Telekomunikasi Indonesia: Many Things To Like (NYSE:TLK)

Elevator Pitch

I continue to assign a Buy rating to PT Telekomunikasi Indonesia Tbk (NYSE:TLK) [TLKM:IJ] stock. There are multiple things that I like about TLK, such as its value unlocking moves, the successful cross-selling between its wireless and broadband segments, the growth prospects of the new infrastructure business arm.

TLK Continues To Explore Value Unlocking Opportunities

In my prior September 5, 2023 write-up, I drew attention to the reported sale of the rumored sale of a stake in Telekomunikasi Indonesia’s fintech unit known as Finnet, and the potential listing of the company’s data center division. I viewed these two transactions as means of realizing the value of TLK’s businesses and assets.

At the beginning of this month, DealStreetAsia, a subsidiary of Japan’s Nikkei that reports on private equity, venture capital, and M&A news in the Asian region, published an article on a potential deal for Telekomunikasi Indonesia. Specifically, TLK is reported to be keen on finding a buyer to acquire part of its equity interest in PT Swadharma Sarana Informatika based on a number of DealStreetAsia’s sources.

Swadharma Sarana Informatika calls itself “a company engaged in the field of Rupiah (Indonesian currency) Money Processing Services” on the company’s website. It would be fair to say that there are limited synergies between Telekomunikasi Indonesia’s core wireless services and Swadharma Sarana Informatika’s cash processing and management solutions.

In my view, there are three key benefits associated with TLK’s value unlocking moves focused on the monetization of non-core assets or businesses such as Swadharma Sarana Informatika and Finnet (detailed in the September 5 update).

Firstly, proceeds from any potential equity interest sale can be allocated to investments in Telekomunikasi Indonesia’s core businesses.

Secondly, the holding company discount attached to Telekomunikasi Indonesia’s shares can be reduced over time, as TLK owns fewer non-core assets.

Thirdly, the value of TLK’s interest in these non-core businesses or investments has the potential to increase in the future, if Telekomunikasi Indonesia can attract strategic partners with the relevant expertise to take a stake in these companies.

Combination Of Wireless And Fixed Broadband Businesses Has Began To Deliver Results

I previously noted in my April 10, 2023 update for TLK that the “combination of the company’s wireless and broadband businesses” by mid-2023 will put Telekomunikasi Indonesia “in a better position to facilitate cross-selling between these two businesses.” This is exactly how things have panned out.

At the company’s Q3 2023 earnings call (transcript taken from S&P Capital IQ) on November 1, Telekomunikasi Indonesia shared that its wireless subscriber base expanded by +3.3% QoQ and its wireless ARPU (Average Revenue Per User) jumped by +11.4% YoY in the third quarter of the year. TLK highlighted at the most recent quarterly results briefing that the “cross-sell and upsell” associated with the “FMC (Fixed Broadband-Mobile-Convergence) integration” were the main reason for the wireless segment’s excellent metrics.

It is worth mentioning that Q3 2023 is the first quarter that Telekomunikasi Indonesia has executed on the FMC integration strategy (e.g. cross-selling) following the combination of its fixed broadband business and wireless business. As such, it is realistic to think that there is still lots of upside for TLK relating to the full realization of synergies between the wireless and fixed broadband segments in the future. As a reference, only three out of 10 subscribers for Telekomunikasi Indonesia have subscribed to both the company’s mobile and broadband services, so cross-selling is still a work-in-progress.

Potential Upside Surprise From InfraCo In 2024

Telekomunikasi Indonesia has established a new infrastructure business referred to as InfraCo in the final quarter of the current year, and InfraCo is expected to start operating next year.

A Brief Overview Of Telekomunikasi Indonesia’s New InfraCo Business

There are two major reasons behind TLK’s decision regarding the formation of InfraCo.

The first reason is that the fixed broadband penetration rate for the Indonesian market is very low at the mid-teens percentage level, so there is no lack of companies which are willing to provide fixed broadband-related services to take a bet on future broadband penetration growth in the country. At its recent Q3 results call, Telekomunikasi Indonesia indicated that InfraCo “can create new revenue” by providing its “fiber assets” to these new entrants in Indonesia’s fixed broadband space.

The second reason is that TLK’s own fiber assets aren’t fully utilized, so it makes a lot of sense for the company to develop new revenue drivers (e.g. wholesaling) via the monetization of idle capacity. Also, TLK emphasized at the latest third quarter earnings briefing that InfraCo is also part of its plans to “improved EBITDA margin.” In other words, InfraCo will help to add new and high-margin revenue streams for Telekomunikasi Indonesia.

Telekomunikasi Indonesia has yet to guide for specific financial contributions from InfraCo in FY 2024, so there is a good chance that InfraCo might provide an unexpected boost to TLK’s top line and profitability for the next fiscal year.

Concluding Thoughts

There are lots of positives for Telekomunikasi Indonesia which translate into a Buy rating for the stock. I am positive on TLK’s exploration of value-unlocking opportunities, the favorable impact of the integration for its fixed broadband and mobile businesses, and the new infrastructure business set up to monetize its fiber assets.