Telekomunikasi Indonesia: Brilliant Entry Point For Indonesia’s Leading Telecom Giant

Opportunity Overview

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK) is a leading telecom company in Indonesia with global operations. It has a 60+% market share in one of the world’s most populous countries and has ample growth potential this decade if it can gain market share and raise its prices. It also operates around 38,000 towers, making it the largest tower provider in Southeast Asia.

Shares have sold off strongly this year, largely due to pricing concerns, but the company’s financial performance has still been acceptable. The company is still positioned to have moderate revenue growth this year due to new client acquisitions. Moreover, the pricing concerns are only related to one smaller segment and did not significantly impact the company’s financial performance this quarter, as its ARPU did not drop. Shares appear to be very oversold, as seen by its drastic recent underperformance despite decent quarterly results in Q1 2024.

This stock has underperformed the iShares MSCI Indonesia ETF by around 20 percentage points. There are also many macro catalysts that could support Indonesia’s stock market, as the World Bank recently upgraded Indonesia’s growth forecast to 5.1% this year. Inflation also recently fell below 3%, which should help support consumer sentiment. Telkom Indonesia is well positioned to benefit from these new macro trends, as a leading telecom player with a strong market share in the Indonesian market.

I think that this month is an excellent time to initiate a larger position, especially since its latest quarterly results were favorable and its 2024 outlook also looks good. Now may be a favorable time to accumulate prior to its next quarterly earnings announcement, when it may announce more positive results.

Shares have pulled back significantly since I last covered this company in 2022, and I think that the company looks like a much stronger buy due to new growth prospects in 2024 and its lower valuation.

Indonesia Market Appeals

The Indonesian telecom market may become one of the world’s largest markets in the future. Indonesia is currently the world’s fourth-most populous country, and its GDP per capita is only $4,000. While the general market may only have moderate growth ahead of it, companies like Telkom Indonesia have been able to outperform due to their existing customer base and new offerings. Telkom Indonesia also has the potential to exploit growth opportunities in other countries, as it has been recently in Singapore with its data center business segment.

Indonesia is a very attractive market due to its population and the potential for wages to increase in the coming years. Indonesia also recently regained its upper middle-income rank from the World Bank in 2023. The country’s minimum wage has been increasing considerably and recently rose by 10% in 2023. In the long run, Indonesian telecom stocks stand to benefit substantially if incomes continue to rise this decade.

Company Outlook

The company’s growth targets include capturing additional market share in the Indonesian market and expanding into other countries like Singapore. The company recently established InfraCo and TDE in Singapore and may also be selling one of its data centers in Singapore this year. Telkom Indonesia has been expanding globally by introducing new data centers to capture some of the increased demand driven by AI. This is one new catalyst that the company has announced this year, which could help support the company’s share price performance this year.

While there have been some concerns over the lower price points of its new segments, these segments are only directed at smaller portions of the population. Moreover, this strategy has also helped the company gain market share. Its new Indihome offering has helped the company gain new customers and could be a relevant long-term growth driver for the company, which has not shown up on recent quarterly earnings reports. Telkom Indonesia was able to grow its customer base by over 8 million in 2023 to reach 159.3 million.

This is a positive trend for the company in the long run, as its new offerings have helped it gain new customers. Moreover, this transition has not taken a strong hit on the company’s ARPU.

Overall, its revenue grew by 1.6% in 2023, while it had stronger growth in other areas like its Indihome and mobile data user segments. Notably, its SMS, fixed, and cellular voice revenues fell by 30%, which is concerning as this segment used to account for over 10% of its total revenue.

Telkom Indonesia has also continued to be very profitable in recent years, with many of its indicators at or above the levels seen in other regional telecom peers. It improved its net income margin and EBIT margin by over 200bps in 2023.

Its ROE and ROE are still well above that of many regional emerging market peers, with the exception of Turkey-based Turkcell Iletisim Hizmetleri A.S. (TKC).

Telkom Indonesia has had healthy free cash flow, even though it has had to invest around 22% of its revenue on capex and despite its drop in operating cash flow last year. It has also had a relatively healthy balance sheet, with low foreign-denominated debt and reasonable gearing ratios.

Q1 Performance Was Still Favorable

Notably, Telkom Indonesia still had a relatively favorable performance during the first quarter of this year, so the YTD sell-off may be overdone. The company’s revenue grew by over 3% last quarter, driven by the 8.6% growth of its digital business segment.

One important trend to note is that the selloff in its share price has been driven by concerns over its pricing. However, the company recently noted that its ARPU has remained stable and that it has been able to capture new customers through its new offerings. In the long run, this pricing model may give the company more room to gain market share and eventually begin upselling to some of these customers.

The company’s international operations were also a key driver of growth this quarter. Its international voice wholesale business grew by over 17%, well above its average revenue growth rate. Its data center and cloud revenue also grew by 6%, largely supported by its data centers in Singapore.

Telkom Indonesia has strong growth potential and has continued to invest heavily for its future growth. Capex during Q1 2024 was around 13% of its revenue and mainly focused on expanding its network infrastructure and improving its user experience.

While Telkom’s share price has declined and moved sideways as if it were a value trap, there actually appear to be several avenues to boost growth in the coming quarters. All other segments of its business still remain healthy, and the company also has some exciting offerings in terms of data centers. Moreover, some of the concerns regarding the decline in revenue per user seem overblown, based on data from this recent quarter.

Takeaway

Telkom Indonesia looks like an excellent buy following its strong sell-off this year.

Telkom Indonesia has lagged behind most of its peer group this year despite its favorable financials and growth prospects. Telkom Indonesia looks like it could be a better choice than other Indonesia ETFs, which invest heavily in financials and have less exposure to consumer themes.

Telkom Indonesia has a lot of interesting growth prospects, which could come into focus in subsequent quarters. Furthermore, many of the concerns about its pricing model may be addressed in subsequent quarters.

One of the main risks with this company is that its revenue growth rate has not been that stellar, even though certain segments have begun to shine in recent months. Consequently, the market has begun valuing this company as a value trap, as seen by the swift drop in its price/earnings ratio.

It is also crucial to consider economic risks in Indonesia, as the currency is beginning to depreciate slightly following its stellar 2023 performance. However, the country’s Central Bank has contained inflation at around 3% and may be able to cut rates to help spark growth. Latest World Bank projections are calling for 5+% growth in Indonesia, which would be well above the average in emerging markets.

The biggest risk is likely that this will likely be a waiting game, as the share price may move sideways or even dip on any disappointing news. However, this looks like a really solid entry point when you consider the long-term historical performance and current dividend yield.

Shares have delivered respectable returns in the long run and have currently dipped well below the highs of last decade.