Telekomunikasi Indonesia: Stellar Indonesia Telecom Play (NYSE: TLK)

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Opportunity Overview

This is one of many articles I’ve written that outlines how frontier and emerging market telecom stocks are safer ways to gain exposure to these markets. Many markets, such as Brazil and Indonesia, have lower penetration rates for some of these services, leading to strong growth in demand while other industries declined. Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE: TLK), also known as Telkom Indonesia, is a solid choice for many reasons:

  • Indonesia is one of the largest telecom markets in the world, and it still has plenty of room for growth. This growth is mainly due to the potential growth in the number of users, but could also be driven by an increase in revenue per user as incomes increase in the country.

  • Indonesia is an extremely important emerging market, but it is often overlooked by emerging market investors. Although it is a significant economy, it is not even among the top 5 constituents of the iShares MSCI Emerging Markets (EEM) ETF.

  • Telkom Indonesia has a market share of around 60% and has performed very well over the past few years.

Y-Charts

Y-Charts

Telkom Indonesia is a decent value stock to consider, but the clearer narrative comes at a price (higher valuation). Now is probably not the best time to enter if you are concerned about performance over the next 1-3 years. However, this is still a solid long-term hold, given that the market is not saturated and there is room for an increase in revenue per user.

The case of Indonesian stocks

Indonesia is the 4th most populous economy in the world, the 10th largest country in the world by purchasing power parity, and the 14th largest economy in the world. Indonesia’s GDP per capita has increased significantly from $2,980 in 2012 to its current level of $3,855. The country’s average income is also low by regional and emerging market standards. Indonesia’s economy has grown rapidly over the past decade, and even recent performance has been exceptional, with GDP growing at 5.4%. It will be hard to ignore Indonesian capital markets this decade if these growth trends continue.

MSCI

MSCI

However, Indonesia is just a blip with the MSCI Emerging Markets. Its weight in the MSCI is lower than that of South Korea and Brazil, despite its economic importance.

Investors focusing on Asia focused more on big countries like China, South Korea and Japan.

Statistical

Statistical

There is room for growth in the Indonesian stock market if macro trends pick up speed. Among all US ADRs, Telkom Indonesia is the only one listed on the NYSE, so it can be the first choice for investors who are passively interested in the market and do not commit to investing directly on the stock exchange. Telecommunications is also one of the fastest growing industries in Indonesia and has been a safe bet even during Covid-19. Telkom Indonesia is basically a macro game about Indonesia. These factors make it worth considering a long-term investment (5-10 years) in Telkom Indonesia.

Telecommunications industry in Indonesia

The Indonesian telecommunications industry is also important globally, and it is likely to attract a lot of investment during this decade. Indonesia currently has 355 million mobile phone subscriptions, making it the world’s third-largest market. Penetration rates in other areas are still relatively low. In 2020, there were only 11.7 million fixed broadband subscribers in Indonesia, out of 273.5 million. There is still plenty of room for growth in this area.

Fixed broadband subscribers per 100 inhabitants

Trade economy

Trade economy

The country’s three largest telecommunications nations collectively control 80% of the market. Telkom Indonesia is the largest company in the sector, with a market share of around 60% as of 2021. Growing public demand and government support are expected to help drive tower construction in the country. Recent laws have helped liberalize foreign investment in telecommunications and technology, which should help spur industry growth. In addition, local actors are very active in this space. Miratel, a subsidiary of Telkom Indonesia which recently went public, has 28,000 towers in Indonesia.

Covid had minimal impact: The telecommunications industry in Indonesia has not seen a significant slowdown in growth like other industries, due to increased digitalization and increased demand for the internet in Indonesia. The total number of Internet users in the first quarter of 2021 increased by 15.5% compared to the first quarter of 2020.

Indonesia

Telkom Indonesia is a leading telecommunications company in Indonesia, which has a dominant position in many business sectors.

TLK

TLK

Mobile-segment: Telkom Indonesia has maintained a market share of 59.3% in this segment and serves more than 170 million customers in Indonesia. However, this segment is relatively saturated, and Telkom Indonesia only saw 0.4% growth in this segment in 2021.

The consumer segment will be one of the main drivers of growth, as revenues from this segment grew by 13.6% in 2021 and 19.5% in 2020.

TLK Annual Report

TLK Annual Report

The company’s enterprise segment will also be a key driver of growth going forward, as it grew by 14.4% last year. However, a key factor to note is that its mobile segment (84.2 billion) is larger than all of its other four segments combined (58.5 billion).

TLK Annual Report

TLK Annual Report

It looks like the biggest driver of growth going forward will have to be increased revenue per user, although there is still plenty of room for subscriber growth in its enterprise/consumer segments. Additionally, while most Indonesians have access to a mobile phone, the % of the population with internet access is relatively low, at around 73%.

Outlook

Emerging market equities are likely to come under fire over the next year, due to heightened political risks, rising commodity prices and growing issues such as inflation/credit defaults. sovereign debt/etc. Indonesia, in particular, is in some ways negatively impacted by rising commodity prices, as it is a net importer of oil and a large buyer of wheat and soybeans. Inflation has remained under control, at 4.9% recently.

Y-Charts

Y-Charts

However, these factors are unlikely to have an impact on the Indonesian telecommunications industry. Over the long term, Telkom Indonesia has significantly outperformed Indonesian ETFs.

Y-Charts

Y-Charts

12-16x earnings is a very attractive entry point for a stock like this (EM telecom company with a large market share). I plan to add a position and accumulate on any pullbacks. One of the attractions of this stock is that you can buy it free of charge from certain brokerages. Other Indonesian stocks are traded on the OTC market and you usually have to pay a fee of more than $7 per trade. This allows for strategic accumulation over time.

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