Management Changes And Improved Margins Will Drive Digital Connectivity Forward

Key Takeaways

• Strategic initiatives like group procurement and fixed-mobile convergence boost net margins, earnings, and long-term revenue growth.
  
• Expansion in digital connectivity and infrastructure, including data centers, enhances revenue potential and earnings with higher profit margins.
  
• A volatile market and declining legacy revenue threaten margins, while reliance on economic recovery and high expenses complicate projected revenue growth.

Catalysts

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

• Telkom Indonesia's successful completion of a one-billing integration enhances fixed-mobile convergence capabilities, laying the foundation for long-term wholesale revenue growth by accelerating FMC adoption and improving customer engagement. This is likely to impact both revenue and net margins positively.
  
• Continued strategic initiatives such as group procurement processes to lower CapEx and improve content cost efficiency should significantly increase net margins and earnings due to the lowering of operational expenses.
  
• Expansion in the B2B segment, focusing on digital connectivity supported by platform expansion, particularly data centers and cloud services, points to potential sustainable revenue growth and improved earnings as these sectors offer higher margins.
  
• Acquisition of fiber optics by Mitratel, which strengthens its position as a digital infrastructure company, suggests potential growth in tenancy and usage, ultimately increasing revenue streams.
  
• The company plans to keep CapEx to revenue at 17-19% in the medium to long term, which, combined with cost efficiency measures, may provide greater free cash flow for dividends, potentially impacting stock attractiveness and driving up earnings per share.

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

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.3% today to 16.5% in 3 years time.
• Analysts expect earnings to reach IDR 26505.6 billion (and earnings per share of IDR 242.88) by about June 2029, up from IDR 16609.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as IDR19685.0 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 19.2x on those 2029 earnings, up from 14.0x today. This future PE is greater than the current PE for the US Telecom industry at 18.9x.
• Analysts expect the number of shares outstanding to decline by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.04%, as per the Simply Wall St company report.

Risks

• The company is operating in a highly competitive and volatile macroeconomic environment, which may impact revenue growth if competitors undercut prices or if economic conditions worsen.
  
• The decline in legacy revenues and pressure on data yield could affect net margins if the company is unable to offset these declines with new digital revenue streams or cost efficiencies.
  
• Despite growth initiatives, the fixed broadband penetration remains low, which may limit potential earnings growth if not effectively addressed.
  
• The company's significant dependence on macroeconomic recovery and market repair initiatives poses risks to achieving projected revenues if economic conditions or industry dynamics do not improve as expected.
  
• High operating expenses and pressures related to maintaining customer engagement and retention could negatively impact net margins, particularly if the company doesn't achieve expected revenue growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of IDR3672.95 for Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR4150.0, and the most bearish reporting a price target of just IDR3000.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be IDR160501.0 billion, earnings will come to IDR26505.6 billion, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 12.0%.
• Given the current share price of IDR2350.0, the analyst price target of IDR3672.95 is 36.0% higher.
• 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.