- Nova School of Business and Economics

Transcription

MASTERS IN FINANCE
EQUITY RESEARCH
PT. TELEKOMUNIKASI INDONESIA
COMPANY REPORT
TELECOM
06 JANUARY 2014
STUDENT: MICHAEL TANJUNG
michael.tanjung.2012@novasbe.pt
Recommendation:
BUY
Price Target FY11:
2,550 IDR
recommendation and a price target of 2,550 IDR, offering an
Price (as of 29-Jan-14)
2,125 IDR
upside potential of 20%. The stock currently trades at a P/E ratio of
Reuters: TLKM.JK, Bloomberg: TLKM IJ
Challenging Year Ahead
…yet to be conquered

We
initiate
coverage
of
Telkom
with
BUY
14.15 – a 30% discount to the telecommunication sector.

Risk factors. Firstly, we foresee XL-AXIS merger and
52-week range (IDR)
1,751-2,566 IDR
Market Cap (trillion IDR)
214.2
Outstanding Shares (B)
100.8
acquisition to be the game changer for the Indonesian cellular market.
Free float (B)
Ultimately, by retaining Axis’ spectrum, XL’s network bandwidth is now
Source: Bloomberg
49.2
on par with Telkomsel. Secondly, inevitable pricing compression
caused by fierce competition in the cellular market would eventually
result in Telkomsel lower margin.

Segments development. We expect the continuingly fixed-to-
mobile substitution effect to further penalize fixed-line voice sector. As
for the fixed-broadband segment, rapidly growing middle class
population, rising household consumption and incremental number of
new enterprises created every year would provide a solid platform for
robust growth. Mobile broadband will be the new growth engine
Source: Bloomberg
fuelled by Indonesian
(Values in Rp billions)
2012A
2013E
2014F
Revenues
77,143
83,145
89,027
EBITDA
39,757
42,987
45,742
Net Profit
12,850
14,172
15,137
EPS
127
141
150
EV/Sales
3.4
3.1
2.9
Telkomsel’s persistently strong cash flow derived from its large
EV/EBITDA
6.2
5.8
5.5
business scale and superior operational efficiency will enable the
EV/Subscribers
1.7
1.7
1.7
Net (Debt)Cash/EV
-1.6%
0.6%
-0.1%
ROIC
30%
30%
28%
young population, and growing urban
population, which subsequently promotes higher penetration of
advance telecommunication gadget such as smartphone and tablet.

In spite of fierce competition in the cellular market,
company to preserve its superior network quality and market share.
Source: Analyst’s Estimates, Company Reports
Company description
Telkom is the largest and most integrated telecommunication service provider
in Indonesia, providing fixed wireline, fixed wireless, cellular, data and Internet
services to over 90% of Indonesian population.
THIS REPORT WAS PREPARED BY MICHAEL TANJUNG, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW .NOVASBE.PT
Page 1/36
COMPANY REPORT
Table of Content
COMPANY OVERVIEW ............................................................................ 3
VALUATION METHODOLOGY................................................................. 4
MACROECONOMIC OUTLOOK ............................................................... 5
FIXED LINE BUSINESS ............................................................................ 6
FIXED-LINE VOICE – THE INEVITABLE DECLINE ..................................................... 6
FIXED WIRELESS ACCESS VOICE – THE END IS NEAR............................................. 8
FIXED BROADBAND – DECENT GROWTH POTENTIAL .............................................. 9
CELLULAR BUSINESS .......................................................................... 11
VOICE USAGE AND TARIFF .................................................................................. 16
SMS .................................................................................................................... 16
MOBILE BROADBAND “FLASH” – THE FUTURE GROWTH ENGINE ......................... 17
INTERCONNECTION .............................................................................................. 21
OPERATING COST MARGIN AND INVESTMENTS .............................. 21
FIXED BUSINESS MARGIN ................................................................................... 22
CELLULAR BUSINESS MARGIN ............................................................................ 23
FIXED LINE INVESTMENTS................................................................................... 24
CELLULAR INVESTMENTS .................................................................................... 24
FOREX RISKS ON INVESTMENTS ........................................................................ 25
CAPITAL STRUCTURE AND COST OF CAPITAL................................. 26
FINAL VALUATION CONSIDERATIONS ............................................... 27
APPENDIX I – FINANCIALS ................................................................... 28
APPENDIX II – ADDITIONAL SCENARIO ANALYSIS ........................... 29
APPENDIX III – INDONESIAN MOBILE OPERATORS .......................... 31
APPENDIX IV – BROADBAND TARIFF COMPARISON ........................ 31
APPENDIX V – SPECTRUM AND 3G BAND PLAN ............................... 32
APPENDIX VI – BTS FORECAST .......................................................... 33
APPENDIX VII – FOREX RISK ON INVESTMENTS ............................... 34
APPENDIX VII – COMPARABLES ......................................................... 34
DISCLOSURES AND DISCLAIMER.......................................................................... 35
RESEARCH RECOMMENDATIONS ....................................................................... 36
PAGE 2/36
Graph 1 – 2012 Telkom Revenues
Contribution by Segments
COMPANY REPORT
Company overview
PT. Telekomunikasi Indonesia (Telkom) is the largest and most integrated
telecommunication company (telco) in Indonesia. Telkom’s source of value creation
is wholly derived from its domestic telecommunication businesses including fixed
line and fixed wireless telephone connections, mobile cellular communications,
network and interconnection services, and data communication services. Telkom still
enjoys monopoly in the fixed line telephone segment; notwithstanding, we see an
inevitable declining demand for fixed-based voice services due to continuing fixedto-mobile substitution effect. Telkom is currently a leading player in the fixed-
Source: 2012 Annual Report
broadband sector with 78% market share; fixed-broadband market has been
growing significantly with rising middle class population; we see a tremendous
1
growth opportunity for the upcoming terms. Through its subsidiary, Telkomsel ,
Telkom provides cellular connectivity that covers more than 97% of the Indonesian
population. Telkomsel has the largest subscribers’ base amounted to 44% market
share in 2012; nevertheless, a recently merged XL-Axis (XL:IJ) would definitely
challenge its dominance. As of December 2012, Telkomsel revenues contribution
totalled to 71%.
Still a State Owned Enterprise
Telkom is a State-Owned Enterprise (SOE) as government owns more than 50% of
Graph 2 – 2012 Shareholder Structure
all shares outstanding. The remaining shares are listed on the Indonesia Stock
Exchange, NYSE and LSE. Bank of New York Mello Corporation serves as the
Depository of registered American Depository Shares (ADS) holders for the
2
Company’s ADSs . Table 1 below presents other top holders;
Table 1 - Institutional Shareholders as of December 2013
Top 10 Holders
Source: 2012 Annual Report
Vanguard Group Inc
Blackrock Fund Advisors
JPM
Invesco LTD
Fidelity International
Norges Bank
Matthews International Capital
Pictet Asset Management Ltd
Grantham Mayo van Otterloo & Co
SchroderInvestment Management Ltd
Total
% ownership
1.44%
0.85%
0.76%
0.65%
0.57%
0.56%
0.47%
0.46%
0.35%
0.32%
6.43%
Source: Bloomberg
1
Telkom assumes control of Telkomsel with 65% ownership, the remaining 35% belonged to Singapore Telecom (ST:SP)
As of September 30, 2013, 45,765,152 ADS shares were listed on the NYSE and LSE. Following the 1-for-5 stock split
(approved on April 19, 2013), each ADS represented 200 common shares.
2
PAGE 3/36
COMPANY REPORT
Valuation Methodology
We used a sum of parts (SOP) approach to arrive at the final equity value. Fixed and
cellular business segments were valued separately using Discounted Cash Flow
(DCF) model. Net debt/cash was derived by deducting excess cash (book value)
from market value (MV) of debt. Obligations to employee and other non-equity items
were obtained from their book value (BV).
We have incorporated various scenarios that could impact our initial cash flow
forecast, and the respective price target. The probability attributed to each scenario
analysis is solely our view on current market situation. Subsequently, we have
reached a price target of 2,547 IDR, implying an upside potential of 20%.
Following table summarizes our valuation;
Table 2 - Summary of Telkom Valuation
Cellular business value
Fixed business value
Enterprise Value
Net cash (debt)
Obligations to employee
Non-equity items
Equity Value
# Oustanding Shares (B)
Price Target
Current Price
Implied Upside Potential
Stake
Method
Base Case
Scenarios
p = 50%
Best Case
Scenarios
p = 30%
Indonesia Economy
to Erode Further
p = 20%
65%
100%
DCF
DCF
-
MV
BV
BV
-
206,907
52,575
259,482
(167)
(2,314)
480
257,481
100.8
2,554
2,125
20%
267,374
58,860
326,234
53
(2,314)
480
324,453
100.8
3,219
2,125
51%
121,627
36,204
157,831
(2,526)
(2,314)
480
153,471
100.8
1,523
2,125
-28%
Weighted
Value
256,771
100.8
2,547
2,125
20%
Unit: billion IDR, unless stated otherwise | Source: Analyst’s Estimates, Bloomberg, Company Reports
PAGE 4/36
COMPANY REPORT
Macroeconomic Outlook
Indonesian economy has been contracting recently; IMF revised GDP growth down
to 5.3% in September 2013 from previously 6.3% in April 2013, but expecting slight
recovery to happen in 2014.
Table 3 – Indonesia GDP Forecast (Constant Price)
GDP
% growth
2008
2,082
6.0%
2009
2,179
4.6%
2010
2,314
6.2%
2011
2,465
6.5%
2012
2,618
6.2%
2013E
2,757
5.3%
2014F
2,908
5.5%
2015F
3,083
6.0%
2016F
3,268
6.0%
2017F
3,464
6.0%
2018F
3,672
6.0%
Units: trillion IDR | Source: IMF
3
We are informed that the revision was triggered by recently high inflation that forced
Bank Indonesia (BI) to continuingly raising interest rate, which in turn had slowed the
overall economy growth due to higher borrowing cost (reduces economic activity)
and higher saving rate (reduces consumption as people tend to save instead).
4
Furthermore, BI rate is expected to be escalating further until the inflation rate ease
back to the target level of 4%-5%, which means growth would continue being
penalized in 2014, at the very least.
Graph 4 – Indonesia GDP Growth YoY
Source: Badan Pusat Statistik Indonesia
Graph 5 – Indonesia Domestic Interest Rate and Inflation
Source: Bank Indonesia (BI)
Other various macroeconomic and demographic indicators will certainly steer our
cash flow forecast; nevertheless, their relevance may differ per business segment,
as such we will cover them specifically and separately for each business segment.
3
As seen in graph 5, Indonesian inflation rate has been very volatile which was mostly caused by large amount of
government subsidy on basic needs like food, fuel and electricity. Early this year government reduced subsidy on fuel and let
the price of gasoline and diesel inflated by 44% and 22% respectively (to 6,500 IDR and 5,500 IDR per litre); this had directly
and swiftly caused a huge jump in inflation rate, as basic needs such as transportation, for instance, became more expensive
and led to higher end-products or services (due to higher logistic costs). World Bank estimates that raw and core inflation
would rise approximately by 300bps and 100 bps respectively when fuel prices increased by 2,000 IDR.
