PT Telekomunikasi Indonesia, Tbk (TLKM) - Initiating Coverag

Bareksa.com - We initiate coverage of TLKM with a BUY rating at TP Rp2.840,- (20% upside), implies P/E 14F at 18x, with EPSg at 6% (3-years CAGR). We recommend BUY considering that: 1) TLKM is the Indonesian largest telecommunication and network provider with 40% market share in 2013. 2) Dominant position in each business segment with strong market share. 3) TLKM will continue its penetration in broadband business with 24%-26% portion to revenue in 2014F-2015F. 4) TLKM plans to manage its DPR at 65%-70% to achieve ~4% dividend yield. TLKM currently trades at P/E 14F 15x. BUY

Strong Market Share in Each Business Segment - PT Telekomunikasi Indonesia, Tbk. (TLKM), is the largest telecommunications and network provider in Indonesia. They position itself as a reliable player in TIMES (Telecommunication, Information, Media & Edutainment and Services) business. Each of its business has strong market share in each segment; the cellular has 40% market share, the broadband has 66% market share and the fixed line has 99% & 47% market share for wireline and wireless.

Broadband is Going to Dominate Revenue - There was a tremendous growth in number of broadband subscribers, 63% CAGR 2010-2013, while the cellular and fixed line was at 12% & 15% CAGR. In 2014F-2015F, we expect broadband subscribes will continue to rise with 33% CAGR 2012-2015F, while fixed line’s will experience -14% CAGR. In terms of revenue contribution, the broadband will contribute 24%-26% vs 13%-20% in 2011-2013. The cellular will remain be the biggest contributor though the percentage will slightly decline to 50%-51% vs >51% in 2011-2013. For the fixed line business, we predict that the contribution will only be at <10% vs 11%-17% in 2011-2013. We consider that the Company plans to shut down its fixed wireless business (flexi).

High Level of Dividend Yield - In 2014, TLKM offers attractive dividend yield at 4% under 50%-70% dividend payout ratio. Going forward, the Company plans to manage its dividend payout ratio at 65%-70% to achieve same dividend yield at ~4%.

In 2013, TLKM had some focuses; (1) strengthening the performance of cellular business, (2) extending broadband penetration in Indonesia, (3) engaging in international expansion. The Indonesia Digital Network (“IDN”) 2015 program represents TLKM initiative in expanding broadband penetration. IDN contains the following elements: id-Access (direct to the home broadband access), id-Ring (fiber optics backbone infrastructure), and id-Con (ICT-based convergence services as new sources of revenue going forward). In 2014, TLKM will continue to support its broadband and cellular business by allocating 20%-25% of its revenue for its CAPEX.

We can see development in its broadband business through its tremendous growth in number of subscribers. During 2010-2013, the broadband has proven a robust growth at the level of 63% CAGR, while the cellular and fixed line was at 12% and -15% CAGR. In 2013, the broadband, cellular and fixed line booked 28, 132 and 16 mn subscribers, compared to 6, 94 and 26 mn subscribers in 2010. We also can conclude that subscribers of the broadband are getting up, while the fixed line’s are getting down. In 2014F-2015F, we expect broadband subscribes will continue to rise with 33% CAGR 2012-2015F, while fixed line’s will experience -14% CAGR.

Sources: Company, Buana Research

In terms of revenue contribution, the cellular business has the biggest contribution to its revenue with portion at the level of 52%-61% during 2010-2013. For the broadband business, percentage contribution has expanded from 13% in 2011 became 20% in 2013 (based on our calculation). On the contrary, the fixed line contribution has tighten from 17% in 2011 to 11% in 2013 (based on our calculation). The Company noted that digital lifestyle will be a key factor that will drive the business in the future. It will lead to an increase in broadband demand which will be compensated by declining in TLKM’s legacy business (fixed wireline and cellular telephone revenue). Along with the Company’s opinion, we expect broadband revenue will be more aggressive in 2014F-2015F, thus the contribution of broadband to the Company’s revenue will increase to 24%-26%. We forecast that the cellular revenue will remain be the biggest contributor though the percentage will slightly decline to be 50%-51% vs >51% in 2011-2013. For the fixed line business, we predict that the contribution will only be at <10% vs 11%-17% in 2011-2013. We consider that the Company plans to shut down its fixed wireless business (flexi).

