Telco: FY25 Outlook: FMC Strategy and Telco consolidation support a resilient FY25 Growth (OVERWEIGHT)

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Telco

FY25 Outlook: FMC Strategy and Telco consolidation support a resilient FY25 Growth

We forecast 6.3%/7.0% revenue/net profit CAGR in FY24-26F, driven by fixed BB focus, mobile monetization and ICT.
ISAT is our top pick (Buy, TP Rp3,800), with robust operating leverage; TLKM offers potentially the best FMC play in the long term.
Reiterate sector OW rating as Telcos are incentivized for healthier conduct amid transformations with tailwind from EXCL’s merger.

Projected 6-7% yoy sector rev. growth driven by focus on fixed BB

We expect over 6% yoy sector revenue growth in FY25F, driven by higher focus on Fixed Broadband (BB). We believe this strategy will yield sector benefits as a) telcos leverage their captive market and existing infra to secure existing traffic and generate additional revenue, b) it opens access to incremental household spending, and c) it potentially reduces competition.

Foreseeing better monetization and a more subdued mobile competition

We see better momentum prospects in mobile as telcos indicate stabilizing consumer spending since 3Q24, backed by favorable seasonality, which facilitates price increases. This momentum is likely to translate into better mobile ARPU, allowing fixed BB to leverage more attractive fixed ARPU offerings. The anticipated EXCL-FREN merger creates conditions for an oligopoly setting, supporting a more favorable mobile ARPU outlook.

AI should trigger transformational ripple effects in ICT spending

We anticipate that AI will significantly influence ICT spending, creating a chain reaction as client awareness of SaaS productivity grows from FY24 to FY25. We expect SOE and SMEs to accelerate their ICT investments, aiming to enhance their infrastructure and support AI applications. ISAT is positioning itself ahead of the curve by establishing a leadership role in AI branding while committing US$2-3bn in capex with partner BDx. This strategic move sets the stage for stronger ICT revenue growth.

Telkom potentially the best LT FMC play; EXCL’s merger offers great upsides

ISAT and EXCL are outsourcing the capex burden for fixed BB, enabling them to focus on the B2C market. This strategy may lead to higher op. leases, but the incremental EBITDA is expected to flow directly to EBT. In contrast, TLKM retains control of the last-mile network on its balance sheet and hence the opportunity to enhance earnings in B2C and B2B markets. If XL and FREN merge, the resulting revenue and cost synergies will be substantial. A key sector risk remains the proliferation of illegal internet. However, we believe this is a symptom of the current weak macro and that users are likely to prefer more premium services under better macro conditions.

Maintain sector Overweight on attractive growth and new opportunities.

We expect increased mobile monetization, along with growth in fixed BB to drive a 6.3%/ 7.0% revenue net profit CAGR in FY24-26F. We prefer ISAT (Buy, TP Rp3,800) as our top pick amid strong growth potential with significant operating leverage in the upcoming quarters. Additionally, a potential merger in the sector could further elevate the overall outlook. Key risks include the proliferation of online gambling and prolonged weak purchasing power.

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