4
We are also informed that Indonesia’s large current account deficit has caused loss of confidence from foreign investors
who started pulling their money out of the country in anticipation of the approaching FED tapering. Besides to control inflation,
higher interest rate is also perceived as an incentive for foreign funds to remain intact. Additionally, Rupiah would remain
vulnerable as account deficit has showed no meaningful improvement lately, and thus high inflation would likely to persist
longer; we see this as a downside risk to our initial earnings estimates; we discuss this further under Appendix II - Additional
Scenario Analysis.
PAGE 5/36
COMPANY REPORT
Fixed Line Business
Graph 6 – Total Minutes Productions
from Fixed-Line Voice (LHS) Vs. Cellular
Voice (RHS) Services
Fixed-line Voice – the inevitable decline
Telkom fixed-line telephone service is no other than the plain old telephone service.
This fixed-line telephone service includes local, direct long-distance (DLD) and
international call service. Telkom still enjoys monopoly in this segment with 99%
market share; because of an inevitable decline of the sector growth and
subsequently low potential of value creation, fixed-line telephone segment seems to
attract no new entrants. For the last 5 years, this sector has suffered from fixed-tomobile substitution effect. The overall decreased in total minutes production implies
that minutes production per lines in service (LIS)
5
has decreased by roughly 1,700
minutes in 2008 to only 755 minutes in 2012. As seen in table 4, fixed-line voice
Units: billion minutes | Source:
Company reports
revenue contribution has shrunk considerably;
Table 4 – Telkom Fixed-line Voice Subscribers and Revenues Evolution
Lines in service (millions lines)
Fixed-line voice revenues
growth
6
Voice ARPU (thousand IDR)
2007 A
8.7
18,021
173
2008 A
8.6
15,878
-12%
152
2009 A
8.4
10,289
-35%
102
2010 A
8.3
9,453
-8%
95
2011 A
8.6
9,833
4%
95
2012 A
9.0
8,818
-10%
81
2013 E
9.4
9,016
2%
79
5y-CAGR
2%
-11%
-12%
Units (revenues): billion IDR | Source: Company Reports
Note that ARPU includes fixed monthly subscription charges and usage charges,
which the latter contributes disproportionately larger. Persistently declining ARPU is
7
in fact a result of lower usage per LIS, conversely the implied price per minute has
actually increased from 1,119 IDR in 2008 to 1,297 IDR in 2012. At this rate, fixed
Graph 7 – 2012 Fixed-line Voice
Penetration Rates per 100 Households
(Average: 33)
voice service is actually charging much higher than cellular voice service (of only
8
166 IDR per minute), adding another reason why people tend to use their cellphones nowadays.
Despite the substitution effect aforementioned, we believe that low penetration rate
in the fixed-line telephone sector (refer to graph 7) would still provide little room for
growth, and that the essentialness of basic telephony would drive penetration higher
in the future. In fact, we see a slight pickup in LIS in 2011 after the cellular
penetration rate surpassed 100% mark in late 2010, whilst utilization rate has been
rising from 78% to 81% and 82% in 2012 and 2013 respectively (refer to graph 8).
Units: # households | Source: ITU,
Analyst’s Estimates
5
We refer subscribers in the fixed-line telephone sector as LIS
Average revenue per user (ARPU) is calculated based on total voice revenues per month divided by total LIS
7
Price per minute is calculated by dividing voice revenues by total minutes production
8
This amount is calculated based on 2012 cellular voice revenues and total cellular minutes production (including free
minutes). Lower price per minute seen in cellular voice services is due to excessive promotions (free calls) caused by intense
competition in the mobile market. We discuss further under Cellular Business section.
6
PAGE 6/36
Graph 8 – Number of Lines in Service,
Installed Lines (LHS) and Utilization Rate
(RHS)
COMPANY REPORT
Since the fixed-line telephone penetration is still concentrated in big cities and urban
9
area , we assume that Telkom would continue adding new lines with intention to
drive penetration in the sub-urban or rural area higher. Nevertheless, we foresee the
additional lines to grow at a slower pace than 3% CAGR verified from 2004-2013,
10
with priority set to utilize lines back to 90% level .
Provided the expected additional installed lines for the upcoming terms, we could
then infer the incremental LIS by estimating utilization rate in the future of which is to
converge towards 90% rate. The following table presents our forecast summary for
the next 5 years;
Units: million lines | Source: Company
Reports, Analyst’s’ Estimates
Table 5 – Fixed-line Telephone Forecast
Installed lines
Lines in service
Utilization rate
2012A
11,109
9,034
81%
2013 E
11,498
9,474
82%
2014 F
11,555
9,712
84%
2015 F
11,613
9,956
86%
2016 F
11,671
10,206
87%
2017 F
11,810
10,534
89%
2018 F
11,956
10,808
90%
CAGR
1%
3%
Source: Company reports, Analysts’ estimates | Units: thousand lines
11
Our estimation implies a growing subscribers’ base (LIS) at CAGR of 3% , still
lower than 4.5% CAGR yielded during 2010-2013.
In what regards the ARPU, we expect the downtrend would continue in near
12
future as we are still convinced that the fixed-line usage will decline further due to
voice-to-data substitution effect. Over the top VoIP application such as Skype has
become more popular and been used globally, not only for home-personal use, but
also professionally, such as on-line meeting, job interview and university admission
Graph 9 – Voice ARPU Forecast
interview. Moreover, currently low penetration in the broadband sector coupled with
substantial growth potential would surely negatively affect
Telkom
legacy
business
including
local,
DLD
and
international call services; as such we believe that the fixedline usage would still plummet in the foreseeable future.
As for the longer run, we presume the fixed-mobile/voicedata substitution effect to start lessening, and the respective
usage per LIS to find the equilibrium and stop declining; and
13
Units: trillion IDR and thousand IDR (ARPU) | Source:
Analyst’s estimates
therefore ARPU would rise due to a higher unit price .
9
Yet we could not infer precisely how many cities are currently covered by Telkom and which cities are still to be covered, as
the information in that regards is not disclosed.
10
Telkom has indicated that CAPEX related to fixed-line business would be mostly allocated to the fixed-broadband network
development, thus it would be reasonable to assume slower expansion in the fixed-line telephone.
11
At this rate, we implicitly expect fixed-line telephone penetration rate to reach 33% mark (or equal to current APAC
average) in the next 20 years.
12
We are still convinced that fixed-line usage would still decline in near future due to voice-data substitution (we discuss this
issue in greater detail under Cellular Business section).
13
Bear in mind that ARPU is a function of usage (minutes production/user) and unit prices (price per minute). Though usage
is presumed to be constant over time, a rising unit price would still result in higher ARPU.
PAGE 7/36
COMPANY REPORT
Fixed Wireless Access Voice – the end is near
Graph 11 – Indonesia FWA Subscribers’
Base Trend
Telkom’s fixed wireless access (FWA) voice service is managed by the Wireless
Broadband Division under the trademarks “Telkom Flexi” or “Flexi” and uses CDMAbase network technology.
As of December 2012, Flexi and Esia
14
are the main operators in the sector with the
subscribers’ base totalled to more than 97% market
share when combined, see graph 10.
Graph 10 – FWA Telephone Market Share
Evolution over the Last 7 Years
As also seen in the fixed-line telephone, threat of
Units: million users | Source: ITU, Analyst’s
estimates
substitute is even greater in the FWA voice sector.
New tariff regulation
15
has turned the differences
between FWA and GSM mobile cellular tariff
Graph 12 – 2013 Flexi Subscribers Base
Contraction
immaterial. Moreover, the ever-fiercer competition in
the GSM cellular market has provoked lower tariff
16
charged by the GSM-based operators . Apparently
with similar cost of usage, customers would rather
have GSM-based mobile phone as it provides more
Source: Company reports, Analysts’
estimates
features and richer application experiences. Altogether these circumstances
promote migration to a full mobile GSM service. As seen in graph 11, the FWA voice
market has finally taken a massive hit this year after peaked earlier in 2010; the
overall subscribers’ base plummeted by more than 40%.
Units: million users | Source: Telkom Q3
2013 info memo
Flexi has suffered the worst from pricing compression, as it has been giving
excessive promotions
17
in order to maintain its
subscribers’ base size, see graph 14 and 10; Esia on
Graph 13 – Flexi Revenues Contribution
Graph 14 – ARPU Trend of Flexi and
Esia
the other side has kept ARPU above 20 thousand
IDR, yet lost more than 20% of subscribers in 2012
alone.
Flexi’s
revenue
contribution
has
shrunk
remarkably since 2009; and we estimate its revenues
to be just under 1,000 billion IDR for FY13 following
the 9M-2013 results released. In that same period,
Flexi lost more than 30% of its subscribers, refer to
graph 12.
Units: thousand IDR | Source: Company
reports
Units: billion IDR | Source: Company
reports, Analysts’ estimates
14
Esia is another FWA voice services provider operated by Bakrie Telecom (BTEL)
The government altered the regulation relating to the calculation of right-of-use tariff in December 2010, resulting in a
significantly smaller gap between GSM and CDMA tariff.
16
As of December 2013, average price of voice service charged by FWA provider is 1,666 IDR per minute, which is very
close to GSM-based operators’ average tariff per minute of less than 1,799 IDR. Price already includes interconnection cost.
Source: Operators’ website.
17
Free minutes derived from promotions surely put pressure on ARPU, as unit price decreases while usage is not necessarily
increased.
15
PAGE 8/36
Graph 15 – Flexi Subscribers and ARPU
Forecast
COMPANY REPORT
According to the CFO, Mr Honesti Basyir, Telkom intends to gradually withdraw
FWA voice services over the next two or three years. We see this as an appropriate
move by the management; as spectrum becomes a scarce national resource, 10
MHz spectrum blocks on 850 MHz
18
frequency used by Flexi can be returned and
19
re-used by Telkomsel to provide a lower-end and cheaper data service .
To conclude, we forecast Flexi’s subscriber to continue declining sharply for the next
2-3 years, afterwards the service is presumed terminated. ARPU is expected to rise
as we assume Flexi would start reducing promotions (free calls), and thus unit price
would eventually converge to market price.
Units: million users (Subs.) and thousand
IDR (ARPU) | Source: Company Reports,
Analyst’s Estimates
Fixed Broadband – decent growth potential
Telkom provides fixed-line based broadband internet access using ADSL and fiber
optic technology under the brand “Speedy”. Fixed broadband is still perceived as a
Graph 16 – 2012 Asia Pacific GDP per
Capita PPP constant US$
premium need in Indonesia, and rather explains
low broadband penetration in the country that has
Graph 17 – Fixed Broadband Penetration
per 100 Households
lower GDP per capita than most of its Asia Pacific
(APAC) peers. Looking further into the penetration
rate, we are left with more questions; as seen in
graph 16 and 17 consecutively, Vietnam, India,
and Phillipines has higher broadband penetration
rate than Indonesia despite their lower production
per capita. What might be the setback for
Source: World Bank
Indonesia,
besides
its
rather
challenging
geography condition? Following is our best guess;
Graph 18 – Speedy Market Share Evolution
Units: # households | Source: ITU, Analyst’s
estimates
Indonesian customers have fewer fixed-broadband service choices and incur higher
prices as the fixed-broadband sector is lack of operators and therefore experiences
less efficient competition; in fact, Speedy holds 78% market share in Indonesia (as
per December 2012). Unit price for 1 Megabit per second (Mbps) is comparatively
much higher in Indonesia, yet the average speed of fixed-broadband internet
connection is not truly superior to the available connection speed provided by the
20
mobile broadband services, of which is accessible with a lower cost, see graph 19 .
