Telekomunikasi Indonesia: Sell-Off Looks Overdone (NYSE:TLK)

Elevator Pitch

PT Telekomunikasi Indonesia Tbk (NYSE:TLK) [TLKM:IJ] is awarded a Buy investment rating. Earlier, I wrote about the outlook for Telekomunikasi Indonesia’s different businesses in my February 4, 2024 article.

TLK’s recent stock price correction resulting from concerns about its ARPU (Average Revenue Per User) outlook seems excessive. A preview of the company’s first quarter results and a review of news flow regarding the potential data center business monetization suggest that there are positive catalysts for the stock. In that respect, I choose to maintain my Buy rating for Telekomunikasi Indonesia.

Recent Share Price Correction Is Overdone

Telekomunikasi Indonesia’s shares dropped by a substantial -20% since the beginning of March 2024.

The “launch of Telkomsel Lite” in February 2024, which is “perceived to restart a price war” was the main factor contributing to the significant pullback in TLK’s share price, according to an April 4, 2024 research report (not publicly available) on the stock published by Macquarie Group (OTCPK:MCQEF) (OTCPK:MQBKY). As a reference, the cheapest “Telkomsel Lite” mobile service data offering allows subscribers to pay a mere IDR25,000 ($1.55) to use mobile internet data up to a limit of six gigabytes within a month.

An Overview Of The New “Telkomsel Lite” Mobile Service Data Plans

In my view, the meaningful correction in Telekomunikasi Indonesia’s shares in the past one and half months or so is overdone.

The negative impact of the introduction of “Telkomsel Lite” on TLK’s future mobile ARPU and profitability might not as bad as feared.

At the company’s FY 2023 earnings call (transcript sourced from S&P Capital IQ) on March 26 this year, TLK stressed that “going forward, we expect ARPU to be stabilized” through “productivity improvement” and “volume increase.” Telekomunikasi Indonesia has adopted a targeted approach with the roll-out of “Telkomsel Lite” to focus on specific customer segments such as “the youth and mass market” and certain parts of Indonesia like “the Java area” as per TLK’s management comments at the recent results briefing.

In other words, the market’s worries regarding the APRU and profitability outlook for Telekomunikasi Indonesia appear to be overblown. TLK is only targeting selected client segments and geographical areas with its new “Telkomsel Lite” offering, so the company’s overall mobile APRU isn’t likely to be affected to a very large extent. More importantly, the introduction of “Telkomsel Lite” puts Telekomunikasi Indonesia in a good position to gain market share in certain underserved customer and geographical segments. A potential increase in TLK’s revenue base driven by market share gains will likely enhance the company’s future profitability thanks to positive operating leverage.

Between the start of March and mid-April this year, TLK’s consensus next twelve months’ EV/EBITDA multiple compressed from 5.4 times to 4.6 times as per S&P Capital IQ valuation data, which represents a new three-year trough. As such, it is safe to say that expectations of Telekomunikasi Indonesia are low, which sets the stage for positive surprises.

Telekomunikasi Indonesia is expected to reveal the company’s Q1 2024 financial and operating performance on April 30, 2024. If TLK discloses stable mobile APRU and decent mobile subscriber growth for the first quarter, this should help to ease investors’ concerns about the impact of the company’s new “Telkomsel Lite” offering.

In summary, the big drop in TLK’s stock price in the last one and half months seems excessive, and the potential disclosure of favorable first quarter operating metrics in end-April might be a re-rating catalyst for the stock.

Monetization Of Data Center Business Is In Progress

Last month, TLK issued a 6-K filing announcing that it has concluded a “data center business transfer” between two entities controlled by the company.

In this 6-K filing, Telekomunikasi Indonesia explained that this recent transaction was done with the aim of “consolidating the company’s data center business in the region under one entity.” TLK also emphasized in its announcement that the latest restructuring move “supports the company’s plan to unlock (the value of) the company’s data center business in the future.”

I previously emphasized in my early-February 2024 write-up that the data center business is “a major growth driver for TLK” considering its growth potential in international markets. Therefore, there is a good chance that Telekomunikasi Indonesia’s shares will perform well and command a higher EV/EBITDA multiple, if investors have a better appreciation of the value of TLK’s data center business.

An earlier February 6, 2024 Reuters news article cited comments from a member of TLK’s management team indicating that the company is “looking to sell a stake in the data center business” in 2H 2024. Telekomunikasi Indonesia’s recently announced restructuring efforts with the purpose of “consolidating the company’s data center business” make it more likely that a partial sale of its data center business will happen this year.

My opinion is that a successful sale of a stake in TLK’s data center business to prominent investors (e.g. a large global data center player or a private equity firm) at a reasonably good valuation will likely help to re-rate the company’s shares in a favorable manner.

Key Risk Factors

Telekomunikasi Indonesia’s shares could continue to underperform if certain risks materialize.

A key risk is that TLK’s actual Q1 2024 financial and operating metrics turn out to be worse than what the analysts are anticipating. This could add to existing concerns about the unfavorable effects of the new “Telkomsel Lite” plan rolled out by Telekomunikasi Indonesia.

The other key risk to watch is a delay in the monetization of the company’s data center business. This might send a negative signal about investors’ view of the growth prospects for TLK’s data center operations.

Closing Thoughts

Telekomunikasi Indonesia is still rated as a Buy. I think that the recent sell-off in TLK’s shares has been overdone. The company’s stock price is likely to recover with the disclosure of above-expectations Q1 operating metrics and the successful sale of a partial interest in the data center business.