Indonesia Telco: 2021 outlook: recovery around the corner
Time to straighten the rudder
We continue to expect competition in the telco industry to moderate in 2021. EXCL/ISAT have yet to react in any meaningful way to Telkomsel’s (Tsel) Unlimited Max plan. Indeed, in 3Q20, data yields at EXCL and ISAT were relatively flattish q-q at IDR4.3/MB and IDR4.0/MB, respectively. As we have argued previously, smaller carriers lack sufficient capacity to compete with Tsel in all regions where they have made forays due to spectrum deficiency and financial constraints. While the smaller carriers may decide to react in some manner, they are more likely to act through localized offers, with a relatively limited impact on overall yield. We expect cellular industry revenue growth to return to an increase of c.5% y-y in 2021E (vs. -1% in 2020E), aided by moderating competition and a gradual recovery in purchasing power.
Omnibus Law paves the way for 5G
We believe one of the major aims of the Omnibus Law is to ensure 5G readiness down the line, as it appears to pave the way for improvements in industry efficiency and profitability through infrastructure sharing (both passive and active), consolidation, and pricing control. We believe this is key, considering the more capital-intensive nature of 5G (relative to 4G). Of course, the terms and conditions still need further clarification, which the implementing regulations (slated for 1H21) should provide. However, based on the published law, we believe near-term risk to Tsel’s dominant position will be limited.
Towers: near-term profitability intact, but we are turning more cautious over the medium and long terms
In the near term, tower companies (towercos) should continue to enjoy solid co-location demand on the back of carriers’ 4G coverage expansion and network densification. They should also benefit from the low-interest-rate environment. That said, given the tapering-off of inorganic growth momentum, we project the towercos’ revenue growth in 2021E to moderate to c.7% (vs. +14% in 2020E). Meanwhile, we are more cautious over the medium/longer term, as: 1) Mitratel could be pressed to raise efficiency/ROI through co-location/ tenancy growth, which would likely add to competitive pressure; and 2) the Omnibus Law could pave the way for industry consolidation. While these factors have a minimal impact on near-term profitability (as towercos’ contracts are long-term in nature), they could cap long-term growth potential.
Overweight on the telco sector; Neutral on the tower subsector
All in all, we maintain our positive outlook on the telco sector and thus reiterate our Overweight call. We highlight the following investment points: 1) price war risks are blown out of proportion; and 2) the Omnibus Law could lead to improvement in overall industry profitability. TLKM (TLKM IJ, IDR3,510, BUY) remains our top pick among the telcos. We expect TLKM to see c.5% top-line growth next year, in-line with the industry. On valuation, we downgrade ISAT (ISAT IJ, IDR4,560) to HOLD. For the tower subsector, we remain Neutral and retain TOWR (TOWR IJ, IDR985, BUY) as our preferred pick. We continue to prefer the telco companies, which should fare better on the back of their improved prospects for cost savings/infra sharing/M&A. We are more cautious on the towercos due to: 1) potential for higher competitive pressure stemming from Mitratel’s tenancy growth; and 2) risk of telco industry consolidation.