Thus, it is no surprise that fixed-broadband penetration is rather limited in Indonesia.
Source: ITU, Company Reports
18
CDMA-base operators currently use 850 MHz frequency band to provide voice and data services, whilst GSM-3G use
2,100 MHz frequency.
19
Spectrum license for providing telecommunication services through 850 MHz frequency is priced much cheaper than the
2,100 MHz used for 3G, the associate radio usage charges are also lower, thus allowing Telkomsel to provide cheaper dataservice for the lower-end market. This way Telkomsel would have more flexibility to maintain its premium services and prices
without putting more pressure on its operating margin. If executed rightfully, Telkom would be able to create additional value
in the long run through its more efficient spectrum management.
20
The data presented is the actual speed. In practice, operators claim 7.2 Mbps for their 3G connection download speed.
Moreover, the average mobile broadband cost per Mbps is lower than 5 US$. Notwithstanding, fixed broadband still has an
advantage of higher capacity of usage and a more reliable internet connection. See appendix IV for tariff comparison.
PAGE 9/36
COMPANY REPORT
Table 6 - 2013 Fixed Broadband Comparison Matrix
21
# Operators
Cost per Mbps (US$)22
Cost of Broadband (US$)
As % GDP/capita
Household Download Index (Mbps)23
Vietnam
6
13.72
13.18
India
9
11.00
19.49
23%
4.22
Indonesia
3
25.72
42.50
22.7%
3.36
Thailand
20
2.48
30.25
8.98%
12.96
China
5
2.25
27.03
9.93%
15.99
APAC
9.29
17.23
Europe
3.60
22.11
Source: ITU, Ookla, Companies’ Websites
Graph 19 –Indonesia Broadband Speed
Comparison
Despite the aforementioned hindrance, we believe that
Graph 20 –Fixed Broadband
Subscriptions in Indonesia
low penetration rate would still provide decent growth
opportunity for Telkom Speedy in the future.
We expect the subscribers’ base to grow at slightly
lower rate in 2014 than seen in 2012-2013 amid
CAGR
32.5%
recent economy contraction aforementioned under
24
Macroeconomic Outlook section . As for the longer
run, it would be reasonable to forecast stronger growth
provided a solid platform formed by rapidly growing
Units: Megabit per second (Mbps) | Source:
ITU, Ookla
middle class population, firm economy growth and
Units: thousand subscribers | Source: ITU
growing number of new enterprises created every year
(refer to graph 22 and 23). Additionally, household consumption has also been
increasing
exponentially,
which
signals
growing
demands
for
premium
products/services.
Graph 21 – Indonesia Households Consumption
Expenditure
Units: billion USD | Source: World Bank
Graph 22 – Percentage of Household with
Disposable Income Larger than 15,000 USD
and 25,000 USD
Source: Euromonitor
Graph 23 – Decreasing cost to start a
business, and increasing number of new
business registered every year
Source: World Bank
21
This indicator aims to explain bargaining power of buyer, more number of operators implies that customers have more
choices and that competition is presumably more efficient resulting in generally lower prices. Though may be not entirely true,
but the fact that Speedy holds more than 75% market share, which results in high market concentration, customers are
therefore inferred low bargaining power.
22
Cost per Mbps measures the median cost charged by the provider for 1 Mbps. Indonesia is among the highest by a far
margin.
23
Household download index measures average download speed per broadband connection. Additional information,
European countries’ average download speed is above 20Mbps.
24
Recently high inflation that is expected to persist until mid-2014 would really penalize customers’ purchasing power; as
such we expect their spending behavior would be shifted towards premier needs, such as food, transportation, etc.; thus
available income for premium needs would be reduced, and premium products or services, including fixed-broadband service
would surely be less attractive.
PAGE 10/36
COMPANY REPORT
Table 7 - Speedy Subscribers and Monthly ARPU (last 5 years)
Subscribers (000)
% growth
Broadband Revenues
Broadband ARPU
2009
1,145
78%
5,339
389
2010
1,649
44%
7,069
357
2011
1,789
8%
7,484
349
2012
2,341
31%
7,980
284
2013 E
3,114
33%
8,382
224
CAGR
28%
12%
-13%
Units: billion IDR (revenues) and thousands IDR (ARPU) | Source: Company Reports, Bloomberg
Telkom had introduced “Speedy Instant” or pre-paid subscription
25
that provides
more flexibility to subscribers, which explains significant ARPU declined in 2012 and
2013, yet the impact on the overall revenue was being offset by the strong growth of
the subscribers’ base, refer to table 7 - Broadband ARPU.
26
Telkom has recently engaged in fiber network roll-out , and we foresee the better
technology
27
would facilitate the demand for larger data capacity and faster
connection; we shall later see a clear distinction between mobile and fixed
broadband in terms of speed and capacity.
We forecast Speedy subscribers’ base to continue growing at CAGR of 30% for the
next 2-3 years, and of 10% thereafter. Our perpetuity growth estimation implies that
fixed broadband subscriptions in Indonesia would reach 50% penetration rate in
approximately 20
28
years from today.
In what concerns ARPU, we expect the declining trend to continue in the future due
to increasingly growing number of pre-paid subscribers
29
and the fact that Telkom is
already charging higher unit price than its APAC peers average, we foresee a
30
gradually declining tariff .
Graph 24 – Speedy Subscribers and ARPU Forecast
Units: thousand subscribers and thousand IDR (ARPU) | Source: Analyst’s estimates
25
Pre-paid subscribers are being charged the same initial amount for equipment (including modem) installation. The monthly
charge will be then accumulated according to their monthly usage.
26
We could not infer how many households were actually under FTTH subscriptions. Telkom only disclosed in its reports that
it had roughly 5 million homepass capacity in 2012 and aimed to reach 15 million by 2015.
27
Telkom is upgrading their old copper network with fiber to the home (FTTH), thus we expect higher speed and capacity to
be delivered in the future.
28
We assume that the average persons of approximately 4 per household will not change in the future, and the population
will continue growing at CAGR of around 1% in the long run-as projected by the IMF.
29
Pre-paid subscribers tend to have control over their own expenditure by simply limiting the usages, hence implying a rather
lower ARPU.
30
It would be reasonable to see lower tariff in the future driven by the regulator (as was seen in cellular market couple years
ago), assuming lower tariff would induce higher broadband penetration.
PAGE 11/36
COMPANY REPORT
Cellular Business
Over
the
past
years,
mobile
cellular
market
has
overshadowed
other
telecommunication services sectors in Indonesia; and with subscribers’ base totalled
to more than 280 million in 2012, it has become the fourth largest cellular market in
31
the world .
Graph 25 – Cellular Revenues Contribution
throughout the Years
Graph 26 – Cellular Subscriptions in Indonesia
Graph 27 – 2012 Asia Pacific Cellular
Penetration per 100 Inhabitants
CAGR
16%
Source: Analyst’s estimates, Company reports
Units: million users | Source: ITU
Units: # users | Source: ITU
According to the Indonesian Telecommunications Regulatory Authority (BRTI), it is
common that a single user owns more than one mobile phone and holds 2-3 active
SIM cards with reason to get the best network quality (higher-end user) or cheapest
price (lower-end user) available. We see this as an opportunity for continuing growth
being sustained in near terms. As such, we forecast Indonesian cellular subscribers’
base to continue increasing at CAGR of 4% (lower than 6% yielded in 2012-2013)
Graph 28 – Average Price for a Prepaid
Starter Pack
32
for the next 3 years, and of 1% in perpetuity .
Indonesian cellular market is characterised with high churn rate and highly
disproportionate number of prepaid subscribers (refer to graph 30). In fact, we also
see a correlation between low GDP per capita and high number of pre-paid
subscribers. We believe that a cheap prepaid-starter-pack (refer to graph 28)
coupled with limited financial means to commit for a post-paid plan explains why
Indonesian cellular market is flooded by pre-paid subscribers. This also partly
explicates low cellular average revenue per user (ARPU)
33
seen in Indonesian
cellular market.
Units: US$ | Source: Company
Websites
Graph 29 displays ARPU evolution relatives to GDP per capita, which seems, has
reached the equilibrium (of around 2%-2.5%). We assume similar pattern to hold in
31
Top 5 global mobile markets by number of subscribers (2012); China (1,112 million users), India (865 million users), USA
(303 million users), Indonesia (282 million users), Brazil (248 million users). Source: ITU
32
We look into Bloomberg (Bloomberg Industry – Telco Asia Pacific) forecast for Asia Pacific mobile sector growth of 7%
CAGR as proxy; since the forecast made by Bloomberg includes China and India – of which their cellular penetration rate is
still below average, it would be reasonable to forecast a slower growth for Indonesia. As for perpetuity, we expect the
subscribers base to increase with population; population is projected to grow at CAGR of 1% by World Bank.s
33
Bear in mind that pre-paid subscribers have greater control over their own cellular service expenditure by limiting usage.
Generally pre-paid ARPU will be much lower than post-paid ARPU.
PAGE 12/36
COMPANY REPORT
the long run, meaning that cellular ARPU is to increase consistently with rising GDP
34
per capita .
Graph 30 – Churn Rate vs. Prepaid Subscribers (as % of
total cellular subscribers)
Graph 29 – ARPU to GDP per Capita Comparison
Source: World Bank, Bloomberg, Analyst’s Estimates
Graph 31 – Indonesian Cellular
Market Share Evolution
Source: Bloomberg, Analyst’s estimates
In 2001, the government liberalized the cellular market; and since then there have
been three big players namely Telkomsel (TLKM:IJ), Indosat (ISAT:IJ), and XL
Axiata (EXCL:IJ) that control more than 80% market share (as of December 2012,
see graph 30). The other operators are briefly described in the appendix III.
35
Using Herfindahl-Hirschman Index (HHI) -that measures industry concentration
level we see that competition has been escalating sharply (measured by a
decreasing HHI index – showing of a less concentrated market). Smaller operators
namely, Axis (not listed) and Hutchison Indonesia (not listed) have been significantly
Source: Company reports,
Analyst’s estimate
36
re-establishing their position in the market for the last 3 years . As seen in graph 31,
XL was the one mostly affected
Graph 32 – HHI of Indonesian
Cellular Market
37
by their stronger presence.
In early 2013, XL proposed an acquisition of Axis, which was recently approved
38
in
the beginning of December 2013 by the Ministry of Communication and Information
(KOMINFO) with a certain term that obliges them to return spectrum blocks of 10
MHz in 2,100 MHz frequency band used for 3G network. Even after returning 10
MHz frequency blocks, XL-Axis now has spectrum capacity as large as Telkomsel;
Source: Analyst’s estimates
34
Note that we only use this additional information to triangulate our ARPU estimation, not to actually forecast the ARPU.
