SECTOR UPDATE REPORT - MNC Sekuritas€¦ · ‘Telkomsel 5G Experience Center’, while EXCL will test 5G technology in one Kota Tua, Jakarta, locale. With TLKM and EXCL's fundamental

Short-Term Shock Ensures Healthier Competition Environment Following the end of the SIM card registration period, the telecommunications sector recorded moderate growth of 7.26% YoY in 1H18, below the average FY12-FY17 figure of 9.56% YoY. This can be understood by considering the decline in revenues of telecommunication operators TLKM, EXCL and ISAT, who suffered an average drop of -8.39% YoY in 1H18. We are confident this regulation has the potential to act as a positive catalyst over the long term which will ultimately suppress the churn rate and result in a more efficient and stable industry. FY19F Catalyst: Data Price Rationalization and Focus on Network Quality We believe the sector will continue its growth by 9.28% YoY in FY19F, mainly due to: 1) Healthier long-term competition after the SIM card registration is implemented, the number of SIM cards registered stood at 254.79 million as of April 2018; 2) Operators are starting to rise data yield that more rational by 4%-11% in FY19F, at a level of IDR7,000-IDR17,000 per GB; 3) Various bundling promos as an effort to acquire and keep customers; 4) Focus on network quality as a the main driver of business continuity and maintaining its market share. On the other hand, M&A will be the main concerns in the near future and could shape Indonesia’s telecom industry in the long run. We believe fundamentally healthy operators with large economies of scale will be able to survive. Overweight Recommendation with Top Picks: EXCL and TLKM By considering positive catalysts and risks, we remain OVERWEIGHT for the telecommunications sector in Indonesia with top picks EXCL (BUY; TP: IDR3,300) and TLKM (BUY; TP: IDR 4,150). We are positive on EXCL’s growth outlook as well as pursuing ex-Java market opportunities. We see the increase in tariffs and bundling strategies carried out by EXCL as driving better performance in 2H18E. Our EXCL's target price implies EV/EBITDA at 4.02x/3.80x level in FY18E/FY19E. We also give a nod to TLKM on the back of its strong brand positioning. Our TLKM’s target price implies EV/EBITDA at 6.31x/5.73x level in FY18E/FY19E.

TELECOMMUNICATION SECTOR UPDATE Paving the Way for Better Performance

Sources: Bloomberg, MNCS (as of Oct 24, 2018)

Ticker Market Cap (IDR billion)

EV/EBITDA (x) PER (x) Rec.

Target Price (IDR) FY18E FY19F FY18E FY19F

TLKM 348,698.94 5.87 5.40 15.55 14.26 BUY 4,150 EXCL 29,498.88 4.98 4.63 75.42 70.86 BUY 3,300 ISAT 14,236.82 3.22 3.07 NA NA BUY 3,300

SECTOR UPDATE REPORT

MNC Sekuritas Research Division | Oct, 24 2018

Please see important disclaimer at the back of this report

Page 1 www.mncsekuritas.id MNC Sekuritas 1-500-899 [email protected]

Research Analyst

Victoria Venny N.S. [email protected] (021) 2980 3111 ext. 52236

Sector Update Report | MNC Sekuritas Research Division

In 1H18, the telecommunications sector recorded moderate growth of 7.26% YoY, below the average FY12-FY17 figure of 9.56% YoY. This can be understood by considering the decline in revenues of telecommunication operators TLKM, EXCL and ISAT, who suffered an average drop of -8.39% YoY in 1H18. The decline in telecommunications sector revenues transpired following the legal enactment of a SIM card registration policy, which resulted in a severe cut in the number of subscribers. A significant reduction in legacy business also dampened the performance of telecommunication operators. We project telecommunication sector growth at 8.06%/9.28% YoY in FY18E/FY19F, in line with Indonesian GDP growth of 5.20%/5.30% YoY in FY18E/FY19F.

