Executive Summary / Key Takeaways

• Infrastructure Value Unlock is the Core Long-Term Story: Telkom's phased spin-off of wholesale fiber (TIF), data center (NeutraDC), and tower (Mitratel) assets represents a structural shift from integrated telecom to infrastructure platform, following global precedents that have generated significant valuation uplifts for peers like Telenor and Telefónica (TEF).

• Fixed-Mobile Convergence Presents Near-Term Execution Risk: The IndiHome integration into Telkomsel has achieved 53% convergence penetration and exceeded IDR 1.9 trillion synergy targets, yet group revenue growth decelerated to 0.9% YoY in 9M 2024 while normalized EBITDA declined 2.1%, suggesting integration benefits have not yet translated to financial momentum.

• Financial Performance Reflects Transition Pain: Telkomsel's mobile revenue growth slowed to 0.4% in Q2 2024 as legacy voice/SMS declines of 20-30% annually offset digital business growth, while Mitratel's 83.2% EBITDA margins and data centers' 9% growth highlight the diverging performance between legacy connectivity and infrastructure assets.

• Attractive Yield Masking Payout Sustainability Concerns: The 6.04% dividend yield appears compelling, but the 96.59% payout ratio leaves minimal cushion for the IDR 17.5 trillion 9M 2024 CapEx program, suggesting potential pressure on dividend policy if infrastructure monetization timelines slip.

• Macro Headwinds Compound Competitive Pressures: Management's explicit warnings about "deflation threat," soft purchasing power, and tightening consumer spending create a challenging backdrop for ARPU recovery, even as competitors ISAT and EXCL show mixed performance that temporarily reduces price war intensity.

Setting the Scene: From State Monopoly to Infrastructure Platform

Telkom Indonesia, founded in 1884 in Bandung and tracing its modern corporate structure to a 1991 restructuring, has evolved from a state-owned telephone monopoly into Southeast Asia's largest integrated telecommunications and digital infrastructure provider. The company generates revenue through three distinct pillars: a B2C segment anchored by Telkomsel's mobile and fixed broadband services, a digital infrastructure segment comprising Mitratel's towers, NeutraDC's data centers, and the newly formed TIF's fiber assets, and a B2B ICT services segment targeting enterprises and government.

This structure reflects the "5 Bold Moves" transformation strategy launched in 2022, which recognizes that Telkom's most valuable assets are no longer the subscriber relationships that drove historical growth, but the physical infrastructure that underpins Indonesia's digital economy. The July 2023 transfer of IndiHome's 9.4 million fixed broadband customers into Telkomsel marked the first major move, creating a converged customer base of 159.9 million mobile subscribers. Subsequent establishment of PT Telkom Infrastruktur Indonesia (TIF) in Q4 2023 and PT Telkom Data Ekosistem (NeutraDC) in Q1 2024 signaled management's intent to separate infrastructure ownership from service operations, enabling focused capital allocation and potential strategic partnerships.

The industry context makes this strategic pivot critical. Indonesia's telecom market has consolidated around three mobile players, with Telkomsel maintaining dominant market share but facing intensifying competition from Indosat Ooredoo Hutchison (ISAT) and the newly merged XL Axiata-Smartfren entity (EXCL). Simultaneously, over-the-top providers like Google (GOOGL) and Meta (META) erode legacy voice and SMS revenue by 20-30% annually, while cloud giants AWS (AMZN) and Alibaba (BABA) encroach on enterprise connectivity services. These pressures compress mobile ARPU and limit pricing power, making infrastructure assets—whose value grows with data consumption regardless of which service provider wins the customer—increasingly attractive.

Technology, Products, and Strategic Differentiation

The Fixed-Mobile Convergence (FMC) initiative represents Telkom's core technological and strategic bet. By integrating IndiHome's fiber network with Telkomsel's mobile infrastructure, the company aims to create a unified customer experience that drives revenue uplift through cross-selling, reduces OpEx through shared infrastructure, and improves CapEx efficiency via coordinated network investments. The 53% convergence penetration achieved by September 2024, up from 37% in July 2023, demonstrates rapid customer adoption of bundled offerings.