HHI is calculated by summing of the squares of the market shares of all cellular operators. The value ranges from 0 to
10,000. HHI Index of 10,000 indicates market-monopoly while 0 implies a nearly perfect competition. For example, market of
8 participants (as in the case of Indonesia cellular market) with perfectly equal market share would have a HHI index of 1,250.
36
Axis and Hutchison market share were estimated around 5% and 8% in 2012 respectively, which increased to 7% and 12%
in 2013.
37
XL lost 3% of its market share in 2012
38
According to the Indonesian Supervising Committe for Business Competition (KPPU), XL-Axis merger and acquisition
would not harm the market competition, and will not cause monopolistic industry. KPPU estimates an increase of 200 points
in HHI post-merger.
35
PAGE 13/36
Graph 33 – 2013 Total BTS Comparison
COMPANY REPORT
Table 8 – 2013 Spectrum Blocks (MHz) and BTS Comparison Matrix39
900 Mhz
7.5
10
7.5
0
0
7.5
Telkomsel
Indosat
XL Axiata
Hutchison
AXIS
XL-Axis
1,800 Mhz
22.5
20
7.5
10
15
22.5
2,100 Mhz
15
10
15
10
10
1542
# BTS40
65,65341
23,207
42,796
~13,000
~10,000
~53,000
Source: Ministry of Communication and Information Technology, Company reports, Analyst’s estimates
Source: Company reports
In order to understand the implication of those figures presented above, we run
some spectrum efficiency calculation that reveals their importance, please consult
appendix V. We foresee XL-Axis to become a more formidable player in the future;
by retaining Axis’ spectrums and infrastructures, XL would be able to cut its
43
investment budget and save considerable amount in capital expenditure , and to
focus more on rebranding and gaining more market share. Nevertheless, we expect
the impact on the industry dynamic and especially on Telkomsel to be more
apparent in medium to long term timeframe, considering an integration process
44
that XL-Axis has to endure. Furthermore, XL-Axis merger and acquisition will
promote industry consolidation as also supported by the regulator who thinks that
45
the cellular market is currently too crowded . Should the consolidation happen in
the future, Telkomsel would most likely be forced out of consolidation to avoid high
46
market concentration . We expect Telkomsel’s market share to eventually shrink to
40% over the long run.

Best case Scenario – market share remains intact
Notwithstanding the aforementioned concern, we see a likely scenario that
Telkomsel would be able to maintain its market share through aggressive customer
39
Telkomsel and XL acquired additional 5 MHz in 2,100 MHz band in February 2013. See appendix V for the 2,100 MHz
Band Plan by the Ministry of Communication and Information Technology.
40
Base tranceiver station (BTS) is a telecommunication equipment that transmits and receives radio telephony signals to and
from other user equipment devices, such as mobile phone.
41
Currently Telkomsel has the most BTS employed and spread throughout the country and claims to cover more than 97% of
the population. In 2013, it has added 11,356 new BTS of which 71% are 3G BTS. We estimate the BTS deployed by
Telkomsel in 2018 will consist of more than 75% 3G/4G BTS, as the company intends to stop deploying 2G-BTS in near
future.
42
XL-Axis is obliged to return 10 MHz spectrum blocks in 2,100 MHz.
43
Looking at our spectrum efficiency calculation, XL-Axis would have enough capacity to accommodate its potentially
growing subscribers’ base without incurring any significant investment for additional BTS and/or spectrum in near future.
44
Integration process would involve network integration, business process re-engineering, streamlining distribution networks,
redefining cost-structures, rebranding, etc.
45
According to the regulator, it will be hard to obtain additional spectrum in the future without consolidation as spectrum is a
scarce national resource. It is expected that Indonesian telecommunication sector will face spectrum crunch in the next 2-3
years where there are insufficient bandwidth to accommodate excessively growing data demand.
46
Regulator uses HHI index-where level of concentration is divided into 4 spectrum; spectrum 1 is associated with HHI Index
that ranges from 0-1800 (low concentration), spectrum 2 with HHI Index ranges from 1801-3000 (moderate concentration);
spectrum 3 with HHI Index ranges from 3001-4000 (high concentration); spectrum 4 with HHI Index above 4000 (monoplistic
industry tendency)- to assess any potential merger and acquisition. We expect that Telkomsel will not be granted any
acquisition proposal as it will cause high industry concentration (referring to HHI Index that might jump to above 4000 level).
PAGE 14/36
COMPANY REPORT
loyalty program and by continuously maintaining its superior network quality and
expanding its coverage as seen in the last 3 years. Telkomsel has the capacity to do
so given its strongest operating cash flow resulted from its largest scale business
and superior operating efficiency; moreover, it also has the strongest financial
position among the three, as summarized in the following table;
Table 9 – 2012 Operational and Financial Highlight Comparison
Telkomsel
54,531
57%
25,573
47%
11.7
0.16
Revenues
EBITDA Margin
Operating Cash Flow
OCF/Sales
Interest coverage
Total Debt/EBITDA
Graph 34 – 2013 Subscribers’ base
Evolution
Indosat
22,419
47%
6,989
31%
1.54
2.23
XL
20,970
46%
8,985
43%
5.6
1.4
Units: billion IDR (unless stated) | Source: Company Reports, Analyst’s
Estimates
Secondly, Indosat recent network roll-out issue has resulted in incremental
subscribers’ base of both Telkomsel and XL, and their respective cellular revenues
(refer to graph 34 and 35). Indosat weakest financial position would also limit its
ability to engage in decent network upgrade that leads to continuing poor network
Graph 35 – 9M 2013 YoY Revenues
Comparison
quality, falling operating revenues, worsening operating cash flow and thus limiting
47
investments and having tenacious network issues . This on-going concern over
Indosat would give Telkomsel opportunity to maintain, if not enlarge its subscribers’
base.
Lastly, Telkomsel’s solid network existence and strong brand awareness outside
48
Java may persist and its market share would likely remain intact .
Following table summarizes our Indonesian cellular subscribers’ growth and
Telkomsel market share forecast;
Table 10 – Indonesian Cellular Subscribers and Telkomsel Market Share Forecast
Indonesian Population
# Cellular Penetration
Penetration rate
Best Case -Market Share
Base Case -Market Share
2012 A
247
282
114%
44%
44%
2013 E
248
299
121%
43%
43%
2014 F
252
318
127%
43%
43%
2015 F
255
334
131%
43%
42%
2016 F
259
348
133%
44%
41%
2017 F
262
351
134%
43%
40%
2018 F
266
354
133%
43%
40%
Units: millions users | Source: World Bank, Analyst’s estimates
47
Indosat has netted -1.8 trillion IDR lost in 9M-2013 caused by slumping revenues, higher financial cost and excessive forex
lost. This worsening condition would limit its ability to recover its network issue.
48
Although Telkom was required to share its network infrastructure by the regulator (under network sharing regulation
introduced in 2008), we are convinced that smaller operators are rather lacking of scale than lacking of access to
infrastructure. The fact that they already have access to third party infrastructure provider (with similar capacity with Telkom’s
tower subsidiary), we foresee insignificant changes in the industry dynamic for the upcoming terms.
PAGE 15/36
COMPANY REPORT
Voice Usage and Tariff
Graph 36 – Telkomsel MoU/user/month
We see voice to data substitution effect has started accumulating through voice over
internet protocol (VoIP) applications like Skype, Google Talk, FaceTime, Viber, etc.
Minutes of usage (MoU) per user has been declining, whilst operators has been
inducing usage through promotions (free calls, for instance) that subsequently, has
put pressure on the average revenue per minute (ARPM). Given the fact that
smartphone penetration in Indonesia is still relatively low, yet showing significant
49
growth potential , voice to data substitution effect would only be amplified in near
Source: Company reports, Analyst’s
estimates | Units: minutes/user
future (refer to Mobile Broadband section for greater detail about m-broadband).
The fact that Telkomsel’s has consistently charged higher price per minute (as seen
Graph 37 – ARPM Evolution
in graph 37) whilst being able to preserve its market share is evidence of economies
of scale it has created through its superior network quality that has persisted over
the previous years. Moving forward, we expect Telkomsel’s unit price to be
maintained above market price, yet we believe that price compression is
unavoidable and the ARPM will continue declining due to excessive promotions
resulted from fierce competition. As for the longer run (perpetuity); considering that
the industry consolidation were to happen, market would reach competitive
Source: Company reports, Analyst’s
estimates | Units: IDR/minute
equilibrium eventually; as such unit price would stop being penalized, and start rising
with inflation. Below is our forecast summary;
Table 11 – MoU/User/Month and ARPM Forecast
MoU (minutes)
ARPM (IDR)
Voice Revenue
Implied Voice-ARPU
2011 A
129
172
28,598
22
2012 A
123
166
30,731
20
2013 E
128
163
32,455
21
2014 E
127
154
31,785
20
2015 E
126
149
31,406
19
2016 E
125
146
30,866
18
2017 E
124
145
30,457
18
2018 E
123
151
31,593
19
Units (voice revenues): billion IDR | Source: Analyst’s estimates
SMS
Graph 38 – Telkomsel Historical Trend of
SMS per Users (LHS) and RPS (RHS)
We expect that SMS per user will also resume its down trend following increased
popularity of on-line messaging through Blackberry messenger (BBM), WhatsApp,
Facebook messenger, Lines, etc. Nevertheless, we see that the substitution effect
had peaked in 2010; where average SMS/user stumbled from 285 in 2008 to 177 in
2010 and has been rather slowly decreasing (see graph 38); we forecast SMS
volume to continue declining yet to a lesser degree.
In what regards revenue/SMS (RPS), we see a similar pattern that happened in
2009 being held currently; RPS seems to be resilient not to drop further below 50
Units: # SMSs and IDR/SMS (RPS) |
IDR mark as the operators must cover for the SMS interconnect expense about 35
49
Smartphone penetration in Indonesia has doubled from 12% in March 2012 to 24% in March 2013, source: Emarketer,
retrieve (December 2013) from: http://www.emarketer.com/Article/Smartphone-Penetration-Doubles-Indonesia/1010102
PAGE 16/36
COMPANY REPORT
IDR. This in fact implies 30% net-interconnect margin for SMS, which is expected to
be the minimum margin. However, we anticipate the pricing compression resulted
from lower demand were to persist for the foreseeable future. We assume that
Telkomsel would maintain RPS at a similar rate as competitors.
Table 12 - SMS Production and Revenues Forecast
SMS/user (#)
50
RPS (IDR)
Competitors’
RPS (average)
SMS Revenue
2011 A
174
58
2012 A
168
50
51
2013 E
163
51
-
2014 F
159
51
-
2015 F
156
51
-
2016 F
153
52
-
2017 F
152
52
-
2018 F
152
53
-
13,093
12,631
12,921
13,202
13,370
13,348
13,354
13,557
Units: billion IDR (revenues) | Source: Company Reports, Analyst’s Estimates
Graph 39 – Mobile Broadband Subscribers
(LHS) and Total Data Traffic production
(RHS)
Mobile broadband “Flash” – the future growth engine
Over the past 5 years, we have seen enormous growth of data usage; as seen in
graph 39, Telkomsel’s mobile broadband subscribers’ base has increased massively
from 1.8 million in 2009 to 22.7 million in 2013, whilst data traffic production increased
immensely from 12 petabyte
51
(PB) to 96 PB.