A “Moderate Monitored Telecommunications Industry” was up 7.26% YoY in 1H18



Exhibit 01. Trends in the Growth of the Information and Telecommunications Sector in Indonesia (%)

Source: BPS, MNCS estimates

10.00

12.30

10.409.69

8.879.69

8.879.81

8.06

9.28

6.20 6.00 5.605.00 5.10 4.80 5.00 5.07 5.20 5.30

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19F

Information & Telecommunication Sector GDP Growth

Following the end of the SIM card registration period, determined by the Ministry of Communication and Information on May 1, 2018, 1H18 revenues of the 3 largest telecommunications operators (TLKM, EXCL and ISAT) each fell victim to stagnant growth of 0.54%/1.07%/-26.78% YoY, respectively. This decline in revenues was in line with the decrease in the number of TLKM, EXCL and ISAT operators, down by -0.01%/4.75%/-21.89% YoY in 1H18. Fewer customers also meant less ARPU for TLKM, EXCL and ISAT in 1H18, at -19.1%, -8.82% and -36.44% YoY. Although the short-term effects of SIM card registration regulation slashed the number of customers, we are confident this regulation has the potential to act as a positive catalyst over the long term. We see the impact of this regulation as a good opportunity for operators and consumers to choose services according to needs, which will ultimately suppress the churn rate and result in a more efficient and stable industry. Based on the Ministry of Communication and Information Press Release No. 112/HM/KOMINFO/05/2018, up until the April 30, 2018 deadline for registration, the number of SIM cards registered stood at 254.79 million.

SIM Card Registration: Short-Term Shock Ensures Healthier Long-Term Competition


In the midst of a tight competition map in the telecommunications sector, it is important for operators to implement creative and appealing strategies in order to defend market share. We believe that the use of SIM cards for approximately 6 months can reduce the churn rate. Seeing this, telecommunication operators launched various smart phone bundling promos with monthly data packages as an effort to acquire and keep customers. TLKM works with Erajaya to issue cash back promos of up to IDR2 mn in the purchase of new smart phones on Erafone and GraPARI, if the purchase is accompanied by a Telkomsel bundling package. Meanwhile EXCL offers a cash back promotion of up to IDR9.6 mn for 3 months, if the smart phone purchase is accompanied by a 12-24 month package subscription. An ISAT ‘SuperPlan’ bundling promo offers prices of around IDR2.9 mn for 12-24 month subscriptions to packages.

Bundling Strategy as an Effort to Acquire Customers



Exhibit 02. Bundling Promo Catalogue

Source: Erafone, EXCL

The development of technology is the main key to the sustainability in the telecommunications business. We see fundamentally healthy telecommunications operators with large economies of scale will be able to survive amid tight competition. The need for large capital expenditures to build good network quality encourages telecommunication operators to prepare intensive funding. Until 1H18, TLKM issued capex of IDR14.1 trillion, EXCL IDR 5.3 trillion and ISAT IDR2.67 trillion. TLKM controls a total of 97.5 blocks of spectrum, followed by EXCL and ISAT 45 and 62.5 blocks, respectively, in 1Q18; FREN and Hutchison each have 41 and 25 blocks. In terms of fundamentals, TLKM has a relatively stable leverage ratio, with DER at 1.05x at 1H18, followed by EXCL at 1.62x and ISAT at 2.67x. Meanwhile, based on the company's ability to manage cash availability, TLKM and EXCL are in the strongest cash position, with a cash ratio at 0.31x and 0.12x, compared to ISAT at 0.07x (1H18) and FREN at 0.03x (1Q18).

Large Capex Demands: Driving the Telecom Industry Urge to Merge


We perceive the competitive landscape of the telecommunications industry as increasingly narrowing in line with limited frequencies and the ability of operators to sustain business continuity. TLKM and EXCL are alleged to start investing in 5G technology and developing larger market share outside Java. TLKM leads the market, introducing the first 5G service in Indonesia at the 2018 Asian Games, through the ‘Telkomsel 5G Experience Center’, while EXCL will test 5G technology in one Kota Tua, Jakarta, locale. With TLKM and EXCL's fundamental performance and good financial position, we pinpoint them as able to lead the strengthening of the telecommunications sector in the future. We project a competitive map of the telecommunications industry as leading to a consolidation strategy, given the still high inequality of other small-scale telecommunications operators.