Why this matters: FMC addresses the fundamental challenge facing all mobile operators—commoditization of connectivity. By owning both fixed and mobile infrastructure, Telkom can offer differentiated quality of service, particularly for enterprise customers requiring guaranteed bandwidth and latency. The strategy also creates switching costs; a household using Telkomsel mobile, IndiHome broadband, and Telkomsel's digital lifestyle services faces higher friction to churn than a single-service customer. Management's target of capturing the "next 10 million customers" in the mass market through ARPU-below-IDR 200,000 offerings like EZnet shows the strategy's breadth, while "more for more" premium bundles target ARPU accretion from existing subscribers.

The infrastructure spin-offs serve a different but complementary purpose. Mitratel, with over 38,600 towers and a tenancy ratio improving to 1.52x, generates 83.2% EBITDA margins by leasing infrastructure to all operators, including competitors. This transforms a cost center into a revenue engine that grows regardless of Telkomsel's market share. Similarly, NeutraDC's 42-megawatt capacity, 70% utilization, and planned expansion to 400 megawatts by 2030 positions Telkom to capture hyperscale demand from cloud providers and enterprises, a market growing at 15%+ annually where lease rates are trending upward due to supply-demand imbalances.

The TIF fiber spin-off, valued at IDR 35.8 trillion (22.2% of Telkom's equity), represents the most significant infrastructure monetization move. By separating wholesale fiber connectivity into a dedicated entity, Telkom can pursue strategic partnerships, optimize asset utilization, and potentially unlock valuation multiples comparable to global fiber companies that trade at premium EBITDA multiples. The phased implementation starting December 2025 allows Telkom to retain 99.9999997% ownership while preparing for external capital infusion that could accelerate network expansion without straining the parent company's balance sheet.

Financial Performance & Segment Dynamics

Telkom's 9M 2024 financial results reveal the tension between long-term strategy and near-term execution. Group revenue grew just 0.9% year-on-year to IDR 112.2 trillion, a sharp deceleration from the 3.7% growth in Q1 and 2.5% in H1. This slowdown occurred despite the FMC integration, suggesting that synergy realization lags operational convergence. Normalized EBITDA declined 2.1% to IDR 57.8 trillion, with margins compressing to 51.5% from cost pressures including the IDR 1.24 trillion early retirement program and increased provisioning for doubtful accounts from enterprise and government segments.

Telkomsel's performance illustrates the core challenge. While H1 revenue surged 29.9% to IDR 57.2 trillion (boosted by IndiHome consolidation), underlying mobile revenue growth slowed to just 0.4% in Q2 2024. Digital business revenue grew a modest 2.5% in 9M 2024, decelerating from 8.6% in Q1, as increased competition and price pressure forced strategic pricing adjustments to retain market share in price-sensitive segments. Legacy voice and SMS revenue continues its 20-30% annual decline, creating a headwind that digital growth cannot yet offset. Mobile ARPU remained stable at IDR 45,000 in Q2 2024 but faces downward pressure from the mass-market Telkomsel Lite and by.U offerings, which prioritize volume over per-unit revenue.

The infrastructure segments tell a different story. Mitratel's 9M revenue of IDR 6.82 trillion grew 8.7% year-on-year with EBITDA margins expanding to 83.2%, demonstrating the power of asset-light infrastructure leasing. The tower business adds 120-2,596 sites annually, improving tenancy ratios and generating cash flows that are largely insulated from mobile service pricing wars. NeutraDC's revenue grew approximately 9% in 9M 2024, with H1 revenue of IDR 1 trillion up 22% year-on-year, driven by CDN traffic growth. The 70% utilization rate and rising lease rates indicate strong demand, though management acknowledges that long-term rates may rationalize as new capacity enters the market.

