NON-RATING ACTION COMMENTARY

Fitch Ratings-Singapore-10 August 2023: Indonesian telecommunications companies' average monthly revenue per user (ARPU) will rise in 2023, led by data price hikes and higher data consumption by subscribers, Fitch Ratings says. We believe telcos will focus on profitable growth by adding high-value subscribers rather than competing on price.

We expect the 2023 revenue of the three-biggest telcos - PT Telekomunikasi Indonesia Tbk (Telkom, BBB/Stable), PT Indosat Tbk (BBB-/Stable) and PT XL Axiata Tbk (BBB/Negative) - to rise by a mid-single-digit percentage (2022: 3.7%). We expect XL's and Indosat's revenue to grow by mid-to-high single digits in 2023, faster than the industry average. Telkom's revenue will rise by a low-to-mid single digit given a continued decline in its legacy SMS, voice and fixed telephone revenue, which contributed around 10% of its 1H23 revenue, and a lower subscriber base.

XL sees room for further ARPU improvement and data traffic growth has remained healthy, despite a tariff hike in March 2023. Indosat aims to increase its monthly ARPU to IDR40,000 by 2024, which is likely to be supported by higher spending from its own app's active users. Telkom is using data analytics and focusing on higher-value customers to drive its ARPU growth. The three telcos reported ARPU growth in 2Q23, as the blended ARPU of Telkom's mobile unit rose by 16% yoy to IDR49,700, Indosat's gained 2.3% yoy to IDR35,800 and XL's increased 7.7% yoy to IDR42,000.

We forecast Telkom's EBITDA margin will narrow slightly due to the continued loss of legacy revenue, lower margin at its interconnection business, and additional spectrum expense for adding the 2.1GHz spectrum. Telkom expects to realise IDR500 billion in cost synergies in 2023 following the merger of its mobile subsidiary, Telkomsel, and its consumer fixed broadband business. Fitch expects Indosat's 2023 margin to rise by around 250bp from 2022 on cost optimisation and revenue growth. XL's EBITDA margin should continue to widen from the low base in 1Q23 due to front-loaded rental costs in 1H23 to prepare for the festive Lebaran period, but we expect the full-year margin to remain flat compared with 2022.

Telcos are pushing subscribers to engage on their mobile applications to reload and purchase services instead of a traditional model of physical scratch cards to top up their accounts. This allows telcos to better understand their customers' consumption patterns and use personalised offerings to improve customer spending and stickiness. XL is leading the digital adoption with its app's monthly active users rising to 47% of its subscriber base by end-2Q23 from 45% at end-1Q23. The monthly active users of Indosat's apps have also risen steadily to 34% from 32% in the same period. Telkom's monthly active app users remained at 22% by end-2Q23, even though the numbers rose by around 1 million per quarter in 1H23.

Fitch expects the government's auction of the 700MHz spectrum to take place at end-2023 at the earliest. Fitch currently expects a 90MHz bandwidth in the 700MHz band to be available for telcos and another 200Mhz bandwidth in the 3.5GHz band to be auctioned later next year. The additional annual spectrum expense will have a negative impact on the telcos' margins and leverage, but all three have sufficient headroom in their standalone credit profiles to absorb the impact.

Contacts:

Lu Mengjia

Senior Analyst

+65 6796 7259

Fitch Ratings Singapore Pte Ltd

1 Wallich Street, #19-01 Guoco Tower,

Singapore 078881

Nitin Soni

Senior Director

+65 6796 7235

Media Relations:

Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com

Additional information is available on www.fitchratings.com

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