Exhibit 03. Total Debt to Total Equity Level (x) The Three Largest Operators in the Telecommunications

Source: Bloomberg, MNCS

Until 1H18, the average telecommunication operator traffic data growth rose by 83.30% YoY. However, this increase was not matched by operators’ yields in obtaining profits, amid data service package price wars. Following the enactment of the SIM card registration regulation, operator yields are on a downward trend, one which ultimately impels operators to monetize pending data when costs for infrastructure kick in. Data yield has settled to IDR6,000-IDR16,000 per GB in 1H18 (vs IDR10,000-IDR31,000 in 1H17). However, several operators began to raise data yield in 2H18, with our target to up it by 4%-11% in FY19F, at a level of IDR7,000-IDR17,000 per GB. Increased average traffic data of our telecommunications operators is estimated to grow moderately, at 33% YoY FY19F level, due to an increase in data yield. We believe that data service monetization can gradually be achieved, in line with the Government's focus on creating a healthy industrial climate supported by significant growth in internet data usage.

Increasing Traffic Data Needs Compared with Increased Yield

1.05

1.62

2.67

0.00 x

0.50 x

1.00 x

1.50 x

2.00 x

2.50 x

3.00 x

3.50 x

4.00 x

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

TLKM EXCL ISAT




Overweight Recommendation with Top Picks: EXCL and TLKM

We believe the sector will continue its growth by 9.28% YoY in FY19F, mainly due to: 1) Healthier long-term competition after the SIM card registration is implemented, the number of SIM cards registered stood at 254.79 million as of April 2018; 2) Operators are starting to rise data yield that more rational by 4%-11% in FY19F, at a level of IDR7,000-IDR17,000 per GB; 3) Various bundling promos as an effort to acquire and keep customers; 4) Focus on network quality as a the main driver of business continuity and maintaining its market share. On the other hand, M&A will be the main concerns in the near future and could shape Indonesia’s telecom industry in the long run. By considering positive catalysts and risks, we remain OVERWEIGHT for the telecommunications sector in Indonesia with top picks EXCL (BUY; TP: IDR3,300) and TLKM (BUY; TP: IDR 4,150). We are positive on EXCL’s growth outlook as well as pursuing ex-Java market opportunities. We see the increase in tariffs and bundling strategies carried out by EXCL as driving better performance in 2H18E. Our EXCL's target price implies EV/EBITDA at 4.02x/3.80x level in FY18E/FY19E. We also give a nod to TLKM on the back of its strong brand positioning. Our TLKM’s target price implies EV/EBITDA at 6.31x/5.73x level in FY18E/FY19E.

Exhibit 04. Data Yield and Traffic for Each Operator

Source: Bloomberg, Company, MNCS

00 TB

200,000 TB

400,000 TB

600,000 TB

800,000 TB

1,000,000 TB

1,200,000 TB

1,400,000 TB

1,600,000 TB

IDR0/GB

IDR10,000/GB

IDR20,000/GB

IDR30,000/GB

IDR40,000/GB

IDR50,000/GB

IDR60,000/GB

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E FY18E FY19F

TLKM Yield (LHS) EXCL Yield (LHS) ISAT Yield (LHS) TLKM Traffic (RHS) EXCL Traffic (RHS) ISAT Traffic (RHS)


Disclaimer This research report has been issued by PT MNC Sekuritas, It may not be reproduced or further distributed or published, in whole or in part, for any purpose. PT MNC Sekuritas has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; PT MNC Sekuritas makes no guarantee, representation or warranty and accepts no responsibility to liability as to its accuracy or completeness. Expression of opinion herein are those of the research department only and are subject to change without notice. This document is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment. PT MNC Sekuritas and its affiliates and/or their offices, director and employees may own or have positions in any investment mentioned herein or any investment related thereto and may from time to time add to or dispose of any such investment. PT MNC Sekuritas and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discusses herein (or investment related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.



MNC SEKURITAS RESEARCH TEAM Edwin J. Sebayang Head of Retail Research, Technical, Auto, Mining [email protected] (021) 2980 3111 ext. 52233

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MNC Research Investment Ratings Guidance BUY : Share price may exceed 10% over the next 12 months

HOLD : Share price may fall within the range of +/- 10% of the next 12 months SELL : Share price may fall by more than 10% over the next 12 months

Not Rated : Stock is not within regular research coverage

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Documents

SECTOR UPDATE REPORT - MNC Sekuritas€¦ · ‘Telkomsel 5G Experience Center’, while EXCL will test 5G technology in one Kota Tua, Jakarta, locale. With TLKM and EXCL's fundamental