Revenue

In 2010-2013, TLKM’s revenue grew by 6% CAGR from Rp69,2tn to Rp83tn, where 66%-72% of its revenue came from Telkomsel (65% of its shareholder owned by TLKM). Going forward, we forecast revenue will reach Rp89tn (+7% YoY) in 2014F and Rp95,7tn (+8% YoY) in 2015F. It will grow at 7% CAGR 2012-2015F. Company itself gives guidance thet 2014 revenue growth will inline or slightly better than industry at ~7% YoY in its 2014F revenue. We use 3 main drivers to underpin the revenue growth; broadband, cellular and fixed line, with following assumptions:
- Monthly ARPU
We use monthly ARPU to calculate broadband and fixed line revenue. We forecast the growth of broadband ARPU will be same as the previous year in 2014F and will remain same afterwards. Related with the fixed line ARPU, we assume it will decrease by -12% & -17% CAGR 2012-2015F for wireline & wireless, respectively. We consider its continuous decrease of ARPU during 2010-2013 by -10% & -20% CAGR for wireline and wireless, respectively.
- Revenue per Minute (RPM) for cellular & Minute of Usages (MoU)
We assume RPM for cellular (Telkomsel) will have the same growth as 2013 at 5%, as Telkomsel already has higher RPM than its peers. MoU for cellular is our basis volume to calculate voice revenue for cellular. We assume MoU will grow as same as growth level for RPM.
- Revenue per SMS (RPS) for cellular & SMS Units
We assume RPS for cellular (Telkomsel) will decrease to reach Rp63,-/SMS, considering its declining price which happen continuously within 2 years. SMS units for cellular is our basis volume to calculate SMS revenue for cellular. We assume SMS units will grow as same as growth level for MoU.

EBITDA & EBITDA Margin

In 2010-2013, TLKM’s EBITDA grew by 4% CAGR from Rp37,1tn to Rp41,8tn. Moreover, the Company was able to manage its margin to be at the level of 50%-54%. Going forward, we forecast EBITDA will reach Rp44,5tn (+7% YoY) in 2014F and Rp48,1tn (+8% YoY) in 2015F. We expect 2014F-2015F EBITDA margin will slightly down due to an increase in data usage demands. Management states that data margins are lower than its traditional services. The Company itself expects flat to slightly lower EBITDA margins due to higher in 2014F.

High Dividend Yield

In 2014, TLKM offers attractive dividend yield at 4% under ~70% dividend payout ratio. Going forward, the Company plans to manage its dividend payout ratio at 65%-70% to achieve same dividend yield at ~4%.

Capital Expenditures

In 2014, TLKM will continue to support its broadband and cellular business by allocating 20%-25% of its revenue for its CAPEX, where ~60% of that will be allocated for Telkomsel’s operation and the rest will be used for Telkom. In 2013, TLKM added 15.567 BTS where 74.5% of it was 3G. Hence, up to 2013, TLKM has 69.864 BTS (exc. BTS for flexi), where 38.7% is 3G. Please be informed that the portion of 3G has been expanded by 2.030 bps from 18.4% in 2010.

Valuation
We apply DCF-based model using cash flow up to 2017F and a WACC of 11% and LTG 5%, arriving to our target price at Rp2.840,- (20% potential upside compared to last closing price in 25 Apr’14 at Rp2.365,-). Our target price implies P/E 14F 18.3x and P/E 15F 17.6x. TLKM is currently trading at P/E 14F 15.2x and P/E 15F 14.7x. BUY

*M. Dian Octiana are equity analyst of PT Buana Capital. This article is part of the Equity Research of PT Buana Capital