The B2B ICT segment grew 9.4% in H1 2024 to IDR 10.2 trillion, with digital connectivity and e-payment services driving growth. However, management notes a "more selective" approach to enterprise project acquisitions, suggesting margin defense takes priority over top-line growth. This discipline is prudent given the increased provisioning for doubtful accounts from large enterprise and government customers, which contributed to G&A expense acceleration in Q3 2024.

Outlook, Management Guidance, and Execution Risk

Management's 2024 guidance reflects cautious optimism tempered by macro realities. The company maintains low single-digit group revenue growth targets, EBITDA margins of 50-52%, and CapEx-to-revenue of 22-24%. Telkomsel's EBITDA margin guidance has been revised downward to 45-46% from the earlier 46-48% range, acknowledging higher operating and maintenance expenses from network upgrades and IndiHome integration. The convergence synergy target of IDR 1.9 trillion for 2024 was overachieved by Q3, but management admits that "cost savings benefit will only materialize into 2025," implying that revenue uplift remains elusive.

The competitive landscape shows signs of stabilization, with management noting "some stabilization in the competition landscape" and selective price increases from competitors. This supports Telkom's strategy of "refraining from engaging in price war" and focusing on "more sustainable revenue generation by increasing data consumption productivity." However, the "threat of deflation" and "soft purchasing power environment" create headwinds for ARPU recovery, particularly in the mass market where Telkomsel Lite and by.U compete.

Key execution milestones carry significant weight. The FMC billing platform integration is expected to complete in Q4 2024, enabling the launch of Telkomsel One convergent plans that should drive revenue uplift through attractive bundling. Data center monetization through strategic partnerships is targeted for early 2025, with management aiming to "unlock value and leverage expertise" to fund the 400-megawatt expansion plan. The TIF fiber spin-off's Phase 1 in December 2025 will test whether Telkom can achieve valuation multiples comparable to global fiber companies while retaining operational control.

Capital allocation priorities reveal management's confidence in the infrastructure story. The early retirement program, while costing IDR 1.24 trillion, is projected to deliver a 2.5-year payback and 21% IRR, creating a leaner organization. CapEx intensity at 15.6% of revenue in 9M 2024 is below the 22-24% full-year target, but management plans acceleration to "set the foundation for future revenue growth." The commitment to reduce CapEx-to-revenue to 17-19% by 2028 through network efficiency and asset optimization suggests a path to higher free cash flow conversion, critical for sustaining dividend payments.

Risks and Asymmetries

The investment thesis faces material risks that could break the bull case. Macro headwinds pose the most immediate threat. Management's explicit warnings about "deflation threat" impacting mass market consumption patterns and "tightening" credit and debit card transaction values directly affect Telkomsel's ability to drive ARPU uplift. If consumer spending remains constrained, the "more for more" strategy for premium segments may stall while mass-market offerings like Telkomsel Lite pressure blended ARPU.

Execution risk on the FMC integration remains substantial. While convergence penetration has progressed rapidly, the financial benefits have not materialized in group-level revenue growth or EBITDA expansion. If the Q4 2024 billing system integration encounters delays or if convergent offerings fail to resonate, the IDR 1.9 trillion synergy target for 2024 may represent one-time cost savings rather than sustainable revenue uplift. The history of telecom mergers suggests that cultural integration and system complexity often erode projected benefits.

Competitive dynamics could deteriorate quickly. Although ISAT's revenue declined 1.6% YoY in 9M 2025 and XLSmart posted losses from merger integration costs, both competitors have strengthened their positions through M&A and spectrum acquisitions. If they abandon disciplined pricing to gain market share, Telkom's "no price war" stance may force a choice between margin preservation and subscriber retention. The 20-30% annual decline in legacy voice/SMS revenue creates a treadmill effect where digital growth must continuously accelerate just to maintain flat revenue.

