2023-04-10 10:40:51 ET
Summary
- TLK expects its top line to grow by +5% or higher in FY 2023, which could turn out to be its best year in terms of revenue expansion since 2018.
- The valuation creation levers for Telekomunikasi Indonesia include more aggressive cross-selling, the potential listing of its data center assets, and sustaining a high dividend payout ratio.
- TLK's current mid-single digit forward EV/EBITDA valuation multiple is undemanding, and there is room for valuation re-rerating supported by multiple value creation levers.
Elevator Pitch
My rating for PT Telekomunikasi Indonesia Tbk's ( TLK ) [TLKM:IJ] stock stays as a Buy. I previously discussed how Telekomunikasi Indonesia's stock performed last year and the prospects for the company's shares in my earlier January 26, 2023 article .
With this latest write-up, I highlight the multiple levers that TLK has at its disposal to create value in the short to medium term. Despite the presence of a number of value creation levers, Telekomunikasi Indonesia is trading at a reasonably attractive 5.6 times forward EV/EBITDA which supports a Buy rating.
TLK's Management Guidance Is Favorable
Telekomunikasi Indonesia offered reasonably good financial guidance at the company's most recent fiscal 2022 earnings call (event transcript taken from S&P Capital IQ ) in late-March 2023. Specifically, TLK guided for "mid- to high single digit" percentage revenue growth for FY 2023, and it also outlined its expectations of achieving an EBITDA margin for this year that is on par with what it achieved last year.
With respect to top line expansion, Telekomunikasi Indonesia's revenue growth rates ranged from +0.7% to +4.9% in the past five years. In other words, TLK has failed to achieve an annual sales increase of more than +5% in recent years. This explains why I think that Telekomunikasi Indonesia's "mid- to high single digit" percentage revenue growth guidance is very impressive.
In terms of profitability, TLK indicated in its Q4 2022 results presentation slides that the company's EBITDA margin improved by +70 basis points from 52.9% for FY 2021 to 53.6% in the previous year. Telekomunikasi Indonesia's guidance of stable EBITDA margin for FY 2023 suggests that the company's expected faster revenue growth (relative to prior years) for the current year won't come at the expense of price cuts or higher operating costs.
In my view, there are multiple value creation levers supporting Telekomunikasi Indonesia's positive outlook in 2023 and beyond, as detailed in the subsequent sections.
Corporate Restructuring Will Drive More Aggressive Cross-Selling
On April 6, 2023, Telekomunikasi Indonesia announced in a 6-K filing that it plans to do a "spin-off of the Company's IndiHome (fixed broadband) business" to Telkomsel, TLK's wireless or mobile business arm. Essentially, this proposed transaction represents a combination of TLK's two key business divisions.
As an indication of how the planned spin-off transaction could lead to faster growth for TLK, Telekomunikasi Indonesia highlighted at its FY 2022 earnings briefing that it is targeting a million new broadband subscribers this year. As a comparison, TLK achieved net new subscriber additions of approximately 611,000 in 2022.
Assuming that the spin-off exercise and combination of the company's wireless and broadband businesses are completed in the middle of 2023 as planned, Telekomunikasi Indonesia will be in a better position to facilitate cross-selling between these two businesses. This explains why TLK is confident in securing significantly more new broadband subscriptions for the current year.
A Potential IPO Could Unlock Value Of Data Center Assets
Telekomunikasi Indonesia has reportedly been in discussions involving a potential public listing of the company's data center business as mentioned by Bloomberg in an article published late last year.
There are two ways to assess the expected valuation uplift associated with the monetization of TLK's data center properties via an IPO.
One way is to compare the market capitalization of Telekomunikasi Indonesia and the potential price tag for the company's data center business. In the late-2022 Bloomberg article, it was mentioned that the minimum valuation that TLK has set for its data center operations is $1 billion. This suggests that the indicative valuation of the data center assets is equivalent to a meaningful 4% of Telekomunikasi Indonesia's current market capitalization in excess of $28 billion.
Another way is to assess the differences in valuation between TLK and pure-play data center businesses. As per S&P Capital IQ's valuation data, Telekomunikasi Indonesia is now valued by the market at just 5.6 times consensus forward next twelve months' EV/EBITDA. In comparison, a spokesperson for TLK interviewed by Bloomberg , as per the earlier news article that I referred to, sees the company's data center assets as worthy of a 25 times EV/EBITDA valuation multiple. Separately, Sunevision Holdings Ltd. ( SVNHF ) [1686:HK], a Hong Kong data center operator, currently trades at a consensus forward next twelve months' EV/EBITDA ratio of 16.6 times.
As per the analysis presented above, there is a clear opportunity for Telekomunikasi Indonesia to create value by selling part of its data center business at a good price and a rich valuation multiple in a potential public listing.
Positive Change In Shareholder Capital Return
TLK revealed a key change to the company's shareholder capital return at its recent earnings call. Telekomunikasi Indonesia indicated at its FY 2022 investor briefing that it will raise its dividend payout from 60% for fiscal 2021 to 75%-80% for FY 2022 with ensuring that the stock's "dividend yield" is "competitive in the market" as a key consideration.
In my view, Telekomunikasi Indonesia has sent a strong signal that the company is willing to return a higher proportion of earnings and excess capital to its shareholders going forward. The favorable view of TLK's dividend outlook is reflected in the sell-side's financial projections, with expectations that the stock's forward FY 2023 dividend yield of 4.5% will be much higher than its historical trailing twelve months' dividend yield of 3.5% .
More importantly, TLK should be able to attract and retain a group of income-focused shareholders assuming that it sticks with a high dividend payout ratio, which should provide support for its share price.
Closing Thoughts
There are quite a few things that Telekomunikasi Indonesia can do to drive better financial performance or push up its share price, which I refer to as value creation levers in this article. This makes me bullish on TLK's shares, which justifies my Buy rating for the stock.
For further details see:
Telekomunikasi Indonesia: Multiple Levers To Pull