In order to forecast revenues contribution from mobile-broadband properly, we breakdown the key drivers as follow;

Units: million users and Petabyte (Data
traffic) | Source: Company reports
Young Population and Growing Urbanization
First and foremost, Indonesian young population would provide an economic
advantage for the telecommunication carriers as they are more technology savvy,
social and connected; which also becomes even more relevant as we see broadband
penetration in Indonesia, unlike global broadband penetration, is skewed heavily
Graph 40 – 2012 Broadband
Penetration by Age Group
towards age group of 14-34 years old, see graph 40.
Table 13 - Portion of Indonesian Population by Age Group
2015 F
26%
17%
17%
15%
12%
13%
Age 0-13
Age 14-24
Age 25-34
Age 35-44
Age 45-54
Age 55+
2025 F
24%
17%
17%
16%
14%
19%
2035 F
22%
16%
17%
16%
16%
26%
Source: World Bank
Source: Telkom Presentation 2011
Furthermore, urban population has been increasing and its respective poverty
headcount has been consistently decreasing since 2006. Though we could not
quantify urban population by age group due to lack of data, we assume that growing
urbanization
50
51
in
general
will
promote
higher
penetration
of
advance
Note that revenue per sms (RPS) is associated with total SMS productions thus including free SMSs
1 Petabyte = 1,000,000,000 MB
PAGE 17/36
COMPANY REPORT
telecommunication gadget, such as smart-phones and tablets, which in turn will drive
data traffic higher. Altogether, those indicators aforementioned above will provide a
solid platform for robust growth in the mobile-broadband sector.
Graph 41 – Poverty Headcount Ratio at
Urban Poverty line (% of urban population)
Graph 43 – 2012 Facebook users
globally (excluding USA)
Graph 42 – Urban Population (% of Total)
Source: World Bank

Source: World Bank
Smartphone + Social Media = the Next Big Thing
It is undeniable that a changing lifestyle within Indonesian society promotes higher
usage of smartphone and other large screen devices, such as iPad, Android Tablet,
etc. Indonesians are more modernized and seek more sophisticated way to
communicate through on-line messaging platform, on-line news portal, on-line social
media and video streaming platforms, etc. This argument is supported by the large
number of Facebook and Twitter (the most recognized social media platforms
Units: million users |Source: Facebook
Annual Report 2012
Graph 44 – 2013 Global Twitter Users
(% of Total, excluding USA)
globally) users in Indonesia, which is currently the fourth and the third largest market
for Facebook and Twitter respectively. Furthermore, smartphone users grew
substantially from 11 million in 2011 to 42 million in 2013, which also explains huge
jump in data-traffic between the years (refer back to graph 39). Nowadays,
smartphone can leverage and deliver those aforementioned needs in a more
sophisticated fashion. This is why they are the key value driver to mobile carrier
operators of which will surely benefit from this fast growing advance technology
gadget. As shown in graph 47 reported by Cisco, data traffic produced by
smartphone users has grown substantially and surpassed data traffic produced by
Source: PeerReach statistics, October
2013
notebooks in 2013, whereas graph 45 and 46 shows that Asia Pacific (will) have a
high share of the total mobile traffic.
Graph 45 – Monthly Data Traffic Production
by Region
Units: Terabytes | Source: Cisco Visual
Networking Index 2013
Graph 46 – Global Mobile Data Traffic Monthly
Forecast
Units: Exabytes | Source: Ericsson Mobility
Report, November 2013
Graph 47 – Global Mobile Data Traffic by Device
Type
Units: Petabyte | Source: Cisco Visual
Networking Index 2013
PAGE 18/36
Graph 48 – Connection Speed
Threshold
COMPANY REPORT
Graph 48 describes the minimum speed of internet connection required to utilize the
respective usages. As of today, mobile cellular broadband has the capacity to
accommodate those needs effortlessly with an average connection speed that is
faster than 1,000 Kbps. The fact that nowadays, Indonesian can go online by
Graph 49 – 2013 Global Smartphone Penetration
spending as low as 15,000 IDR (less than
2 US$) (which was a decrease from
52
50,000 IDR (4 US$) 2 years ago ), would
only boost mobile broadband penetration
Units: Kbps | Source: Ericsson Mobility
Report, November 2013
higher. Moreover, smartphone penetration
rate in Indonesia is still comparatively low,
signalling tremendous growth that is yet to
Graph 50 – %population has
broadband connection
be seen.
Source: Nielsen report, September 2013

Flash Market Share, Unit Price and Data Volume
Forecast
Following 9M-2013 results released, Telkomsel Flash has approximately 55% of
mobile broadband market share, which is a decline from 74% in 2011. For the last
two years competition in mobile broadband has been fiercer than ever, and has led
to enormous data pricing compression. Nowadays a single operator provides more
Source: ITU
than 3 different packages with diverse choices in capacity and speed. Several
smaller operator charges much lower tariff which compete purely on valuedestroying pricing strategy. Graph 51 summarizes mobile broadband price, speed
and capacity comparison between operators;
Graph 51 – 2013 Price/MB, Average Download Speed, and Average Capacity (Advertised) Comparison
Implied Price/MB
Advertised Speed and Capacity
Kbps
MB
5,400
750
8,366
1,000
7,200
1,000
7,200
1,000
7,200
750
6,104
1500
154
500
Units: IDR/MB | Source: Company reports, Company websites, Analyst’s estimates
Telkomsel biggest threat now comes from XL-Axis considering its stronger
infrastructures (more BTS-wider coverage) and larger capacity (larger spectrum
bandwidth), and its low-cost strategy. As such, we foresee Flash subscribers’ base
to deteriorate further to 40% in the long run and in the perpetuity (or at similar level
of its cell-phones market share).
52
Average tariff for a mobile broadband prepaid starter pack in Indonesia as of December 2013. Source: Company websites
PAGE 19/36
COMPANY REPORT
Table 14 - Broadband Subscribers' Base and Flash Market Share Forecast
2011 A 2012 A
Indonesian M-Broadband users
12
26
Penetration rate (% population)
5%
11%
Flash and Blackberry subsccribers
9
17
Market Share
74%
64%
53
2013 E
42
17%
23
55%
2014 F 2015 F 2016 F 2017 F
61
75
90
104
24%
29%
35%
40%
32
37
41
45
52%
49%
46%
43%
2018 F
114
43%
45
40%
Units: million users | Source: Emarketer, Company reports, Analyst’s Estimates
Graph 52 – Substantial Data-Pricing Compression
(cost/MB) started in 2012
Furthermore, we expect data pricing compression to continue in the
future; Telkomsel current price per megabyte (MB) is currently at premium
54
103 IDR , whilst the market average is just 64
55
IDR. We forecast
Telkomsel price to be driven by the market price in the future, especially
by XL-Axis, considering business scale they just created.
Graph 53 – Monthly Data
Traffic per User Forecast
We foresee data usage (traffic) will increase substantially
in the future with enhanced network capacity, namely 4GSource: Company reports, Analysts’ estimates |
Units: IDR/MB
56
LTE technology . Nevertheless, we forecast Indonesia’s
CAGR 25%
data traffic production to be less than the Ericsson’s
projection since the implementation of the LTE network in Indonesia
is quite lagging compared to the global average
5758
.
Source: Ericsson Mobility Report,
November 2013
Table 15 - Mobile Broadband Revenue Forecast
Data/user/month (MB)
Cost/MB (IDR)
Broadband Revenue
Implied ARPU (000 IDR)
2012 A
258
121
2013 E
353
109
2014 F
472
92
2015 F
619
81
2016 F
779
72
2017 F
961
67
2018 F
1,160
62
6,273
31
10,442
38
16,501
43
22,168
50
27,992
56
34,592
65
38,879
72
CAGR
27%
-11%
30%
14%
Units: (revenues) billion IDR | Source: Company reports, Analyst’s Estimates
53
We expect Indonesian broadband users to grow substantially at CAGR 26% for the next 4 years (using indication from
Ericsson for Asia Pacific mobile broadband sector and Emarketer), and 10% over the longer run. Our estimation infers that
penetration rate will be close to 100% in approximately 10 years-time. We assume that multiple subscriptions per user will be
more apparent in mobile broadband sector as people generally own tablet and smartphone at the same time (as they provide
rather different features). Considering that technology in general always grows swiftly and exponentially, our implicit
timeframe should be then reasonable.
54
Global average is at 0.50-1.00 US$ cent (60-120 IDR). Source: international operators websites, analyst’s research
estimates.
55
Please note that this is the offered price on competitors websites, therefore we might overestimate (underestimate) the true
price charged per MB due to less (more) actual usage. As for Telkomsel, Indosat and XL we used the actual revenue per MB
derived from total data revenues divided by total data traffic production.
56
Last October 2013, Telkomsel conducted 4G-LTE network trial, of which the actual (not advertised) 4G internet connection
speed reaches approximately 15 Mbps or about 7-8 times faster than average normal 3G connections.
57
South Korea was the first to commercially deploy 4G technology in 2006, followed by Northern European countries in 2009,
and rest of the world (developed countries) in 2010-2011.
58
There are two important factors in estimating data traffic production per user; first is the device being used, 4G enabled and
3G enabled devices apparently have different output. We assume that Indonesians, being less wealthy on average than its
international peers, would prefer cheaper product (Indonesia has been flooded by smartphone shipped from China targeting
lower-end users) that obviously has technical limitation (most of them are still 2G-3G only devices) when compared with
higher end products such as iPhone or Samsung Galaxy (of which are made ready for 4G network), thus limiting their
broadband usage. Second is the 4G-LTE network availability; as aforementioned, Indonesian cellular operators have not yet
conducted 4G-LTE network roll-out, indication is that they might start as soon as next year. Regulator (BRTI) is still arranging
and assessing 4G LTE frequency band. As frequency band is limited, there is speculation that 4G will be operated in 1,800
MHz band, which is currently being used for 2G network, and reaffirming network might take some time, if not years.
PAGE 20/36
COMPANY REPORT
Interconnection
59
Economies of scale are more apparent in what regards net-interconnect margin .
Graph 54 – Net-interconnect Margin
Comparison
Given its largest market share, Telkomsel has been able to yield significantly higher
net-interconnect margin, as seen in graph 54.
In 2006, the Ministry of Communication and Informatics Republic
Indonesia (KOMINFO) mandated a cost-based interconnection tariff
60
scheme ; where the interconnection charges are determined by the
network operator on which a call terminates based on a long-run
incremental cost formula. As of today, all network operators charge
estimates
similar on/off net tariff as presented in graph 55. Regulator has altered
the tariff in 2008 that reduced off-net charged per minute by 10% to approximately
30 IDR, which implies termination rate of 5 IDR per second that is equivalent to
approximately 0.025 USD/minute. At this rate, interconnection tariff in Indonesia is in
61
Graph 55 – On-Net vs. Off-Net Tariff
per second
fact relatively low compared to its International peers . We could then argue that
62
cellular market in Indonesia should not be heavily affected by the network effect ;
nevertheless, market share would still be the important factor in gaining netinterconnect margin; as larger market share implies higher interconnection revenues
and lower interconnection expenses. As we expect Telkomsel’s market share to
eventually contracting in the future, we suppose the respective net-interconnect
margin to shrink too. Graph 56 recaps our interconnection expense and revenue per
minutes relative to ARPM forecast.
estimates | Units: IDR/second
Graph 56 – Net Interconnect Margin Forecast
Source: Company reports, Analysts’ estimates
59
Net-interconnect margin is calculated by deducting interconnection revenues received from other operators by the
interconnection expenses paid to other operators.
