Telekomunikasi Indonesia Persero (TLKM IJ) (Buy) - Dividend play; cut TP to IDR 4,100

Dividend play; cut TP to IDR 4,100

Weak earnings growth (~1.5% CAGR in FY24-26F) on the back of persistent competitive dynamics

Over the past 18 years (i.e. since the start of intense cellular sector competition in Indonesia; 2007-2024), TLKM has seen its earnings CAGR declining from a high of ~5.6% (2007-2017) to ~1.5% (2017-24F). We expect this to persist into 2030F, with a similar CAGR of ~1.5%. We argue that without an improvement in the competition dynamics (i.e. price increases across segments which should translate into ARPU uplift) combined with cost and capex efficiencies, it would be difficult to see a recovery in earnings CAGR that would mimic nominal GDP growth. While we think it is difficult to assume that the intense competition would subside, we think cost and capex efficiencies are more visible. Operations and maintenance (O&M) expense (which is the single-largest cost item) is the key potential efficiency that TLKM can deliver. Over the past decade, O&M has accounted for ~26-27% of revenue – near-zero improvement. Also, we think the current capex to sales ratio of ~25% is rather high considering largely-muted revenue growth trajectories that we have seen so far.

Maintain Buy rating and cut TP to IDR4,100 (from IDR4,800), implying 55% upside

We think TLKM is increasingly deemed as a dividend stock. TLKM and its cellular subsidiary Telkomsel (TSEL – not listed) remain the market leaders within the Indonesia telecom space and TLKM has the highest profitability margin of ~15-16% and ROAE of ~15%. The company continues to churn decent cash flows which can be used as dividend. We maintain our Buy rating for the stock, though we believe in the near-term TLKM’s share price would underperform the broader Indonesian index. We slightly cut earnings by ~0.1-0.4% for FY24-26F (refer to tables inside for details). We also raise our dividend payout estimate to 75% for the near-term. At the current share price, the implied dividend yield for TLKM would be ~7% - which we believe is decent, though in recent months we have seen rising government bond yields.

Valuation and risks: Following earnings revisions, we lower our TP to IDR4,100. We derive our TP based on DCF methodology where we assume a risk-free rate of 6.5%, an equity risk premium of 7.8% and a terminal growth rate of 1.5% (down from 2.5% previously; Fig. 6). At our TP, the stock would trade at 5.4x 2025F EV/EBITDA (vs. 3.8x at the current price). Risks are adverse macroeconomics, lower data traffic growth, irrational competition, lower ARPUs, declining cellular revenue market share from outside Java and difficulties in securing new sites for network expansion.

Year-end 31 Dec	FY23		FY24F		FY25F		FY26F
Currency (IDR)	Actual	Old	New	Old	New	Old	New
Revenue (bn)	149,216	152,423	152,423	156,826	156,826	160,280	160,280
Reported net profit (bn)	24,560	24,566	24,579	25,528	25,493	25,480	25,518
Normalised net profit (bn)	24,560	24,566	24,579	25,528	25,493	25,480	25,518
FD normalised EPS	247.92	247.99	248.12	257.70	257.34	257.22	257.59
FD norm. EPS growth (%)	18.3	0.0	0.1	3.9	3.7	-0.2	0.1
FD normalised P/E (x)	10.7	–	10.7	–	10.3	–	10.3
EV/EBITDA (x)	4.3	–	4.0	–	3.8	–	3.7
Price/book (x)	1.9	–	1.6	–	1.5	–	1.5
Dividend yield (%)	6.3	–	6.7	–	7.0	–	7.3
ROE (%)	18.5	16.5	16.5	15.4	15.3	14.7	14.7
Net debt/equity (%)	16.7	3.3	3.5	1.5	1.2	1.6	1.3

