Escalating Spectrum Auctions And Tech Risks Will Strain Margins

Key Takeaways

• Escalating regulatory and technology risks threaten margins, elevate capital costs, and may render recent investments less valuable in the long term.
  
• Intensifying competition, stalled subscriber growth, and merger execution challenges jeopardize revenue stability while exposing the company to integration and profitability pressures.
  
• The merger, digitalization efforts, infrastructure investment, and converged offerings position XLSMART for improved profitability, market share, and resilient revenue growth amid industry challenges.

Catalysts

Provides telecommunication, telecommunications network, and multimedia services for consumers and businesses in Indonesia.

• Despite optimism around the merger, ongoing and escalating government spectrum auctions are likely to impose significantly higher costs and capital expenditures on XLSMART Telecom Sejahtera in the coming years, leading to persistent downward pressure on operating margins and constraining cash flows.
  
• The pace of technological innovation, particularly with new network paradigms such as satellite connectivity and open-RAN, risks rendering recent infrastructure investments obsolete faster than anticipated; this will likely result in increased depreciation charges, heightened capital intensity, and declining returns on invested capital over time.
  
• Intense competition and the rapid shift in consumer behavior toward over-the-top (OTT) digital platforms continue to erode traditional telecom revenue streams, as evidenced by a blended ARPU that has been trending down and weak purchasing power across the customer base; future revenue growth will be threatened as price-sensitive users become increasingly difficult to monetize.
  
• Integration execution risk from the recent merger – including the need to sunset overlapping towers, harmonize IT systems, and shift cost structures – carries the likelihood of substantial one-off impairment charges, operational disruptions, and delayed realization of expected synergies, which will weigh on both net margin and earnings for several quarters.
  
• Prolonged reliance on subscriber expansion in rural and low-income segments, compounded by ongoing market saturation and stagnating subscriber growth rates, means that future topline growth may require aggressive pricing and elevated promotional activity, directly compressing ARPU and increasing the volatility of both revenue and net profit.

XLSMART Telecom Sejahtera Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on XLSMART Telecom Sejahtera compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming XLSMART Telecom Sejahtera's revenue will grow by 10.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 7.3% in 3 years time.
• The bearish analysts expect earnings to reach IDR 3416.9 billion (and earnings per share of IDR 179.22) by about July 2028, up from IDR 1662.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 27.8x today. This future PE is lower than the current PE for the ID Wireless Telecom industry at 21.3x.
• Analysts expect the number of shares outstanding to grow by 1.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.63%, as per the Simply Wall St company report.

XLSMART Telecom Sejahtera Future Earnings Per Share Growth

Risks

• The merger between XL Axiata and Smartfren positions XLSMART with significant scale advantages, allowing for extensive cost synergies (estimated at 300 to 400 million USD annually) and network rationalization, which can lead to sustained improvements in operating margins and net profitability over the medium to long term.
  
• Despite headwinds in consumer purchasing power and industry ARPU pressure, the company's strong focus on digitalization, customer quality, and digital platform engagement (evidenced by an 18% year-on-year increase in active digital users) provides a pathway to stabilizing and eventually growing revenues through higher-value service offerings and cost efficiencies.
  
• XLSMART's aggressive investments in network infrastructure, particularly in 4G fiberization and upcoming 5G readiness (63% of sites fiberized and strategic spectrum positioning), enhance service differentiation, enabling premium pricing and strong brand loyalty which are supportive of long-term revenue and market share gains.
  
• The company's convergence strategy, uniting mobile, broadband, and content offerings, facilitates cross-sell and upsell opportunities, which can increase ARPU and customer retention, buffering against industry stagnation and driving revenue diversification.
  
• XLSMART is likely to benefit from the broader trend of digital economy growth in Indonesia, urbanization, and government-supported connectivity initiatives, which expand the addressable market and provide steady secular tailwinds for subscriber and revenue growth over the coming years.

Valuation

• The assumed bearish price target for XLSMART Telecom Sejahtera is IDR1625.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of XLSMART Telecom Sejahtera's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR5000.0, and the most bearish reporting a price target of just IDR1625.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be IDR46839.7 billion, earnings will come to IDR3416.9 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 12.6%.
  
• Given the current share price of IDR2550.0, the bearish analyst price target of IDR1625.0 is 56.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.