Telekomunikasi Indonesia: Two Catalysts To Watch (NYSE:TLK)

Elevator Pitch

My rating for PT Telekomunikasi Indonesia Tbk’s (NYSE:TLK) [TLKM:IJ] stock is a Buy.

I discussed about TLK’s tower business spin-off and the consolidation of the telecommunications market in Indonesia with my earlier November 19, 2021 write-up. In this article, my focus is on two new catalysts which could help to drive a positive re-rating of Telekomunikasi Indonesia’s stock price and valuations. My buy rating for TLK assumes that the two re-rating catalysts can support an expansion in the stock’s valuation multiple.

Planned Merger Of Mobile And Fixed Broadband Businesses

Bloomberg reported late last month that Telekomunikasi Indonesia has already “picked advisers for the merger of its broadband and wireless businesses as part of an overhaul of the state-owned telecommunications group.” The company refers to its mobile and fixed broadband businesses as Telkomsel and Indihome, respectively.

There are three main reasons for my positive view relating to the planned merger between Indihome and Telkomsel.

Firstly, there are revenue synergies in the form of cross-selling.

Indihome has the potential to expand its fixed broadband subscriber base in a meaningful way by reaching out to Telkomsel’s customers.

Notably, the fixed broadband penetration rate in Indonesia is quite low at around 20%. Separately, Indihome’s most recent third quarter EBITDA was just slightly over a quarter of the EBITDA generated by Telkomsel in the same period as per S&P Capital IQ data. These two key metrics offer an indication of the significant growth potential of Telekomunikasi Indonesia’s fixed broadband business. A merger between Telkomsel and Indihome will allow the latter to grow at a much faster pace through cross-selling efforts.

Also, Telkomsel is in a better position to fend off competition, assuming that a growing proportion of its mobile subscribers also become Indihome’s fixed broadband clients.

According to Fitch Ratings, Telkomsel and Indihome boasted market shares of 70% and 53%, respectively in the Indonesian market. These numbers suggest that competition is far more intense in the mobile market as compared to the fixed broadband market in Indonesia. As such, the adoption of a bundling strategy to increase customer switching costs will play a key role in enabling Telkomsel to maintain or extend its market leadership in the Indonesian wireless market. Therefore, the merger between Telekomunikasi Indonesia’s fixed broadband and mobile businesses will provide a substantial boost to the company’s bundling strategy.

Secondly, there are also cost synergies associated with the potential merger.

At the company’s Q3 2022 earnings briefing on November 1, 2022, Telekomunikasi Indonesia highlighted there are opportunities to cut costs following the completion of the merger. Specifically, TLK mentioned that there is a certain degree of “duplication (of costs) amongst Telkom (Telekomunikasi Indonesia) and Telkomsel” which include expenses relating to “marketing”, “resellers”, and the “sales force.”

Thirdly, certain Telekomunikasi Indonesia products and services can grow even faster following the integration of the company’s fixed broadband and wireless businesses.

One of them is Orbit. TLK describes Orbit as a “fixed wireless” offering which provides “home internet service that uses a WiFi modem with the best cellular network quality” on its product website. Telekomunikasi Indonesia also noted at its most recent quarterly investor call that it has a service called Smooa which “allows IndiHome subscribers to buy Telkomsel internet quota under single billing system.”

In conclusion, it is reasonable to view the eventual completion of the merger of Indihome and Telkomsel as a major catalyst for Telekomunikasi Indonesia’s shares.

New Infrastructure Company Will Help To Unlock Value Of TLK’s Assets

Another catalyst to watch is the establishment of a new infrastructure company or InfraCo for Telekomunikasi Indonesia. TLK disclosed at its recent third quarter investor call that it intends to “explore new InfraCo business model and infra (infrastructure) sharing potential.”

There are two key things that investors should consider.

One key thing to note is that infrastructure currently represents an expense for Telekomunikasi Indonesia in the form of network costs. Going forward, if TLK engages in “infra sharing” as it mentioned, this will enable the company to develop a new revenue source by sharing its infrastructure (e.g. fiber) with other companies.

Another key item to pay attention to is that this isn’t the first time that TLK is looking at options to monetize the value of its telecommunications infrastructure. In my November 19, 2021 article, I touched on Telekomunikasi Indonesia’s spin-off and public listing of its telecommunications towers business, Miratel.

TLK emphasized at its Q3 2022 earnings call that “there are several scenarios for the exit” of InfraCo, including a public listing. In other words, Telekomunikasi Indonesia is very likely going to either sell a stake in InfraCo to other investors or spin off InfraCo as a separate listed entity in time to come.

Closing Thoughts

TLK’s shares are rated as a Buy. The market values Telekomunikasi Indonesia at 5.6 times consensus forward next twelve months’ EV/EBITDA now according to valuation data taken from S&P Capital IQ, which doesn’t seem very demanding. It is reasonable to assume that TLK could command a higher valuation multiple once the two key catalysts mentioned in this article come into fruition.