Buana Capital: Rapid Growth in Data Services, Buy on TLKM

Bareksa.com - Buana Capital maintain buy recommendation on PT Telekomunikasi Indonesia (Persero) Tbk TLKM with a higher target price (TP) of Rp3,380 (16% Upside) on the back of FY14-15F Broadband Subscribers’ assumption changes. Their BUY stance are supported by : 1) Improving Internet Connectivity in Indonesia. 2) Rapid Growth in Data Services. 3) Its Potential to be The Most Prepared Telco Operator to Implement 4G LTE Throughout Indonesia. 4) Its Reputation as a Telco Operator with the Highest EBITDA Margin Compared to Peers. TLKM Trades at 17.6x & 2.7x FY15F P/E & P/BV.

Improving Internet Connectivity Index in Indonesia

Recently Indonesia has shown much improvement in the internet connectivity. According to Net Index Explorer by Ookla average download speed in Fixed Broadband has increased by 56% yoy in December 2014 to 5.28 Mbps while Mobile Broadband has also increased by 56% yoy in December 2014 to 3.04 Mbps. Buana view this improvement has propelled rapid growth in data traffic recently.

Graph. Average Internet Speed in Indonesia

Graph. Percentage of TLKM's Revenue Contribution

Source: TLKM, Buana Research

Rapid Growth in Data Services
TLKM continue to booked a rapid growth in data services as it can be seen in the growth level of data traffic which grew 146% yoy in 9M14, doubled from previous growth level in 9M13 which only grew by 74% yoy. Along with the rapid growth in data traffic, the company also able to maintain stable subscriber growth with a higher growth level of Broadband subscribers in 9M14 (+31.8% yoy) compared to 9M13 (+17.9% yoy). Buana believe this data services’ performance will continue to bolster the company’s revenue and continue the uptrend broadband revenue contribution which can be seen since 2011. Buana expect the percentage revenue of broadband will reach 30% and 33% in 2016F and 2017F.

Graph. Data Traffic

Source: TLKM, Buana Research

Consistently Able to Generate Premium Pricing for Data
With the largest base of 83,346 BTS as of 9M14, TLKM managed to keep its position as a telco company with the best network infrastructure and coverage in Indonesia. With superior quality of the company’s network infrastructure, it is able to consistently charged a premium for data.

Graph. Average Pricing for Data Comparison

Source: TLKM, Buana Research

The Most Prepared Telco Operator to Implement 4G LTE throughout Indonesia
With superior number of 3G BTS compared to other telco operator, TLKM will be well prepared to implement 4G LTE technology throughout the nation. The company’s management also stated that all of its 3G BTS are LTE-capable. The problem preventing Telkomsel/TLKM from rolling out LTE services to a wider audience lies with the backhaul. Currently, only ~33% of the company’s network is fiberized. That’s why after the company launch 4G LTE commercially, it currently implement the technology in big cities in Java and Bali.

Forecast Changes
In summary, Buana had changed their assumption on Fixed Broadband subscribers, mobile broadband subscribers and ARPU - Fixed Broadband due to rapid growth on the data services. The impact of they change are a lower 1% Net Profit in FY14F and a higher 3% Net Profit in FY15F. Their new price target are Rp 3,380 which obtain by using 11% WACC and 4% Terminal Growth.

Graph. Financial Summary