Together with our Daiwa alliance partner Bahana Securities, we recently met up with Indonesia’s Minister of Communication and Information, Rudiantara, and three Indonesian telcos (TLKM, EXCL, ISAT) for an industry update. Key takeaways: (i) the minister and companies are all supportive of sector consolidation; (ii) the companies expect a gradual recovery in cellular prices, after a dismal 2018; and (iii) EXCL and ISAT plan to increase capex and ramp up network coverage. All in, we maintain our HOLD rating on Axiata – we expect its 66.4%-owned EXCL to see an improved EBITDA margin in 2019E, but high depreciation expenses may continue to weigh on its bottom line. Elsewhere, pricing and control remain big hurdles for consolidation in the Indonesia cellular sector, in our view.

Government supports consolidation; possible incentives include spectrum license retention / discount on spectrum usage fee

Indonesia’s Communication and Information Minister Rudiantara supports industry consolidation. The ministry, acting as facilitator and accelerator, plans to provide support by allowing an acquiring telco to retain the spectrum of the acquired telco. The government may provide additional incentives by allowing the merged telco to temporarily return surplus spectrum to the government, thereby helping the merged telco to reduce spectrum usage fees. The minister intends to implement the new spectrum-retention regulation by end-2019. Elsewhere, Rudiantara is firmly against the proposal to implement a floor price on telco services.

Companies expect gradual recovery in cellular prices; focusing on expanding network / improving service quality

After a difficult 2018, the Indonesian telcos have started to raise their cellular package prices. Representatives from all the companies we met (TLKM, EXCL, ISAT) expect cellular prices to recover gradually in 2019. For 2019, the telcos are focusing on expanding their networks and improving service quality, instead of price competition. Separately, all companies are supportive of sector consolidation.

We Expect Recovery But No Smooth Sailing; Maintain HOLD on Axiata

We came away from our visits with a mixed feeling. While we are positive on the Minister’s supportive initiatives and corporates' openness to consolidation, the pricing and control remain a major hurdle. Without consolidation, the competition should continue to cap their cellular prices and the sector's service revenue growth. We maintain our HOLD rating on Axiata (AXIATA MK), the major shareholder of EXCL, with an unchanged SOTP-derived price target of RM4.09. We expect EXCL’s earnings to recover from a dismal 2018. While we expect gradual revenue gains in its key operating subsidiaries (including EXCL), the stiff competition and regulatory risks may continue to cap earnings growth and weigh on investor sentiment.

Source: Affin Hwang Research - 4 Apr 2019