BUY | Vignette 14 March 2022 | Equity Research | Telco Sector

Smartfren Telecom
Not Rated The Sunrise Is Coming From The East
Mohammad Fakhrul Arifin On the way to a “sweet” operational scalability
mohammad.arifin@bcasekuritas.co.id FREN’s 4Q21 achievement was another evident of optimal operational restoration with a guidance of
+6221 23587222 ext 11109 revenue swing more than sufficient to generate “near-to-positive” bottom line. Robust EBITDA margin
to above ~45.0% (vs. 39.0% in 3Q21) under a circumstance solvency ratio, in particular gearing ratio, be
maintained at around ~1.7-1.9x is a solid proposition to bode the Company’s outlook in 2022F at a sweet
spot. Meanwhile, a depressed ARPU of IDR24.3k (-5.8% YoY) is a result of higher denominator variable
(9M21 subs: 32.5mn/+18.2% YoY; vs. 33.0mn of subs projection in 12M21) and generous discount
offered by the Company during the pandemic. Robust Data traffic has become the main anchor to
Current Price: IDR81 dragged up data revenue by 11.1% (YoY) to IDR9.6tn. Not to mention, the Company strives to enrich the
customer’s digital experience through the launch of MySF; combine all the features through one-click
app. Going forward, with the expectation to grow beyond “Telco revenue” and soon-to-leverage the
ongoing established foundation for 5G expansion, it’s about time for the Company's momentum play to
impenetrate positive territory in 2022F.
12M PRICE PERFORMANCE Necessity is the mother of invention
(IDR) (%)
Recent collaboration between FREN and Group 42 (UAE Company) & Amara Padma Sehati (Local partner)
200 120.0
to build 1,000MW Data Center has come to close for cornerstone. The development is expected to
160
80.0 commence in 1H22, where the initiation phase 1 starts by building 100-200MW (majority will be Tier III
120 Data Center) in several locations, not to mention Kota Delta Mas and the new capital city in Kalimantan.
40.0
80
Moreover, positive market momentum seems to emerge since the acquisition of 20.5% stake in Mora
-
40 Telematika Indonesia (Moratelindo) that has sharpened the Company initiative on customer-centricity,
- (40.0) enabling it to become more agile and pave the way to be the next Converged Operators with the launch
Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 of Quad-Play program - combine 4 main services (Internet, Cable TV, Fix Telephone, and FREN’s sim card)
FREN IJ (LHS) Rel. to JCI performance (RHS) into a single-package. In addition, our simulation shows FREN’s net gearing might still settle at healthy
territory, even if leverage more debt to acquire Moratel stake of 30.5% to take a position as major
shareholder. Worth noting, besides extensive support in fiber optics network (>48.5k km) by Moratel,
the Company allocates USD200mn Capex in 2022F to bolster network quality and coverage in Indonesia.
STOCK PERFORMANCE
Might still left behind its peers under the reverse kinked-demand hypothesis
YTD 1M 3M 12M
Absolute -6.9% -2.4% -11.0% -12.0% Emphasizing the story on price rationalization, we are in a view that FREN is likely to follow the footprint
JCI Return 5.6% 3.2% 5.1% 9.3% of its peers, and not too far-fetched to expect another chapter to unfold within the next 1-2 years once
Relative -12.5% -5.6% -16.1% -21.3% bottom-line entering positive territory. What’s more, the Company is having a considerable gap discount
to sector average of ~30.8%, given superior market penetration to cater middle-to-low income segment.
We are looking at the scenario where FREN is able to maintain positive and relatively wide-discount
MARKET DATA
12M price range (IDR) : 76 - 162 spread to its peers, settle a place on appealing proposition to contend with prominent players. Our
Outstanding shares (mn) : 308,107 preliminary computation suggests that the Company’s valuation of 2022F EV/EBITDA at 10.6x under the
Market cap (IDRbn)/(USDmn) : 24,957 / 1,741 assumption of 10% EBITDA growth; relatively premium compare to avg sector multiple at 6.0x.
Avg daily turn. (IDRbn/USDmn) : 105.9 / 7.4
Financial highlights 2017 2018 2019 2020 2021
Revenue (IDRbn) 4,668.5 5,490.3 6,987.8 9,407.9 10,456.8
Operating profit (IDRbn) (2,253.2) (2,646.5) (2,302.3) (784.7) 247.2
SHAREHOLDERS
PT Global Nusa Data : 25.9% EBITDA (IDRbn) 662.9 974.6 1,380.9 3,048.7 4,099.8
PT Dian Swastatika Sentosa Tbk : 18.9% Net profit (IDRbn) (3,022.7) (3,552.8) (2,187.8) (1,523.6) (435.3)
PT Wahana Inti Nusantara : 15.8% EV/EBITDA (x) 52.2 33.6 24.1 14.3 11.7
PT Bali Media Telekomunikasi : 10.7% EPS (IDR) (9.8) (11.5) (7.1) (4.9) (1.4)
Public (less than 5%) : 28.7% EPSG (%) - (17.5) 38.4 30.4 71.4
Source: Bloomberg, BCA Sekuritas P/E (x) (8.3) (7.0) (11.4) (16.4) (57.3)
17.537036
BVPS 30.0 40.4 41.3 40.1 41.1
P/BV (x) 31
2.7 2.0 2.0 2.0 2.0
Net gearing (%) 104.4 62.8 65.0 151.6 181.5