60
KOMINFO issued Regulation No.8/PER/M.KOMINFO/02/2006 on interconection on February 8, 2006. (retrieved from:
Telkom annual report 2012, )
61
Average termination rates around the world; Europe (0.07 USD), Africa (0.19 USD), Asia Pacific (0.04 USD), USA (0.16
USD). Source: ITU World Tariff Policies Database 2012
62
The fact that smaller operators like Hutchison and Axis has been able to reinforce their position lately is evidence that
network effect is rather insignificant in Indonesian cellular market. Additionally, as we foresee data-voice to take charge in
near future, interconnection cost would be less relevant.
PAGE 21/36
COMPANY REPORT
Operating Cost Margin and Investments
Fixed Business Margin
As discussed previously, broadband tariff in Indonesia is relatively more expensive
than its International peers; we believe that the regulator would likely to drive price
lower, considering currently low broadband penetration rate could be propelled by a
Graph 57 – Fixed-line Business EBITDA Margin Forecast
decreasing unit price; consequently lowering Telkom operating
margin. Moreover, although regulator has not required Telkom to
share its fixed-broadband infrastructure, in the future where demand
for fixed-broadband is presumed to be increasingly growing, we
foresee threat of new entrants and a likely scenario that Telkom
would have to share its infrastructure thus decreasing its competitive
advantage. It would be then most reasonable to expect a rather
Source: Company reports, Analysts’ estimates,
Bloomberg
contracting margin in the future. Nevertheless, we are still convinced
that
Graph 58 – Fixed Business Operational Expense
Contribution by Segments
Telkom’s
fixed-business
margin
would
be
higher
than
comparables due to following reasons; firstly, Telkom’s operation and
maintenance expense contributes by relatively low portion to the
overall operating expenses, this means that even if unit price margin
were to shrink, it would not affect Telkom’s overall margin greatly. In
fact the company was able to reduce costs related to the operation
and maintenance in 2012, which shows its superb operational
efficiency. Secondly, Telkom’s most expensive bill comes from
63
Source: Company reports, Analysts’ estimates
personnel expense , which consistently contributes around 50% of
total operating expense, whereas comparables’ average is within 20-30% range;
Moreover, Telkom’s workforce efficiency in which reflected by the amount of
Graph 59 – 2012 Revenues per
Employee
revenue generated per employee is relatively low, suggesting that the company still
has some extra space in the trunk for the workforce efficiency enhancement. Lastly,
which we consider as best case scenario; though we could not quantify precisely as
64
65
for Telkom fibre roll-out case , according to FTTH Council Europe , “fiber access
networks are lower cost to build than copper and much lower cost to operate”; total
operational cost reductions were estimated of around 15%-30%; as such we
presume higher margin to be sustained.
As for the worst case scenario (Indonesia economy to erode further, appendix II), it
Source: Analysts’ estimates,
Bloomberg | Units: billion IDR
is common that companies including Telkom would not be able to adjust its fixed
cost instantly, such as personnel cost, SG&A expense, etc. and therefore sudden
63
Being an SOE, Telkom rather assumes responsibility in creating job field.
Telkom did not disclose specifically its investments and operational cost related to FTTH, and revenues gained from the
investment.
65
Stanislawski, S., & Kauze, J. (2012). Financing Stimulus for FTTH. Retrieved from
http://www.ftthcouncil.eu/documents/Reports/FTTH_Finance_Report.pdf
64
PAGE 22/36
COMPANY REPORT
drop in revenues – in response to the slumping demand, would result in significantly
lower margin. We use comparables margin (of 40%) as proxy in determining margin
contraction for the worst case scenario.
Cellular Business Margin
Graph 60 – Prepaid Subscribers (% of
Total)
As aforementioned, Indonesian cellular market is characterized by its highly
disproportionate amount of pre-paid subscribers; as of December 2012, only 1 in
100 cellular subscribers is a post-paid subscriber. Though pre-paid ARPU is much
lower than post-paid ARPU, the profit margin associated with pre-paid subscription
is arguably higher as pre-paid subscribers pay higher unit prices (price per minute
and per SMS, for instance), and operator need not deal with bad-credit customer
which may incur additional operating cost (under SG&A expense). We believe that
is one of the main reasons why Indonesian cellular operators have been able to
sustain EBITDA margin above 45% whilst international median margin is around
66
38% . We see a correlation between high revenue contribution from prepaid
subscribers and high operating margin as shown in graph 62 and 63.
Graph 62 – 2012 Prepaid Subscribers (%
of Total)
Graph 61 – 2013 Unit Price Comparison
(Telkomsel Prepaid vs. Post-paid) as advertised
Units: IDR | Source: Company websites,
Graph 63 – 2012 Margin Comparison
Notwithstanding the aforementioned fact, we see that market share (competition)
Graph 64 – EBITDA Margin vs. Market
Share
has a substantial impact on margin. As seen in graph 64, Telkomsel EBITDA margin
has been shrinking consistently with a decreasing market share. Moving forward, we
see continuously contracting margin to be in line with our declining-market share
forecast.
compression
Additionally,
that
is
heavy
caused
by
pricing
Graph 65 – Cellular EBITDA Margin Forecast
vicious
competition would continue putting pressure
67
on margin too . Subsequently, we forecast
margin to be gradually declining towards
Source: Company report, Analyst’s
estimates
competitors’ margin.
We are aware that our initial estimate involves
66
Source: Bloomberg
Telkomsel’s expense related to network activity is significant, contributing to about 65% of total operating expense,
therefore, unit price margin really does matter for it.
67
PAGE 23/36
COMPANY REPORT
upside risk where Telkomsel would in fact be able to sustain higher margin as if the
company were to succeed in preserving its market share; as such we incorporated
this likely scenario into our best-case scenario analysis.
Fixed Line Investments
Fixed network business investments mostly utilized for deploying access and
backbone infrastructure to support the broadband services. As part of the IDN
project aforementioned, we foresee intensive capital expenditure (CAPEX) relative
to sales to last until 2015.
In order to have the notion of recent investment intensity committed by Telkom, we
conducted comparable analysis focusing on capital expenditure per fixed-line
subscription as shown in graph 67, which we expect similar intensity to hold in near
future as we believe that relatively more expensive investment made by Telkom per
fixed-line subscribers was largely due to a more challenging Indonesia’s geography
condition, and the fact that Telkom has just began its fiber roll-out whereas its peers
had started couple years ago. As for the longer run, Telkom’s fixed network CAPEX
budget should be closer to the comparable CAPEX.
Graph 66 – Customer Survey Results
Graph 67 – 2012 CAPEX per Fixed-Line
Connection
Graph 68 – Fixed Network CAPEX Forecast
Units: thousand IDR | Source: Bloomberg,
Units: trillion IDR | Source: Bloomberg, Analyst’s estimates
In what regards extraordinary maintenance, we foresee no additional CAPEX
required as Customer Satisfaction Index
68
has showed continuing improvement,
which implies that the existing infrastructure has served the customers well.
Cellular Investments
We see that Telkomsel capital expenditure per incremental data traffic and per
subscribers has been much lower than its competitors. It would therefore be
reasonable to anticipate higher investments made by Telkomsel in the future in
order to keep up with competitors, especially in response to XL-Axis’ stronger
infrastructure.
68
Telkom routinely engage independent market analysts to conduct survey and market research on their customers’ levels of
satisfaction and loyalty. (avaliable on annual report 2012,2011,2010)
PAGE 24/36
Graph 69 – Cellular CAPEX Comparison
Units: billion IDR | Source: Company
reports
COMPANY REPORT
Graph 70 – CAPEX to Revenues
Graph 71 – CAPEX per Subscriber
Units: thousand IDR/subs | Source:
Company reports, Analyst’s estimates
Graph 72 – CAPEX per Incremental
Data
Units: IDR/MB | Source: Company
reports, Analyst’s estimates
Since Telkomsel’s CAPEX has been largely, if not all, devoted to BTS deployment, it
is of utmost importance to properly estimate the additional BTS of which is installed
to accommodate excessively growing data-demand. Considering limited spectrum
availability operators could only meet data traffic through deploying more BTS.
Please see appendix VI for our BTS forecast.
Our BTS forecast implies that Telkomsel’s capital expenditure would be
continuously larger than its current level. Notwithstanding, provided our mobile
broadband revenues forecast, Telkomsel would break even in 2015, and would
continue generating good returns from the emergence of the mobile broadband
usage.
Graph 73 – Cellular CAPEX Forecast
Units: trillion IDR | Source: Analyst’s estimates
Graph 74 – Mobile Broadband Revenue Contribution
Units: billion IDR | Source: Analyst’s estimates
FOREX Risks on Investments
We also take into account FOREX risk associated with Telkom capital expenditure
69
committed under foreign currency contractual agreement . As provided in the
appendix VII, higher CAPEX was somehow associated with weaker Rupiah in that
respective year. Hence, it is also important to understand what might be the
additional amount derived from the FOREX risk. By assuming that in the future,
Telkom would commit to 40% USD denominated CAPEX, we could then infer
additional amount of CAPEX associated with increased in USD/IDR.
69
More than 90% of the foreign currency contractual agreement was denominated in USD
PAGE 25/36
COMPANY REPORT
Capital Structure and Cost of Capital
Graph 75 – Target Debt/EV
Target D/EV
Management has been rather conservative in its use of debt. As seen in graph 75,
Telkom has engaged in comparatively low leverage than its peers. Strong operating
cash flow has allowed Telkom to finance its investments without relying too much on
debt. Yet we assume that the company would seek an optimal capital structure (by
increasing leverage) in order to minimize the cost of capital over the long run. We
infer 14%
Source: Analyst’s estimates, Bloomberg
70
debt to enterprise value to be maintained in the future.
Cost of Capital
Table 16 – WACC
US 10Y TIPS
US 10Y Govt. bond
71
US inflation
Indo inflation
Rf
0.8%
3.0%
2.2%
4.5%
5.3%
Market risk premium
β sector
β country
Cost of equity
5.5%
0.95
1.22
11.6%
Probability of default
Recovery rate
Yield
Cost of debt
1.9%
49.6%
9.0%
7.9%
We used CAPM pricing model to estimate the cost of equity. Firstly, we inferred
that the US 10-year government bond is the most applicable risk-free asset and
thus its yield would give us the most appropriate risk-free rate proxy. Next, we
obtained Indonesia risk-free rate by adjusting the differential in the expected
72
Target D/EV
14%
long term inflation . Secondly, in order to get a fair estimation on
telecommunication
sector
systematic
risk,
we
regressed
63
global
telecommunication companies’ stock returns on the MSCI World Index returns;
we then unlevered each company beta using their respective capital structure
and statutory tax rate. Subsequently, we derived a median of unlevered beta of
0.85. Finally by using Telkom capital structure and statutory tax rate, we could
obtain the appropriate levered beta for Telkom.
