Industry Trend Analysis - TSGN Acquisition A Springboard For Telkom's Growth - FEB 2018


BMI View: Telkom Indonesia ' s acquisition of TSGN will boost its ability to service Asia ' s high-value enterprise segment. We view the acquisition as positive in rais ing Indonesia's business connectivity and competitiven e ss ; it will also provide a modest boost to government plan s to provide nationwide broadband access.

Telekomunikasi Indonesia International (Telin) - the international arm of state-owned Telekomunikasi Indonesia (Telkom) - will acquire a 70% stake in Malaysian satellite provider TS Global Network (TSGN) in a MYR108.5mn deal, subject to regulatory approval. We have a positive view of the acquisition in view of Telkom's ambition to expand its satellite capabilities to serve growing Indonesian broadband demand, as well as penetrating the regional enterprise connectivity segment.

Better Broadband Coverage

Indonesia's business Internet traffic is forecast to grow at a CAGR of 27% over the next five years, versus the APAC region average of 24%, according to Cisco's Visual Networking Index (VNI). By contrast, we forecast the total number of Indonesian broadband subscriptions to grow by an underwhelming 7.2% CAGR over the same period. While demand for Internet access will be robust, infrastructure has been lagging behind: a fragmented wireline market and meagre wireline broadband coverage exist due to Indonesia's geographical nature. In order to tap unmet demand for connectivity, the government has set a 2019 target to provide nationwide broadband access, and we view the TSGN acquisition as being complementary to that initiative.

Growing Demand, Lagging Infrastructure
Indonesia Broadband Subscriptions
f = BMI forecast. Source: BMI, national sources

TSGN's MySat-1 satellite has a minimum 35 dBW C-band coverage throughout the whole of Indonesia, which it uses to offer very small aperture terminal (VSAT) connections for businesses. We expect that Telkom will repurpose free capacity on the satellite (estimated at 50%) to serve broadband to business subscribers and rural communities - boosting its subscriber base in the short-term. Provision via satellite is also a more cost-effective way to serve businesses in more inaccessible areas in Indonesia - particularly islands that do not have wired infrastructure. Compared to deploying wireline infrastructure, satellite utilisation will be less capital-intensive in addressing the needs of rural and multi-site customers.

Increasing Regional Enterprise Presence

The purchase also provides Telkom access to TSGN's 150 existing customers throughout Malaysia, Indonesia, Brunei, Papua New Guinea and the Solomon Islands. With multinational corporations and large businesses among TSGN's clients, Telkom inherits a portfolio of high-value subscribers into its enterprise business - which grew at an impressive 39.5% in the year to September 2017. The acquisition also comes on the back of Telkom's investment in the Indonesia Global Gateway (IGG) project - a 5,300km fibre-optic submarine cable connecting various regions in Indonesia to Singapore. The project, which is due to be operational by Q318, will boost business connectivity to the regional trading hub - a boost to Indonesia's regional competitiveness.

Enterprise Segment Boosting Revenues
Revenue Contribution (INR mn) & YoY Growth (%) Of Telkom's Enterprise Segment
Source: BMI, Telkom

The acquisition will also further strengthen Telkom's regional presence. Telin has a presence in 11 countries outside of Indonesia, and operates an MVNO and enterprise services unit in Malaysia, although its market presence is small. We expect Telkom to use TSGN into its Telin to further increase its outreach to the Malaysia enterprise segment. With Malaysia aiming to be a regional leader in the digital economy, we believe Telkom is hoping to grasp opportunities for growth in the country via the acquisition.

Complementing Its Ageing Satellite Portfolio

TSGN's MySat-1 satellite will complement Telkom's ageing portfolio: its Telkom-1 and Telkom-2 satellites are expected to be decommissioned in 2021 and 2020, respectively. The launch of Telkom-3 failed in 2012, so the acquisition will boost the company's capacity before Telkom-4 launches in Q318. Telkom has also expressed intentions to reduce its reliance on external companies for satellite provision, and we view the acquisition as a move to internalise risks associated with escalating costs.