TLKM - Banking on burgeoning demand for digital infra

TLKM has initiated a groundbreaking of 3x17MW NeutraDC Hyperscale Data Center (HDC) in Batam. The HDC construction, which is expected to complete in 2 years, lies on 8 ha land in Kabil Integrated Industrial Estate (KIIE), Batam, as management eyes to cater growing demand from Singapore estimated to have exceeded 500MW. Singtel and Medco Power will be joint shareholders of Batam HDC with the remaining 35% and 5% of stakes. At this point, we still maintain our figures, reiterating BUY with a TP of IDR5,200. Data center at glance TLKM has launched a five-bold-move strategy, outlining plans to consolidate its robust assets with data center (DC) business under DC co as management eyes to expand DCs to 400 MW by 2030. TLKM’s data center business currently sits under Telkom Data Ekosistem (TDE), with Telin and TelkomSigma operates DCs in overseas and domestic, respectively. The company has so far owned 27 data centers, including 3 DCs operating in Hongkong, Singapore and Timor Leste. TLKM holds around 40% of data center market share with among largest players operating in Indonesia are Data Center Indonesia (DCII) and NTT. Blessings from Singapore digital hub The estimated capex for tier III and IV Batam HDC is to be c. USD500 million for two years, based on calculation of USD12 million/kWh. Management said that most of lease will be coming from long term contract on the pipeline, that is expected to start generating revenue by 2023. Batam HDC competitive edge lies on cheaper electricity costs that stands at USDc10/w or one-third compared to those in Singapore. According to management, PLN and Medco Power will be the power suppliers for the HDC. Bearing fruit from continuous infra investment Management projects CAGR growth of Batam multi-tenant DC to be 36.1% for 2023-2031, mostly driven by spillover demand from Singapore. Yet, with competitive electricity prices and Batam being nearby global tech hub, it also attracts competitors such as, GDS and DC First developing DCs in the area with capacity of 28MW and 30MW, respectively. A rise of social media, digital economy and the arrival of 5G will further push demand for DCs going forward with expected CAGR growth at c.28% for ‘21-‘30. In addition, TLKM’s strong backend, partnerships with global tech on workload and eyeball as well as superior customer base across segments puts TLKM to be on pole position for catering burgeoning demand. Moreover, security concern over data as a result of digitalization has come to the realization of so-called digital sovereignty, triggering demands for onshore DCs. Reiterate BUY on better competition in mobile and consolidation initiatives With the expansion of DC business, we reiterate our BUY call with a price target of IDR5,200, implying 6.2x 2023 EV/EBITDA while it is currently trading at undemanding valuation of 4.3x EV/EBITDA. Improving competition landscape in mobile will be the key driver for 2023 despite concerns over GOTO market price. We like its consolidation initiatives under five bold moves and bright future for DC market.