Although CAPM infers that investors are well diversified and implies that sector
beta should be an adequate measure of the investment risk associated with
Tax rate Telkom
WACC Telkom
Tax rate Telkomsel
WACC Telkomsel
Source: Analyst’s estimates,
Bloomberg
20%
10.9%
25%
10.8%
Telkom, we believe it does not sufficiently capture specific country risks such as
political instability, social unrest, natural disaster, etc. Therefore we incorporate
country beta in our cost of equity estimation to reflect this additional risk. To
obtain the country beta, we regressed Jakarta Composite Index (JCI) returns on the
MSCI World Index returns (using monthly data of the last 5 years). Lastly, by
assuming risk-premium of 5.5% we derived the cost of equity of 11.6%.
In what regards cost of debt, we incorporated Moody’s probability of default and
73
historical recovery rate for similar rated companies (BBB-) into our calculation .
Taking into account the specific tax rate for Telkom and Telkomsel, we estimated
their respective weighted average cost of capital of 10.9% and 10.8%.
70
71
We use mean-reversion approach; adding 2/3 of Telkom current weight to 1/3 of sector average
US expected inflation was obtained by deducting US 10Y bond yield with US 10Y TIPS
72
Risk free Indonesia = (1 + Risk free US) * (1 + Indo Inflation) /(1 + US Inflation) - 1
73
The cost of debt was calculated as follow; (1+yield) * (1- probability of default) + recovery rate * probability of default -1
PAGE 26/36
COMPANY REPORT
Final Valuation Considerations
ROIC
Graph 76 – ROIC
Our valuation implies a declining ROIC
74
for the cellular business due
to expectedly lower margin and higher investments for the upcoming
terms discussed previously. Notwithstanding, we believe that
relatively high excess return generated by Telkomsel is reasonable
given its persistently strong operational and financial position that
would enable the company to maintain its large-scale business, which
also being supported by the cellular market size and structure in
Indonesia aforementioned previously. As for the fixed-line business,
we believe that the emergence of the growing demand for fixedSource: Analyst’s estimates
broadband service, despite the unavoidable decline of the fixed-voice service, would
avoid value destruction. Nevertheless, we would not see significant excess returns
generated from the fixed network business as we foresee broadband price
compression would penalize the margin and NOPLAT consecutively.
Terminal growth rate
We derived terminal growth rate for both cellular and fixed-line business from the
reinvestment rate and the ROIC associated with their respective perpetuity cash
flow. As for our base case scenario, we obtained 7% and 4.5% nominal growth rate
for the cellular and fixed-line business respectively. Considering the expected longterm inflation rate of 4.5%, cellular and fixed-line business is then respectively
presumed to grow by approximately 2.4% and 0% in real term and in perpetuity.
Since the cellular business terminal value contributes by disproportionately large
amount to the enterprise value, impact on the fair value caused by changes in the
implicit cellular growth rates is considerably larger. We then performed another
sensitivity analysis in regards to the final price target that is affected by the implicit
cellular growth rate derived from reinvestment rate and ROIC, refer to table 18.
Cellular Growth
6.50% 6.75%
4.00% 2,318 2,417
4.25% 2,332 2,431
4.50% 2,347 2,446
4.75% 2,362 2,461
5.00% 2,379 2,478
7.00%
2,529
2,543
2,547
2,573
2,590
7.25%
2,657
2,670
2,686
2,700
2,717
7.50%
2,803
2,817
2,832
2,847
2,864
74
Table 18 – Price target sensitivity to changes in cellular
ROIC and RR
ROIC
Fixed-line
Growth
Table 17 – Terminal Growth Rates Sensitivity Analysis
Reinvestment
20.9%
28.5% 2,172
29.5% 2,237
30.5% 2,308
31.5% 2,386
32.5% 2,473
Rate
21.9%
2,262
2,339
2,425
2,520
2,626
22.9%
2,364
2,457
2,547
2,676
2,809
23.9%
2,481
2,592
2,718
2,863
3,030
ROIC presented here is obtained from the base-case scenario.
PAGE 27/36
24.9%
2,615
2,750
2,907
3,089
3,305
COMPANY REPORT
Appendix I – Financials
Table 19 – Financial Summary
2011 A
2013 E
2014 F
2015 F
2016 F
2017 F
2018 F
77,143
40,343
25,887
-1,459
-200
24,228
-5,866
-5,512
12,850
83,145
42,987
27,978
-806
-363
26,809
-6,563
-6,074
14,172
89,027
45,742
29,284
-658
0
28,626
-7,002
-6,487
15,137
96,109
48,357
30,189
-546
0
29,643
-7,222
-6,726
15,695
103,729
50,707
30,913
-778
0
30,135
-7,327
-6,843
15,966
111,252
53,590
32,222
-694
0
31,529
-7,670
-7,158
16,701
119,006
56,242
33,519
-662
0
32,856
-7,990
-7,460
17,406
17,881
14,863
32,744
13,932
423
-139
138
14,355
18,390
-2,387
16,003
-122
-1,091
242
-4,143
-10,889
-16,003
21,532
14,456
35,988
16,260
-2,075
964
427
15,576
20,412
-1,205
19,207
-7,080
-1,459
293
1,404
-12,365
-19,207
23,223
15,008
38,231
22,389
-616
-965
-514
20,295
17,936
-1,769
16,167
-5,985
-806
173
291
-9,839
-16,167
23,708
16,458
40,166
25,525
-1,593
-78
-474
23,380
16,786
-1,868
14,918
2,394
-658
117
-2,599
-14,172
-14,918
24,019
18,168
42,187
26,452
-337
-454
-354
25,307
16,880
-1,802
15,078
-948
-546
96
1,457
-15,137
-15,078
24,689
19,794
44,483
27,595
-162
-312
-331
26,790
17,693
-1,192
16,502
-1,592
-778
140
1,423
-15,695
-16,502
25,661
21,368
47,029
28,333
-63
-354
-472
27,443
19,585
-1,201
18,385
-3,420
-694
116
1,579
-15,966
-18,385
26,600
22,724
49,324
29,794
-189
-168
-341
29,097
20,227
-1,226
19,001
-3,373
-662
101
1,633
-16,700
-19,001
9,634
5,250
758
5,616
74,897
1,789
5,043
102,987
8,355
1,039
7,882
6,859
17,871
42,006
13,471
47,510
102,987
13,118
5,409
579
8,867
77,047
1,443
4,817
111,280
7,456
1,844
9,149
6,578
19,275
44,302
15,437
51,541
111,280
22,695
5,536
667
5,400
84,462
1,408
5,389
125,557
9,268
1,497
10,334
7,508
19,566
48,172
17,012
60,373
125,557
19,650
5,342
714
5,700
93,268
1,669
5,897
132,240
9,951
1,515
11,316
7,654
16,967
47,403
18,539
66,297
132,240
20,668
5,767
771
6,041
101,416
1,805
6,293
142,760
10,727
1,724
12,409
7,354
18,424
50,640
19,967
72,153
142,760
22,336
6,224
832
6,339
109,176
1,845
6,446
153,198
11,345
1,851
13,185
7,736
19,847
53,964
21,317
77,918
153,198
25,831
6,675
892
6,837
116,096
1,891
6,971
165,193
12,442
1,817
14,150
8,232
21,425
58,066
22,886
84,241
165,193
29,282
7,140
955
7,262
122,993
2,064
7,382
177,078
13,136
1,911
15,159
8,520
23,059
61,785
24,501
90,792
177,078
Summary of P&L forecast
Revenue
EBITDA
EBIT
Net financial income (expense)
Other income (expense)
EBT
Taxation
Minorities
Net Profit
71,238
37,016
22,153
-1,091
-220
20,842
-5,387
-4,505
10,950
Summary of Cash Flow forecast
NOPLAT
Depreciation
Operating Cash Flow
Net CAPEX
∆ in net working capital
∆ in other operating assets-liabilities
Others
Investing Cash Flow
Core Business FCF
Non-core FCF
FCF to the Firm
Change in excess cash
Interest paid (received)
Interest tax shield
Change in debt
Change in equity
FINANCING CF
Summary of Balance Sheet
Forecast
Cash and cash equivalents
Accounts Receivable
Inventories
Other current asets
Fixed assets
Intangible assets
Other non-current assets
Total Assets
Trade payables
Taxes payables
Other current liabilities
Provisions/other non-current liabilities
Total debts
Total Liabilities
Minority interest
Equity attributable to owners
Total Liabilitieis and Equity
2012 A
Units: billion IDR | Source: Company Reports, Analyst’s Estimates
PAGE 28/36
COMPANY REPORT
Appendix II – Additional Scenario Analysis
Indonesia economy were to erode further
Sluggish global economy recovery especially China has continued putting pressure
on commodity prices due to significantly lower demand. Indonesia whose export
derives mostly from commodity, such as coal, petroleum gases, palm oil, etc. has
suffered continuously from this global economy contraction. On the other side,
Indonesia has been massively importing services and products to support rapid
growth and to meet demand of growing consumption; altogether this creates great
imbalances in the current account and causes large deficit. In Q2 2013 Indonesia
current account deficit hit at an all-time high of nearly 10 billion USD (4.4% of GDP)
and had showed no meaningful recovery
75
(in spite of remarkably cheaper Rupiah,
76
export showed little improvement) in the third quarter . If export were to continue
slumping in the future, overall country production may continue declining,
unemployment and thus poverty would then inflate higher. Consequently,
disposable income available to households and respective consumption in general
would shrink significantly; companies including Telkom would be greatly affected.
Graph 77 – China GDP Growth Rate
Graph 78 – Indonesia Current Account Deficit
Source: National Bureau of Statistics of China
Source: Bank Indonesia
Graph 79 – Indonesia Unemployment Rate
Source: Badan Pusat Statistik Indonesia
This growing concern may only worsen market sentiment, and foreign capital
outflow would continue even more severely as foreign investors hardly gain their
77
confidence back. In turn, we might see Rupiah being penalized further , and
subsequently inflation would continue rising. Additionally, there is a possibility that
the government would cut its budget on subsidy expenditure – especially on fuel
next year as it is running over budget largely this year of which the amount becomes
75
In contrary, India was able to recover noticeable as its account deficit improve to 1.2% GDP in third quarter from 4.8% GDP
in second quarter.
76
Account deficit narrowed to only 3.8% of GDP in the third quarter.
77
Rupiah along with Indian Rupee were the most depreciated currencies against other foreign currency including the USD; as
both countries endures the highest account deficit among other APAC countries, they are most vulnerable to the approaching
FED tapering.