Source: Company data, Verdhana estimates

Key data on Telekomunikasi Indonesia Persero

Income statement (IDRbn)
Year-end 31 Dec	FY22	FY23	FY24F	FY25F	FY26F
Revenue	147,306	149,216	152,423	156,826	160,280
Cost of goods sold	-95,715	-98,201	-102,927	-106,202	-108,470
Gross profit	51,591	51,015	49,496	50,624	51,809
SG&A	-5,854	-6,099	-6,660	-6,836	-6,974
Employee share expense
Operating profit	45,737	44,916	42,836	43,788	44,835
EBITDA	78,992	77,579	76,902	78,886	80,779
Depreciation	-33,255	-32,663	-34,066	-35,100	-35,945
Amortisation	0	0	0	1	1
EBIT	45,737	44,916	42,836	43,788	44,835
Net interest expense	-3,155	-3,591	-2,487	-2,338	-2,304
Associates & JCEs
Other income	-6,243	-531	250	500	0
Earnings before tax	36,339	40,794	40,599	41,950	42,531
Income tax	-8,659	-8,586	-8,711	-8,989	-9,130
Net profit after tax	27,680	32,208	31,888	32,961	33,400
Minorities	-6,927	-7,648	-7,309	-7,468	-7,883
Other items
Preferred dividends
Normalised NPAT	20,753	24,560	24,579	25,493	25,518
Extraordinary items
Reported NPAT	20,753	24,560	24,579	25,493	25,518
Dividends	-14,856	-16,602	-17,683	-18,434	-19,120
Transfer to reserves	5,897	7,958	6,896	7,059	6,398
Valuations and ratios
Reported P/E (x)	12.6	10.7	10.7	10.3	10.3
Normalised P/E (x)	12.6	10.7	10.7	10.3	10.3
FD normalised P/E (x)	12.6	10.7	10.7	10.3	10.3
Dividend yield (%)	5.7	6.3	6.7	7.0	7.3
Price/cashflow (x)	3.2	3.6	3.7	3.3	3.4
Price/book (x)	2.0	1.9	1.6	1.5	1.5
EV/EBITDA (x)	4.1	4.3	4.0	3.8	3.7
EV/EBIT (x)	7.0	7.4	7.2	6.9	6.8
Gross margin (%)	35.0	34.2	32.5	32.3	32.3
EBITDA margin (%)	53.6	52.0	50.5	50.3	50.4
EBIT margin (%)	31.0	30.1	28.1	27.9	28.0
Net margin (%)	14.1	16.5	16.1	16.3	15.9
Effective tax rate (%)	23.8	21.0	21.5	21.4	21.5
Dividend payout (%)	71.6	67.6	71.9	72.3	74.9
ROE (%)	16.5	18.5	16.5	15.3	14.7
ROA (pretax %)	19.0	18.0	16.6	16.7	16.7
Growth (%)
Revenue	2.9	1.3	2.1	2.9	2.2
EBITDA	4.3	-1.8	-0.9	2.6	2.4
Normalised EPS	-16.2	18.3	0.1	3.7	0.1
Normalised FDEPS	-16.2	18.3	0.1	3.7	0.1
Source: Company data, Verdhana estimates