Regulatory and licensing risks surround the TIF spin-off. The company is "processing additional licensing for TIF's business activity under KBLI 61924 " and awaiting "issuance of the Internet Access Gateway Service License." Any delays could push back the Phase 1 December 2025 timeline, deferring value unlock and potentially straining Telkom's balance sheet if external capital is needed for fiber expansion. The partial spin-off structure, while preserving control, may limit the valuation uplift if investors perceive continued entanglement with the parent.

Valuation Context

At $21.78 per share, Telkom trades at a market capitalization of $21.58 billion and enterprise value of $24.26 billion. The valuation multiples reflect a market skeptical of near-term growth but acknowledging asset value: 16.5x trailing P/E, 6.55x EV/EBITDA, and 9.33x price-to-free-cash-flow. These multiples are reasonable relative to emerging market telecom peers but appear conservative compared to global infrastructure companies, suggesting potential upside if the spin-offs achieve targeted valuation premiums.

The 6.04% dividend yield stands out as a key attraction, particularly in a low-rate environment. However, the 96.59% payout ratio raises immediate sustainability questions. With 9M 2024 free cash flow of IDR 1.92 trillion and CapEx needs of 22-24% of revenue, the dividend consumes virtually all distributable cash. Management's guidance to reduce CapEx-to-revenue to 17-19% by 2028 is critical—if achieved, it could free up IDR 3-4 trillion annually for dividend support or debt reduction. The net debt-to-EBITDA ratio of 0.6x provides balance sheet flexibility, but the high payout leaves minimal cushion for execution missteps.

Comparing Telkom's segments to pure-play peers highlights the valuation opportunity. Mitratel's 83% EBITDA margins and 1.52x tenancy ratio compare favorably to global tower companies trading at 15-20x EBITDA. NeutraDC's 70% utilization and expansion to 400 megawatts by 2030 position it alongside data center REITs commanding 18-22x EBITDA multiples. The TIF fiber assets, valued at IDR 35.8 trillion, represent 22.2% of Telkom's equity but likely trade at a discount within the conglomerate structure. If the spin-offs achieve even modest valuation premiums, the sum-of-parts could exceed the current trading price by 15-25%.

The key valuation variable is timing. The market appears to be pricing in execution risk on both FMC integration and infrastructure monetization, creating a potential asymmetric payoff if management delivers on its 2025 synergy and partnership targets. Conversely, any slippage in the Q4 2024 FMC system launch or early 2025 data center monetization could pressure the stock toward the lower end of its historical trading range.

Conclusion

Telkom Indonesia stands at an inflection point where the value of its infrastructure assets increasingly outweighs the challenges facing its legacy connectivity business. The "5 Bold Moves" strategy correctly identifies that towers, data centers, and fiber networks generate superior returns and defensive characteristics compared to mobile services, where legacy decline and competitive pressure constrain growth. The successful execution of spin-offs and strategic partnerships could unlock substantial value, as demonstrated by global peers who have re-rated 20-40% upon asset separation.

However, the near-term investment case remains contingent on delivering the promised Fixed-Mobile Convergence benefits. The divergence between strong convergence penetration metrics (53%) and weak group financial performance (0.9% revenue growth, -2.1% normalized EBITDA) suggests that operational integration has not yet translated to economic value. The Q4 2024 FMC system launch and 2025 synergy materialization are critical catalysts—failure here would confirm that Telkom's infrastructure value is trapped within a structurally challenged connectivity business.

For investors, the 6% dividend yield provides compensation while awaiting the infrastructure story to unfold, but the 96.5% payout ratio limits margin of safety. The most likely scenario is a gradual re-rating as TIF, NeutraDC, and Mitratel demonstrate consistent growth and margin expansion, offset by continued pressure in the core B2C segment. The key variables to monitor are FMC revenue uplift in 2025, data center partnership closure timing, and competitive pricing discipline across the Indonesian mobile market. If management can thread this needle, Telkom offers an attractive combination of current income and long-term asset appreciation. If not, the infrastructure value may remain locked within a conglomerate discount for years to come.