Telekomunikasi Indonesia: 2023 Will Likely Be A Brighter Year (NYSE:TLK)

Elevator Pitch

I have a Buy investment rating for PT Telekomunikasi Indonesia Tbk’s (NYSE:TLK) [TLKM:IJ] shares.

In my prior update for Telekomunikasi Indonesia published on November 17, 2022, I wrote about TLK’s creation of a new infrastructure entity and its plans for merging its wireless and broadband business arms. I turn my attention to TLK’s 2022 share price performance and its stock price outlook for 2023 with the current article.

Telekomunikasi Indonesia’s 2022 stock price performance was poor, but 2023 should be a better year for TLK’s shares. The profitability of Telekomunikasi Indonesia’s mobile business is likely to improve in 2023 as competition in the Indonesia wireless industry eases; TLK should also benefit from a substantial unrealized gain relating to the increase in the fair value of its investee, GoTo Gojek Tokopedia [GOTO:IJ], this year. As such, my Buy rating for Telekomunikasi Indonesia remains intact.

Telekomunikasi Indonesia’s Stock Price Performance For 2022

TLK’s share price dropped by -18% in the previous year. In contrast, the IDX Compositive, a benchmark index for listed Indonesian companies, rose by +4% in 2022.

Telekomunikasi Indonesia’s underperformance for 2022 is likely attributable to substantial stock price correction for its investee, GoTo Gojek Tokopedia. In the subsequent sections of this article, I explain why I think TLK’s shares will recover in 2023.

Investment In GoTo Gojek Tokopedia

Operating income for Telekomunikasi Indonesia decreased by -13% YoY from IDR36,301 billion in the first nine months of 2021 to IDR31,573 billion for the 9M 2022 financial period, even though TLK’s top line expanded by +3% in the same time frame.

As disclosed in its 6-K filing issued on October 28, 2022, TLK recognized a substantial unrealized loss on change in the fair value of investments amounting to -IDR3,084 billion in the 9M 2022 period. In comparison, Telekomunikasi Indonesia registered a +IDR403 billion unrealized gain on change in the fair value of investments for 9M 2021.

As of the end of the third quarter of 2022, Telekomunikasi Indonesia owned approximately 23.7 billion shares of GoTo Gojek Tokopedia, which describes itself as an operator of an online platform combining “e-commerce, on-demand and financial services”, is listed on the Indonesia Stock Exchange with the ticker GOTO:IJ. GoTo’s share price fell by -36% from IDR382 as of April 11, 2022 (first day of trading post public listing) to IDR246 as of September 30, 2022. This led TLK to incur an unrealized fair value loss of more than -IDR3 trillion in the first nine months of the prior year.

It is noteworthy that GoTo’s shares closed at a share price of IDR91 on the final day of trading in 2022. This implies that GoTo’s stock price plunged by -63% in Q4 2022. As such, it is reasonable to assume that TLK will record another significant unrealized fair value loss when it reports its Q4 2022 and full-year 2022 financial results in April. This explains why Telekomunikasi Indonesia’s shares have underperformed on both an absolute and relative basis last year; the market is pricing in TLK’s expected unrealized fair value loss for the fourth quarter.

On the positive side of things, there is a good chance that GoTo’s stock price will rise in 2023, which will translate into an unrealized fair value gain for TLK this year.

GoTo’s shares have already risen by +29% year-to-date in 2023 to close at IDR117 as of January 25, 2023. According to the sell-side’s consensus forecasts taken from S&P Capital IQ, the mean analyst price target for GoTo is IDR202.26, which implies that its shares have a capital appreciation potential of as much as +73%.

GoTo suffered from a major share price correction in 2022, as its initial valuations at the point of IPO were expensive and the company incurred significant losses. But GoTo’s current valuations are more reasonable, and there are expectations that its losses will narrow this year.

GoTo currently trades at 5.5 times consensus forward next twelve months’ Enterprise Value-to-Revenue (source: S&P Capital IQ), which seems undemanding compared with its consensus FY 2023-2026 top line CAGR of +46%. Moreover, analysts see GoTo’s normalized net loss narrowing from -IDR26,419 billion in fiscal 2022 to -IDR20,594 billion for FY 2023. GoTo stressed at the company’s most recent Q3 2022 earnings call that it has “identified additional (cost optimization) levers that will help us to accelerate our path to profitability”, and disclosed that “a significant part of these cost savings will be realized in Q1 2023.” This provides investors with the confidence that GoTo’s bottom line performance should improve this year.

The Indonesian Wireless Market

Competition between Telekomunikasi Indonesia and its rivals in the Indonesian mobile market should be less intense this year.

According to a January 13, 2023 report published by Indonesian research firm BRI Danareksa, most of the key players in the Indonesian wireless market don’t intend to engage in aggressive price competition in the current year. The BRI Danareksa report highlighted that PT XL Axiata Tbk (OTCPK:PTXKY) (OTC:PTXAF) has plans for price increases in the first quarter, and noted that PT Indosat Ooredoo Hutchison Tbk’s (OTCPK:PTITF) won’t likely compete on price as it will want to offset the negative impact associated with its higher 2023 capital expenditure target with more favorable pricing. TLK, Axiata and Indosat are Indonesia’s three major mobile companies. Specifically, BRI Danareksa forecasts that the average price for wireless plans in Indonesia will rise by between +8% and +10% in 2023.

On its part, Telekomunikasi Indonesia remains committed towards avoiding price competition. TLK had emphasized at the company’s Q3 2022 investor call (source: S&P Capital IQ transcripts) on November 1, 2022 that it has “been leading the healthier market direction” for the industry in terms of pricing which has helped to discourage the marketing of “unlimited (data) packages by our competitors.” More importantly, Telekomunikasi Indonesia highlighted at its most recent quarterly investor briefing that its goal to push for “sustainable profitability” for the Indonesian telecommunications industry at large.

In a nutshell, both TLK and its competitors are very likely to increase the pricing for their respective mobile plans in the current year, and this should have a positive impact on Telekomunikasi Indonesia’s 2023 profitability. Consensus financial figures obtained from S&P Capital IQ suggest that TLK’s EBITDA margin could potentially expand from 54.9% for FY 2022 to 55.8% in FY 2023.

Concluding Thoughts

I continue to assign a Buy rating to Telekomunikasi Indonesia. I expect a share price recovery for TLK to materialize this year, after analyzing the prospects of its investee, GoTo, and the competitive environment in the Indonesian wireless market.