Cashflow statement (IDRbn)
Year-end 31 Dec	FY22	FY23	FY24F	FY25F	FY26F
EBITDA	78,992	77,579	76,902	78,886	80,779
Change in working capital	798	-1,735	8,307	-153	-4,330
Other operating cashflow	1,530	-3,796	-14,178	1	1
CF from operations	81,320	72,048	71,031	78,734	76,450
Capital expenditure	-38,397	-36,418	-38,750	-39,750	-39,750
Free cashflow	42,923	35,630	32,281	38,984	36,700
Reduction in investments
Net acquisitions
Dec in other LT assets
Inc in other LT liabilities
Adjustments	69,506	59,871	59,833	67,408	65,015
CF after investing acts	112,429	95,501	92,114	106,392	101,716
Cash dividends	-14,856	-16,602	-17,683	-18,434	-19,120
Equity issue	302	-58	0	0	0
Debt issue
Convertible debt issue
Others	-103,383	-81,469	-63,188	-84,357	-82,846
CF from financial acts	-117,937	-98,129	-80,871	-102,792	-101,966
Net cashflow	-5,508	-2,628	11,243	3,600	-250
Beginning cash	38,804	33,296	30,668	41,911	45,511
Ending cash	33,296	30,668	41,911	45,512	45,261
Ending net debt	16,009	22,606	5,653	2,053	2,303
Balance sheet (IDRbn)
As at 31 Dec	FY22	FY23	FY24F	FY25F	FY26F
Cash & equivalents	33,296	30,668	41,911	45,511	45,261
Marketable securities
Accounts receivable	8,634	10,667	9,396	10,741	13,174
Inventories	1,144	997	1,552	1,601	4,356
Other current assets	11,983	13,281	13,281	13,281	13,281
Total current assets	55,057	55,613	66,140	71,135	76,071
LT investments	8,653	8,162	8,162	8,162	8,162
Fixed assets	173,329	180,755	185,439	190,089	193,894
Goodwill	8,302	8,731	7,704	6,797	5,998
Other intangible assets
Other LT assets	29,851	33,781	33,781	33,781	33,781
Total assets	275,192	287,042	301,225	309,965	317,906
Short-term debt	21,974	25,501	5,370	5,370	5,370
Accounts payable	18,457	18,608	11,333	11,929	12,314
Other current liabilities	29,957	27,459	28,147	28,793	29,264
Total current liabilities	70,388	71,568	44,849	46,091	46,948
Long-term debt	27,331	27,773	42,194	42,194	42,194
Convertible debt
Other LT liabilities	28,211	31,139	31,091	31,091	31,091
Total liabilities	125,930	130,480	118,134	119,377	120,233
Minority interest	20,004	20,818	20,470	20,157	20,159
Preferred stock
Common stock	17,361	17,303	17,303	17,303	17,303
Retained earnings	111,897	118,441	145,318	153,128	160,211
Proposed dividends
Other equity and reserves
Total shareholders' equity	129,258	135,744	162,621	170,431	177,514
Total equity & liabilities	275,192	287,042	301,225	309,965	317,906
Liquidity (x)
Current ratio	0.78	0.78	1.47	1.54	1.62
Interest cover	14.5	12.5	17.2	18.7	19.5
Leverage
Net debt/EBITDA (x)	0.20	0.29	0.07	0.03	0.03
Net debt/equity (%)	12.39	16.65	3.48	1.20	1.30
Per share
Reported EPS (IDR)	209.49	247.92	248.12	257.34	257.59
Norm EPS (IDR)	209.49	247.92	248.12	257.34	257.59
FD norm EPS (IDR)	209.49	247.92	248.12	257.34	257.59
BVPS (IDR)	1,304.82	1,370.29	1,641.61	1,720.44	1,791.95
DPS (IDR)	149.97	167.60	178.51	186.09	193.01
Activity (days)
Days receivable	21.2	23.6	24.1	23.4	27.2
Days inventory	3.7	4.0	4.5	5.4	10.0
Days payable	67.9	68.9	53.2	40.0	40.8
Cash cycle	-43.0	-41.3	-24.6	-11.1	-3.5
Source: Company data, Verdhana estimates

Company profilePT Telkom Indonesia (Persero) Tbk, also simply known as Telkom, is an Indonesian multinational telecommunications conglomerate. Telkom has major businesses in fixed-line telephony, internet, and data communications. It operates as the parent company of the Telkom Group, which is engaged in a broad range of businesses including telecommunications, multimedia, property and finance services.

Valuation MethodologyWe derive our TP of IDR4,100 based on DCF methodology, with key parameters rf (risk-free rate) of 6.5%, k (equity risk premium) of 7.8% and terminal growth (TG) of 1.5%. At our TP, the stock would trade at 5.4x 25F EV/EBITDA. Benchmark index for the stock is JCI.

Risks that may impede the achievement of the target priceDownside risks for TLKM are adverse macroeconomic trends, faster migration from legacy towards data, which could lower revenue growth, asymmetrical regulation, which could be more detrimental to TLKM, irrational competition in data, lower subscriber spending and difficulties in securing new sites, which are necessary for network expansion.

ESGAs a leading business in the Indonesian telecommunications industry, Telkom Group also carries out social responsibility towards its stakeholders. With the paradigm of “Telkom exists for Indonesia, grows and develops together with the Indonesian people,” Telkom believes that increasing the welfare of stakeholders, including society, and environmental sustainability will also impact the sustainability of the Company. Therefore, Telkom Group is committed to carrying out social responsibility by applying the principle of “profit-people-planet” (“3P”) or often referred to as “environmental, social, and governance” (“ESG”), as well as contributing to the Sustainable Development Goals (SDGs). Telkom Group’s commitment to social responsibility is based on the principles of good corporate governance or GCG, as well as a Company code of ethics that all Telkom and its subsidiaries’ employees must comply with. This commitment is also stated in various Telkom policies, one of them is the Board of Directors Regulation No.PD.701.00/1.00/PR/000/ COP-A3000000/2014 dated 14 October 2014, regarding Management of Telkom Corporate Social Responsibility (Telkom CSR). Furthermore, Telkom as a state-owned enterprise is also required to carry out the Partnership and Community Development Program (PKBL) following the resolution of the Ministry of State-Owned Enterprises (Ministry of SOE). This is stated in the last revision of the Ministry of State-Owned Enterprises’ Regulation of Indonesia Number PER-02/ MBU/04/2020 regarding the Third Amendment to the Ministry of State-Owned Enterprises’ Regulation Number PER09/MBU/07/2015 regarding Partnership Programs and Community Development Programs of State-Owned Enterprise. Under this regulation, Telkom Group is obliged to carry out various programs to improve socio-economic, community welfare, and nature conservation.

