Digital Journey into Digital Era
Adequate Performance in 1Q18: Supported by Digital Business
In the midst of fierce Telco sector competition, TLKM recorded a flat growth top line, up just 4.26% YoY in 1Q18 (vs 12.64% in 1Q17). Revenue growth stalled because of Sim Card Registration, running from 31 October 2017 until 1 May 2018, step by step until prepaid SIMs were totally blocked. The impact can be seen from the decline in TLKM subscribers, settling from 196.32 mn in FY17 to 192.75 mn in 1Q18. Also, the transition to a digital world has affected TLKM performance, which is still shifting from legacy business to instant messaging (cellular voice & SMS to OTT). Legacy Business, which contributed 33.11% to total revenue dropped by 17.59% YoY in 1Q18 (vs. increase of 0.88% in 1Q17), as well as fixed line and interconnection segments, both of which fell sharply, by 17.15%/7.64% respectively, as a result of this cannibalization effect. Meanwhile, Data, Internet & IT segments contributed 49.22% of total revenue, showing growth of 23.26% YoY in 1Q18, due to greatly improved data traffic: around 899,600 TB, boosted by high network superiority and 4G BTS. We thus conclude that TLKM has the best revenue mix in Telco Sector.
Focus on Digital Development to Provide The Best Quality
TLKM has recorded a net profit and net profit margin decline to IDR 5.78 bn and 17.87% in 1Q18 (vs. IDR 6.69 bn and 21.56% in 1Q17). EBIT and EBITDA margin fell by 5.87% YoY to 50.25% (vs. 55.65% in 1Q17) and 1.87% YoY to 66.86% in 1Q18 (vs. 71.04% in 1Q17) because of increased in operational & maintenance expenses, by 23.5% YoY to IDR 10.24 tn in 1Q18. In order to provide the best service, along with maintaining and growing revenue market share, TLKM spent capex of IDR 6.1 trillion, developing more than 6,944 new BTS and backbone infrastructure units, includes 81%ongoing progress on Merah Putih satellite and 85% of the submarine cable system, and towers. We believe that to maintain margin composition TLKM will: 1) jack up prices after Lebaran Holiday; 2) cut marketing expenses in a quest for efficiency in digital advertising and promotional targets; 3) focus on developing a digital ecosystem.
BUY Recommendation with TP: IDR 4,150
We recommend BUY for TLKM with TP: IDR 4,150, implying EV/EBITDA18E/19F of 6.35x/5.76x,PE/PBV18E of 18.33x/4.04x and PE/PBV19F of 16.82x/3.69x. In the short term, TLKM is still adapting to the regulations and shifting into digital business by building various facilities to provide superior services. But for the long term we believe TLKM will maintain its market share and loyal subscriber base by providing premium services in various regions in Indonesia. There also risks, i.e. intense competition outside Java and lower-than-expected yields on top line and bottom line.