mohammad.arifin@bcasekuritas.co.id 1
The Sun Rise Is Coming From The East FREN | NR

Exhibit 1. Smartfren (FREN) 4Q21 result: Operational above; earnings above cons projection

Exhibit 2. FREN: ARPU degradation – As a result of higher subscribers as Exhibit 3. Telco Sector: ARPU comparison among MNOs – The discount
denominator and generous discount offered for Covid packages during the gap to sector average might still relatively huge, implying re-rate
pandemic proposition is likely to happen post-earnings get into positive territory

Sources: Company, BCA Sekuritas Sources: Company, BCA Sekuritas

mohammad.arifin@bcasekuritas.co.id 2
The Sun Rise Is Coming From The East FREN | NR

Exhibit 4. Normal curve: Kinked-Demand analysis – Old story saying that Exhibit 5. In comparison with sector average: Reverse Kinked-Demand
aggressive promotion and lower data prices could attract more subs to come assumption – Offering generous and affordable package prices could be
and gain higher market share, but is it still relevant right now ? one of the main traction to the Company; assuming maintain the
discount gap to avg. peers under a substantial discount

Sources: Company, BCA Sekuritas Sources: Company, BCA Sekuritas

mohammad.arifin@bcasekuritas.co.id 3
The Sun Rise Is Coming From The East FREN | NR

Exhibit 6. Pro-forma analysis – Assuming FREN acquire a major ownership in Moratelindo (51.0%)

Sources: Company, BCA Sekuritas

mohammad.arifin@bcasekuritas.co.id 4
The Sun Rise Is Coming From The East FREN | NR

Exhibit 7. Multiple post-consolidation

Sources: Company, BCA Sekuritas

Exhibit 8. Simulation: Funds needed to acquire 30.5% stake – What it takes to own a majority ownership in Moratelindo (at least 51.0%)

Sources: Company, BCA Sekuritas

Exhibit 9. Quarterly: EBITDA progression – Restoration in operational efficiency Exhibit 10. EBITDA Margin – Solid momentum has escalated FREN’s
has solidify the Company’s EBITDA margin to 45.7% in 12M21, highest-than- outlook to break into positive earnings, in a view, to happen in 2022F
ever in the last few years

Sources: Company, BCA Sekuritas Sources: Company, BCA Sekuritas

mohammad.arifin@bcasekuritas.co.id 5
The Sun Rise Is Coming From The East FREN | NR

Exhibit 11. Aggregate: Earnings trajectory – Solid momentum has escalated Exhibit 12. FREN: Number of subscribers – The Company has extensively
FREN’s outlook to break into positive earnings, in a view, to happen in 2022F acquired new subs through quality network improvement and
competitive data package prices

Sources: Company, BCA Sekuritas Sources: Company, BCA Sekuritas

Exhibit 13. MNOs radio frequency spectrum

Sources: Company, BCA Sekuritas

Exhibit 14. Smartfren (FREN) network coverage

Sources: Nperf, BCA Sekuritas

mohammad.arifin@bcasekuritas.co.id 6
The Sun Rise Is Coming From The East FREN | NR

Exhibit 15. Quad-Play offering - Strategic investment in Moratel supports the Company’s plan for 5G expansion, and Quad-Play program as well

Sources: Company, BCA Sekuritas

Exhibit 16. MySF App – Enhancing the digital experience through one-super app

Sources: Company, BCA Sekuritas

mohammad.arifin@bcasekuritas.co.id 7
The Sun Rise Is Coming From The East FREN | NR

Exhibit 17. FREN’s achievement – Promoting affordable package “GokilMax” and catchy campaign to win SWA Awards 2021

Sources: Company, BCA Sekuritas

Exhibit 18. FREN performance vs comparable peers Exhibit 19. FREN multiple – The Company is currently trading at 20.2x, way
below the historical mean of 20.6x (-1SD – 5 Years historically)

Sources: Company, BCA Sekuritas Sources: Company, BCA Sekuritas

mohammad.arifin@bcasekuritas.co.id 8
The Sun Rise Is Coming From The East FREN | NR

