Telecommunication Business Still Growing, Prospects for TLKM and EXCL are Positive

STOCK RECOMMENDATION - JAKARTA. The prospects for telecommunications issuers are wide open as the penetration of the internet in Indonesia increases. In the future, competition will be directed towards the fixed broadband business.

Head of Equity Research at Kiwoom Securities Indonesia, Sukarno Alatas, believes that the performance prospects of telecommunications sector issuers this year are quite good. The opportunities come from the increase in internet penetration in Indonesia.

The expansion of internet usage is expected to continue, considering that the level of internet penetration in Indonesia is still relatively low compared to neighboring countries, especially in Southeast Asia.

"This condition is an opportunity for players in the telecommunications sector to increase their number of customers," Sukarno explained to Kontan.co.id, Friday (23/2).

Sukarno explained the level of internet penetration in Indonesia increased to 79.5% from 78.19% in 2024. Then, the government's policy of aggressively building telecommunications infrastructure in remote areas will open new opportunities and expand reach.

"Furthermore, the economic growth that is expected to continue to increase will encourage the use of telecommunications services," he added.

At the beginning of this year, Sukarno saw, the election event had a significant impact on telecommunications issuers because it could increase data service traffic. The upcoming Ramadan and Eid periods usually also increase internet data consumption.

However, the intense competition in this sector will still be a challenge. Likewise, government regulations and commodity price fluctuations can affect operational costs.

Sukarno highlighted the impact if the merger between PT XL Axiata Tbk (EXCL) and PT Smartfren Telecom Tbk (FREN) really happens, it will create the second-largest telecommunications operator in Indonesia. This will make the competition even fiercer with competitors namely PT Telkom Indonesia Tbk (TLKM) and PT Indosat Tbk (ISAT).

Mirae Asset Securities analysts Jonghoon Won and Christopher Rusli see the adoption rate of smartphones and cellular network penetration in Indonesia is increasing rapidly. However, many satellite cities in Indonesia still lack adequate communication infrastructure.

"As a result, telecommunications companies are currently focusing on infrastructure expansion and customer acquisition in small cities," Jonghoon and Christopher revealed in their February 21, 2024 research.

Specifically, Mirae Asset likes ISAT because it aggressively pursued customer acquisition in satellite cities in 2023. ISAT has opened many small-scale offline stores in level 2 and 3 villages to actively engage in sales and marketing activities.

In addition, Jonghoon believes that the fixed broadband business will be the next trend in the telecommunications industry. This is due to the penetration rate of fixed broadband which is much lower in Indonesia compared to other Southeast Asian countries.

Considering this situation, the growth of the fixed broadband business is expected to play a significant role in driving the performance of Indonesian telecommunications companies in the future.

"We see the fixed broadband industry emerging as a new mainstay business for Indonesian telecommunications companies," Jonghoon explained.

In addition, the recent introduction of the Starlink satellite broadband product is seen as a welcome development by telecommunications companies. The availability of broadband services via satellite will facilitate internet service access in areas that were previously difficult to reach via fiber optic cables.

Jonghoon said, this in turn will make it easier for telecommunications companies to achieve faster and more sustainable expansion to satellite cities.

BRI Danareksa Securities analyst Niko Margaronis believes the telecommunications sector has good prospects with TLKM and ISAT as choices. BRI Danareksa Securities assigns an overweight rating for the telecommunications sector.

The main choice in the telco sector is ISAT which is traded at an EV/Ebitda of 5.4x with the possibility of increased revenue to offer room in increasing the target price.

ISAT's key project is IOH recently acquired 325 thousand MNC Play customers, so the total Indosat HI-FI is 350 thousand customers. This is expected to increase the topline and provide momentum for the improvement of IOH broadband services.

ISAT sold additional data centers to BDx with a profit of Rp2 trillion, expecting a small impact on revenue or expenditure (Opex) after its divestment. In addition, ISAT does not yet have a dividend policy, but will be determined in the near future at the AGM, considering the positive ongoing direction in free cash flow.

Meanwhile, in line with TLKM's 5 bold moves long-term program, the company is also pursuing the development of its fiber assets, both FTTH and FTTT, and building the Infraco Unit to unlock the value of the company. In addition, the consolidation of data centers from the subsidiary PT Telkom Data Ecosystem (TDE) is expected when new capacity is being developed.

In the midst of the competition between TLKM and ISAT, EXCL emerges as an attractive option in connection with the confirmation of merger discussions. EXCL and TLKM also offer trading opportunities below their average EV/Ebitda.

Niko suggests buying ISAT, TLKM, and EXCL with a target price of Rp 11,100 per share, Rp 4,600 per share, and IDR 3,000 per share. Meanwhile, Joonghon and Christopher recommend trading buy on TLKM, ISAT, and EXCL with each IDR 4,790 per share, IDR 11,150 per share, and IDR 2,600 per share.

Meanwhile, Sukarno mentioned, that the leading stocks from the telecommunications sector are TLKM, ISAT, and EXCL. Recommendations for these three stocks are buy or trading buy with a target price for TLKM of IDR Rp 4,450 per share, ISAT of IDR 12,200 per share, and EXCL of IDR 2,500 per share.