FMC as the Key to Prosperity

TLKM's stake in TSEL increases to 70%. TLKM had signed a Conditional Spin-off Agreement with TSEL on 6 Apr 2023 regarding the spin-off of Indihome (valued at ~IDR 58.3 trillion) to TSEL. After the integration, Singtel will exercise its right to take ~4.5% of TSEL’s new shares for ~IDR 2.7 trillion, while TSEL will issue ~33 thousand new shares for TLKM, which will boost TLKM's stake in TSEL to ~69.9% (current: 65%) while Singtel's stake will decline to ~30.1% (current: ~35%). We believe the transaction will boost TLKM's enterprise value by ~IDR 5.7tn. The final decision regarding the spin-off will be made at TLKM GMS on 30 May 2023.

Impact on profitability. We believe the Indihome spin-off will increase TSEL's EBITDA by ~+9-10% in 2023-2025F with an EBITDA margin of ~47%, while its impact on TLKM's EPS might be relatively insignificant. However, in the long run, we believe TLKM's FMC strategy (including the Indihome spin-off) will positively impact TLKM's overall blended ARPU and reduce its churn rate, given TSEL's (~IDR 44k) and Indihome's (~IDR 268k) blended ARPU figures and their position as market leaders in their respective industries. The company estimates that the synergies established with the FMC strategy will boost its revenue by ~IDR 5.6tn and EBITDA by ~IDR 5.3tn in 2027F.

BUY on TLKM. In light of the potential spike in its enterprise value following its corporate actions, we decided to reiterate our BUY rating on TLKM and raise our TP to IDR 5,100/share (previously: IDR 5,000/share), implying 8.1x 2023F EV-to-EBITDA. We believe that TLKM’s corporate actions and initiatives will provide added value and positively impact the company's profitability in the long term. Risk: tighter competition.