PAGE 29/36
COMPANY REPORT
unsustainable (cutting budget may also be a necessary mean to restore Rupiah
value). If subsidy on food, fuel and electricity were to be reduced again next year,
prices and thus inflation would remain high (higher transportation cost would lead to
higher end-products and or services, for instance). As consequence, domestic
interest rates would be higher and very likely to remain high until inflation meets the
target, in which may penalize growth and reduce consumption much further. In what
regards additional risk associated with largely depreciated Rupiah, as also
expressed by Telkom, slumping Rupiah may trigger modification of the current
floating exchange rate policy in order to stabilize, maintain, or increase the Rupiah’s
value; this modification may result in “substantially higher interest rates, liquidity
shortages, and the withholding of additional financial assistance by multinational
78
lenders” (Telkom annual report 2012 - Risk Factors) . Lastly, next year presidential
election may only bring another uncertainty; this additional political risk would not do
any favour to Indonesian economy.
To conclude; reduced consumption would adversely impact Telkom’s revenue
through limited growth of its subscribers’ base and the reduction of the amount of
telecommunication service used. Subsequently, unit price would have to adjust;
indirectly, by giving more promotions as a mean to induce usage, or directly, by
cutting unit price (per minute, SMS, etc.) as competition would become more
irrational (assuming operators would fight harder to gain incremental subscribers
from competitors due to limited growth in general). Collectively, ARPU would decline
and revenue would be penalized.
Lower unit price also implies lower operating margin and cash flow, which
consequently would affect Telkom’s capability to expand its network capacity as
cash available for CAPEX would be then limited. Historically, Telkom has been able
to fund most of its investments using cash from operation, and has not relied heavily
on debts. Decreasing cash available for investment would force Telkom to rely more
on debt of which its associated cost would be presumably higher than it is today,
hence Telkom would incur significantly higher financial expense, which in turn,
lessen the net profit and/or dividend available for shareholder. As for the case of
limited financial assistance, which implies difficulties in funding CAPEX, Telkom
would suffer from network constraint which could result in increasing complaints and
declining market share that leads to decreasing revenues. As such, we predict
Telkom overall growth rate to be slower in the perpetuity.
78
Available on sub-section Macro Economic Risks, page 60, Telkom annual report 2012.
PAGE 30/36
COMPANY REPORT
Appendix III – Indonesian Mobile Operators
Table 20 - 2012 Mobile Operators in Indonesia
Telkomsel
Indosat
XL-Axiata
Axis
Hutchison
Bakrie Telecom
Smartfren
Sampoerna Telkom
Total
subscribers
125
59
46
16
22
12
11
3
Ownership
Telkom (65%), SingTel (35%)
Qatar Telecom (65%), State-owned (14%), Public (21%)
Axiata Group (67%), Emirates Telco (13%), Public (20%)
Saudi Telecom (80%), Maxis Communication (20%)
Hutchison HK (60%), TPG-private equity (40%)
Bakrie (23%), Raiffeisen Bank International AG (7%), Public (70%)
Sinarmas (82%), Public (18%)
Sampoerna
Units: million users |Source: Companies’ Reports, Analyst’s Estimates
Appendix IV – Broadband Tariff Comparison
Table 21 - Speedy Postpaid Tariff
Activation
Monthly
Fee (Rp)
Charge (Rp)
Limited Home
75,000
200,000
Limited Professional
75,000
400,000
Unlimited Office
75,000
750,000
Unlimited Internet Café
75,000
1,750,000
Monthly Usage
Allowance
1.0 GB
3.0 GB
Unlimited
Unlimited
Excess Usage
Charge
175/MB
175/MB
-
Source: Company Reports
Table 22 - Telkomsel Flash Tariff
Telkomsel Flash
Basic
Advance
Pro
Quota
3 GB
8 GB
10 GB
Tariff (Rp)
125,000
225,000
400,000
Source: Company Websites
PAGE 31/36
COMPANY REPORT
Appendix V – Spectrum Efficiency
Calculation and 3G Band Plan
Graph 80 – 3G Band Plan
Source: BRTI
Table 23 - Spectrum Efficiency Calculation
Telkomsel
Indosat
XL-Axis
Bit efficiency
1.29
1.29
1.29
Busy hour average loading - Lbh
50%
50%
50%
0.256
0.256
0.256
20
20
20
Required user data rate (Mbps) - Rsub
Overbooking factor
No of sector per site - Nsec
3
3
3
23635
4993
19722
44.00%
18.75%
26.40%
Required Bandwidth (BW)
14.19
28.62
10.20
Available BW - 3G
Surplus/Deficit- Bandwidht
15.00
0.81
10.00
-18.62
15.00
4.80
No of site 3G-BTS
Market Share 3G
Source: KOMINFO, Analyst’s estimates
Source: KOMINFO
PAGE 32/36
COMPANY REPORT
Appendix VI – BTS Forecast
By estimating BTS utilization rate and total data traffic production we could infer how
many additional BTS required each year. In our CAPEX estimation, we incorporate
several assumptions due to lack of information. Firstly, we assume that BTS
utilization rate wouldn’t run for more than 90% (very efficient) swiftly in the near
future. Since there are BTSs deployed in more rural or less populated area
throughout the country that are less utilized, the overall average utilization rate must
less than optimal; but for the longer run, we may expect utilization rate be higher
than 90% by assuming that wealth and public infrastructure would be well dispersed
thus promoting higher utilization in the suburban area. Furthermore, gradually
increasing data capacity per BTS should be reasonable as 2G BTS would be fully
79
replaced by 3G/4G BTS with higher capacity in the future . Following table
summarized our BTS forecast;
Table 24 - BTS Forecast
Total Capacity (TB)
Expected Data Traffic (TB)
Utilization Rate
Total BTS
2012 A
109,572
51,938
47%
54,297
2013 E
157,474
96,059
61%
70,940
2014 F
240,239
180,179
75%
90,187
2015 F
316,189
272,067
86%
107,909
2016 F
429,018
386,117
90%
122,012
2017 F
558,208
513,551
92%
132,295
2018 F
666,535
626,543
94%
142,314
Secondly, we assume that “transmission equipment” net book value reported under
the fixed assets caption, consist of simply BTS to provide cellular network services.
In practice, transmission equipment may consist of other base station namely base
station controller, base station subsystems, etc. But since the company only
disclose the number of BTS deployed, we assume BTSs to already include all other
related communication equipment. We could then estimate net book value for each
BTS. The net book value is presumed to already reflect depreciation and deduction.
Subsequently, we could estimate the value of BTS in the future by taking into
account the upcoming depreciation expense.
79
Management indicates that Telkomsel will stop deploying 2G-BTS in the next 1-2 years.
PAGE 33/36
COMPANY REPORT
Appendix VII – FOREX Risk on Investments
Table 25 - Historical FOREX Impact on CAPEX
USD/IDR
Total CAPEX (billion IDR)
% CAPEX in foreign currency
as % revenue
2007
9,125
15,481
32%
26%
2008
9,661
21,356
55%
35%
2009
10,147
17,270
64%
26%
2010
9,059
13,380
54%
19%
2011
8,725
13,932
54%
20%
2012
9,328
16,260
35%
21%
2013 E
10,249
22,399
39%
27%
Source: Company reports, Bloomberg, Analyst’s estimates
Table 26 - Implicit FOREX Impact on Future CAPEX
Spot
1Y Forward
2Y Forward
3Y Forward
4Y Forward
5Y Forward
Dates
IDR/USD
12/27/2013
12/29/2014
12/28/2015
12/27/2016
12/27/2017
12/27/2018
12,259
13,230
14,186
15,144
15,546
15,841
%
different
Impact on
CAPEX
8%
7%
7%
3%
2%
3%
3%
3%
1%
1%
PAGE 34/36
COMPANY REPORT
Appendix VIII – Comparables
Table 27 – Financial Summary
Name
Country
CHINA TELECOM CORP LTD-H
CHINA MOBILE LTD
CHINA UNICOM HONG KONG LTD
BHARTI AIRTEL LTD
RELIANCE COMMUNICATIONS LTD
TELEKOMUNIKASI INDONESIA PER
INDOSAT TBK PT
XL AXIATA TBK PT
SOFTBANK CORP
NTT DOCOMO INC
KDDI CORP
MAXIS BHD
DIGI.COM BHD
AXIATA GROUP BERHAD
PHILIPPINE LONG DISTANCE TEL
GLOBE TELECOM INC
STARHUB LTD
SINGAPORE TELECOM
SK TELECOM
KT CORP
CHUNGHWA TELECOM CO LTD
THAICOM PCL
SHIN CORP PCL
ADVANCED INFO SERVICE PCL
Average
Median
China
Hong Kong
Hong Kong
India
India
Indonesia
Indonesia
Indonesia
Japan
Japan
Japan
Malaysia
Malaysia
Malaysia
Philippines
Philippines
Singapore
Singapore
South Korea
South Korea
Taiwan
Thailand
Thailand
Thailand
Mkt Cap
(billionUSD)
39.8
207.1
35.1
21.2
4.4
17.4
1.8
3.6
102.9
70.8
53.3
16.6
11.4
17.6
12.8
4.8
5.7
44.9
17.8
7.6
24.0
1.3
7.1
19.2
31.2
17.5
EV/EBITDA
TTM
4.07
3.25
2.85
7.96
10.4
5.44
3.89
6.84
11.18
4.54
6.03
13.64
12.81
8.66
7.72
7.49
10.22
12.23
6.11
4.25
8.61
11.41
62.26
10.12
7.8180
7.84
P/E
D/EV
14.54
9.65
21.21
63.4
22.88
13.91
81.28
29.26
20.42
13.71
14.73
29.51
26.7
22.64
17.37
60.89
19.15
15.9
9.15
14.42
18.22
28.22
15.38
17.47
20.8181
18.69
0.35
0.04
0.41
0.37
0.6
0.09
0.53
0.3
0.49
0.03
0.13
0.12
0.03
0.2
0.17
0.25
0.09
0.13
0.28
0.64
0
0.18
0.03
0.03
0.23
0.18
Source: Bloomberg
Graph 81 – ROIC (last filing) vs. PE (TTM)
80
81
Excluding Shin Corp
Excluding Indosat and Globe Telecom
Source: Bloomberg
PAGE 35/36
COMPANY REPORT
Disclosures and Disclaimer
Research Recommendations
Buy
Expected total return (including dividends) of more than 15% over a 12-month
period.
Hold
Expected total return (including dividends) between 0% and 15% over a 12-month
period.
Sell
Expected negative total return (including dividends) over a 12-month period.
This report was prepared by Michael Tanjung, a student of the NOVA School of Business and
Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for
academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for
the information and estimates contained herein and for the opinions expressed, which reflect exclusively
his/her own personal judgement. This report was supervised by Professor Rosário André (registered
with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation
methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA
SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of
its use.
The information contained herein has been compiled by students from public sources believed to be reliable, but
NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability
whatsoever for any direct or indirect loss resulting from the use of this report or its content.
The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion
about the subject company and its securities. He/she has not received or been promised any direct or indirect
compensation for expressing the opinions or recommendation included in this report.
The author of this report may have a position, or otherwise be interested, in transactions in securities which are
directly or indirectly the subject of this report.
NOVA SBE may have received compensation from the subject company during the last 12 months related to its
fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to
or dependent on the opinions expressed in this report.
The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores
Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market
counterparties, private or intermediate customers.
This report may not be reproduced, distributed or published without the explicit previous consent of its author,
unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend
this report reproduction or distribution without further notice.
PAGE 36/36

- Nova School of Business and Economics

Transcription

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