Fig. 1: TLKM— Consolidated earnings CAGR

Source: Company data, Verdhana estimates

Fig. 2: TLKM Consolidated - P&L profile, IDRbn

Source: Company data, Verdhana estimates

Fig. 3: TLKM - Elevated dividend yield

Source: Company data, Verdhana estimates

Fig. 4: TLKM – Earnings changes

Source: Company data, Verdhana estimates

Fig. 5: TSEL— P&L

Source: Company data, Verdhana estimates

Fig. 6: TLKM— valuation

TLKM - DCF IDRbn	31-Dec-24	31-Dec-25	31-Dec-26	31-Dec-27	30-Dec-28	30-Dec-29	30-Dec-30

Cash from existing ops	71,031	78,734	76,450	81,998	85,025	86,921	87,751
Tax paid	(8,711)	(8,989)	(9,130)	(9,175)	(9,653)	(9,839)	(9,920)
Capex	(38,750)	(39,750)	(39,750)	(40,250)	(42,250)	(42,250)	(42,750)
Change in working capital	(5,871)	(153)	(4,330)	355	224	606	457
Free Cash Flow to Firm	17,699	29,843	23,240	32,928	33,346	35,438	35,538
NPV for FCF in 2011-2015F	-	-	-	-	-	-	-
NPV for FCF in 2022F-Onwards							407,021
After deducting minority interest	15,720	26,686	20,870	29,668	30,133	32,159	402,986

		New	Old	Remarks
Risk-free rf		6.5%	6.5%
Equity risk premium		7.8%	7.8%
WACC		10.2%	9.5%
Terminal growth		1.5%	2.5%
Terminal Multiple x		11.5	14.3
Disc rate		10.2%	9.5%

Present Value
NPV of core business		441,254	518,542
Less net debt (cash)		35,173	35,173
NPV Equity		406,081	483,369

NPV per share IDR		4,099	4,800	TP Rounded to IDR4,100 (from IDR4,800)

Source: Company data, Verdhana estimates

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general.

GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.

This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.

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Rating Table

Rating Remains	Buy
Target price Reduced from IDR 4,800	IDR 4,100
Closing price 23 December 2024	IDR 2,650
Implied upside	+54.7%
Market Cap (USD mn)	16,234.7
ADT (USD mn)	20.3

Relative performance chart

Source: LSEG, Verdhana

M cap (USDmn)	16,234.7
Free float (%)	52.1
3-mth ADT (USDmn)	20.3

(%)	1M	3M	12M
Absolute (IDR)	-3.6	-16.4	-33.1
Absolute (USD)	-5.4	-21.4	-35.9
Rel to Jakarta Stock Exchange Composite Index	-2.3	-7.7	-31.1

Research Analysts

Nicholas Santoso (nicholas.santoso@verdhana.id)

Erwin Wijaya (erwin.wijaya@verdhana.id)

Tags: TELECOMS, TLKM, TLKM JK, TLKM IJ, Nicholas Santoso, Erwin Wijaya

Telekomunikasi Indonesia Persero (TLKM IJ) (Buy) - Dividend play; cut TP to IDR 4,100

Dividend play; cut TP to IDR 4,100

Key data on Telekomunikasi Indonesia Persero

Fig. 1: TLKM— Consolidated earnings CAGR

Fig. 2: TLKM Consolidated - P&L profile, IDRbn

Fig. 3: TLKM - Elevated dividend yield

Fig. 4: TLKM – Earnings changes

Fig. 5: TSEL— P&L

Fig. 6: TLKM— valuation

Rating Table

Relative performance chart

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Telekomunikasi Indonesia Persero (TLKM IJ) (Buy) - Dividend play; cut TP to IDR 4,100

Fig. 1: TLKM— Consolidated earnings CAGR

Fig. 2: TLKM Consolidated - P&L profile, IDRbn

Fig. 3: TLKM - Elevated dividend yield

Fig. 4: TLKM – Earnings changes

Fig. 5: TSEL— P&L

Fig. 6: TLKM— valuation

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