Financial summary
Income Statement
2017 2018 2019 2020 2021
Year-end 31 Dec (IDRbn)
Revenue 4,668.5 5,490.3 6,987.8 9,407.9 10,456.8
Operating expense 6,921.7 8,136.8 9,290.1 10,192.6 10,209.6
Operating income (2,253.2) (2,646.5) (2,302.3) (784.7) 247.2
Depreciation & amortization 2,916.1 3,621.1 3,683.2 3,833.4 3,852.6
EBITDA 662.9 974.6 1,380.9 3,048.7 4,099.8
Net interest income 5.8 8.1 7.0 7.2 11.3
Net interest expense (666.3) (606.4) (375.0) (850.8) (962.7)
Foreign exchange gain (losses) (45.9) (146.9) 314.8 (2.4) (35.4)
Net other operating gain (losses) 134.2 230.3 45.0 (3.5) 162.5
Earning Before Tax (Pre-tax profit) (2,777.6) (3,285.8) (2,339.2) (1,597.4) (566.3)
Income tax (245.1) (267.0) 151.4 73.8 131.0
Net profit (3,022.7) (3,552.8) (2,187.8) (1,523.6) (435.3)
EPS (9.8) (11.5) (7.1) (4.9) (1.4)
Balance Sheets
2017 2018 2019 2020 2021
Year-end 31 Dec (IDRbn)
Cash and equivalents 441.5 405.7 196.8 654.5 463.2
Account receivable 199.7 120.5 98.5 270.3 156.2
Inventories 382.3 67.6 60.3 57.5 73.0
Prepaid expenses 1,064.2 1,095.9 1,164.0 1,392.0 1,544.4
Other assets 22,026.8 23,523.8 26,130.9 36,309.9 41,121.0
Total assets 24,114.5 25,213.6 27,650.5 38,684.3 43,357.8
S-T Interest bearing liabilities 3,250.1 2,768.9 1,042.5 2,977.8 3,724.8
L-T interest bearing liabilities 6,846.9 5,451.5 7,436.1 16,428.9 19,699.4
Other S-T liabilities 3,161.1 3,344.4 5,077.5 5,440.1 5,878.4
Other L-T liabilities 1,611.5 1,200.8 1,358.9 1,471.5 1,401.8
Total liabilities 14,869.6 12,765.6 14,915.0 26,318.3 30,704.4
Total equities 9,244.9 12,448.0 12,735.5 12,365.9 12,653.4
Total liabilities & equities 24,114.5 25,213.6 27,650.5 38,684.3 43,357.8
Cash Flow Statement
2017 2018 2019 2020 2021
Year-end 31 Dec (IDRbn)
Receipts from customers n.a. 5,828.5 7,253.7 9,578.1 10,394.1
Payment to suppliers, and employees n.a. (6,416.7) (6,886.0) (7,123.8) (7,123.8)
Others n.a. (324.4) (192.1) (993.3) (399.1)
Operating Cashflow n.a. (912.6) 175.6 1,461.1 2,871.2
Capital expenditure n.a. (1,347.0) (1,275.5) (1,346.2) (956.7)
Proceeds from sale of PPE n.a. 121.1 3.8 12.3 103.4
Others n.a. (1,710.8) (2,537.3) (3,356.2) (1,874.4)
Investing Cashflow n.a. (2,936.7) (3,809.0) (4,690.0) (2,727.7)
Net change in debt n.a. (2,605.4) 1,207.3 2,555.5 (2,072.0)
Proceed from issuance of stock n.a. 6,740.9 2,485.0 1,129.8 584.4
Others n.a. (324.0) (266.5) 0.0 1,151.2
Financing Cashflow n.a. 3,811.5 3,425.7 3,685.4 (336.4)
Net increase in cash and equivalents n.a. (37.8) (207.7) 456.4 (192.9)
Beginning cash flow n.a. 441.5 405.7 196.8 654.5
Ending cash flow n.a. 405.7 196.8 654.5 463.2

Key metrics and ratios 2017 2018 2019 2020 2021

EBITDA margin (%) 14.2 17.8 19.8 32.4 39.2
Net margin (%) (64.7) (64.7) (31.3) (16.2) (4.2)
ROE (%) 0.0 (14.1) (7.9) (3.9) (1.0)
Current ratio (x) 0.4 0.3 0.3 0.3 0.2
Acid ratio (x) 0.3 0.3 0.3 0.3 0.2
Interest coverage (x) n.a. n.a. n.a. n.a. n.a.
Gearing (%) 109.2 66.0 66.6 156.9 185.1

mohammad.arifin@bcasekuritas.co.id 9