,951 7,431 7,233 7,587 7,935 Tax Paid 195 941 (152) (256) (365) Assoc. & JV Inc/(loss) 103 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 1,310 1,597 (2,900) (10.0) (149) Other Operating CF 832 3,785 0.0 0.0 0.0 Net Operating CF 9,612 9,358 4,968 8,582 9,082 Capital Exp.(net) (6,618) 13,132 (7,503) (7,412) (7,193) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Capex to remain Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 elevated in the near Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 term as ex-Java Other Investing CF (17.2) (19,336) 0.0 0.0 0.0 expansions continue Net Investing CF (6,635) (6,203) (7,503) (7,412) (7,193) Div Paid 0.0 0.0 0.0 (354) (568) Chg in Gross Debt (1,926) (4,588) 1,817 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 4.30 25.0 0.0 0.0 0.0 Net Financing CF (1,922) (4,563) 1,817 (354) (568) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 1,055 (1,408) (719) 817 1,322 Opg CFPS (Rp) 777 726 736 804 864 Free CFPS (Rp) 280 2,104 (237) 110 177 Source: Company, DBS Bank
Target Price & Ratings History
3786 Rp 12-mth Date of Closing S.No. T arget Rating Report Price Price 3286 1: 19 Nov 18 2190 3200 BUY 2: 06 May 19 2850 3200 BUY 2 4 5 3: 28 May 19 2790 3200 BUY 4: 12 Jul 19 2860 3400 BUY 2786 5: 05 Aug 19 3130 3850 BUY 3
2286
1
1786 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19
Note : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank Analyst: Sachin MITTAL
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^ Bloomberg ESG Disclosure Scores rate companies annually based on their disclosure of quantitative and policy-related ESG data. It is based on a scoring scale of 0-100, and calculated using a subset of more than 100 raw data points it collects on ESG. It is designed to measure the robustness of companies' disclosure of ESG information in their reporting/the public domain. Based on Bloomberg disclosures, as of 25 Jan 2019, the global ESG disclosure average score is 24.92 and 22.14, 28.26, 49.97 for Environmental, Social and Governance, respectively.
DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends
Completed Date: 7 Oct 2019 09:22:08 (WIB) Dissemination Date: 7 Oct 2019 15:05:05 (WIB)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation 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 for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
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Industry Focus Indonesia Telecom Sector
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 Aug 2019 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBS Bank Ltd, DBS HK, DBSVS their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Indosat, XL Axiata as of 31 Aug 2019 4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Indosat, XL Axiata in the past 12 months, as of 31 Aug 2019 5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Industry Focus Indonesia Telecom Sector
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Industry Focus Indonesia Telecom Sector
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Industry Focus Indonesia Telecom Sector
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