OTT Competition And Regulatory Hurdles Will Erode Telecom Viability

Key Takeaways

• Intensified competition and digital commoditization are eroding market share and pressuring margins, threatening Telkom Indonesia's earnings growth and digital transformation efforts.
  
• Heightened regulatory burdens and persistent high capital expenditure risk weaken profitability, limit flexibility, and raise concerns over capital allocation and dividend sustainability.
  
• Strong market expansion, digital infrastructure investments, and operational efficiencies position Telkom Indonesia for sustained revenue growth, profitability, and competitive resilience.

Catalysts

Provides information and communications technology, and telecommunications network services worldwide.

• The proliferation of digital communication platforms and Over-The-Top (OTT) services is accelerating the decline of legacy telecom revenues for Telkom Indonesia, and while the company is pushing digital bundles, ongoing price competition and commoditization have led to consistent downward pressure on data yields and Average Revenue Per User, likely resulting in ongoing revenue stagnation and margin erosion.
  
• Intensifying competition from global technology giants, who are rapidly encroaching into cloud, data center, and digital services, threatens to erode Telkom Indonesia's market share in high-growth business segments, undermining long-term earnings growth and blunting the impact of digital transformation initiatives.
  
• Heavier regulatory scrutiny around data privacy, competition, and network neutrality stands to increase compliance costs and restrict monetization avenues, with potential to significantly compress net margins and reduce operating flexibility for years ahead.
  
• The company's persistent reliance on large-scale infrastructure and high capital expenditure in a market experiencing decreasing returns could result in long-term capital misallocation, weakening free cash flow generation and ultimately jeopardizing return on invested capital and balance sheet health.
  
• Industry-wide trends toward commoditized connectivity, coupled with sustained upward pressure on operating expenses (such as content and marketing costs), are likely to further depress ARPU and compress profitability, jeopardizing the sustainability of dividend payouts and net income growth through the next economic cycle.

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 15.7% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach IDR 22369.1 billion (and earnings per share of IDR 225.46) by about July 2028, down from IDR 23406.0 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 15.7x on those 2028 earnings, up from 11.2x today. This future PE is lower than the current PE for the US Telecom industry at 18.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.23%, as per the Simply Wall St company report.

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Future Earnings Per Share Growth

Risks

• Indonesia's low fixed broadband and mobile data penetration, coupled with ongoing urbanization and a rising middle class, indicate that Telkom Indonesia's addressable market is poised for long-term expansion, which could result in higher ARPU and stronger revenue growth.
  
• The successful execution and scaling of fixed-mobile convergence, as evidenced by a rising convergence ratio and completed billing integration, supports deeper customer engagement and bundled service adoption, which is likely to drive recurring revenues and higher net margins.
  
• Data center and digital infrastructure investments, combined with new strategic partnerships and monetization of digital business lines, position Telkom to benefit from accelerating demand for cloud services and digital transformation in Indonesia, supporting long-term earnings growth.
  
• Industry consolidation and a healthier pricing environment, as well as rationalization among competitors, reduce the risk of a damaging price war and improve ARPU resilience, offering support for profitability and margin stability over the long term.
  
• Ongoing cost optimization measures including group procurement, technology upgrades, and operational efficiency initiatives are boosting CapEx and OpEx efficiency, resulting in healthy free cash flow, margin improvement, and the potential for increased dividend payouts.

Valuation

• The assumed bearish price target for Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia is IDR2500.28, which represents two standard deviations below the consensus price target of IDR3236.96. This valuation is based on what can be assumed as the expectations of Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia'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 IDR3720.0, and the most bearish reporting a price target of just IDR2500.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be IDR151816.8 billion, earnings will come to IDR22369.1 billion, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 12.2%.
• Given the current share price of IDR2650.0, the bearish analyst price target of IDR2500.28 is 6.0% lower.
• 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.