Have you ever witnessed a scene like this?
A group of individuals, gathered closely, their eyes glued to smartphone screens, fingers moving with lightning speed, all engrossed in a strategic and intense battle.
Yes, they are immersed in mobile gaming, and the most popular among them is Mobile Legends, a game that has evolved far beyond simple entertainment to establish itself as a serious esports arena.
This phenomenon has shifted our perception of gaming from a simple pastime to a legitimate career opportunity that offers significant earnings potential for its players.
Amid the rapid growth of the Mobile Legends esports scene, one name stands out as a key service provider enhancing the gaming experience: XL.
Source: Opensignal
Renowned for its strong and stable network, XL has become the top choice for gamers seeking seamless connectivity.
While mobile gaming continues to surge in popularity, XL's ARPU saw a 2% qoq increase in 4Q23, contrasting sharply with its main competitor, Telkomsel, whose ARPU declined by 4% qoq in the same period.
Source: Sucor Research
Recently, there has been news circulating that EXCL is set to merge with FREN in a deal estimated to be worth around USD 8 bn. This acquisition is expected to be completed more quickly than initially anticipated. If this merger does occur, it would be beneficial as it would consolidate the telecommunications sector.
When we look at other countries, the number of major players is quite small. In Canada, the market is dominated by three major operators: Bell, Rogers, and Telus. Similarly, in Singapore, the big three are Singtel, StarHub, and M1.
In my view, consolidation allows telecom operators to manage their infrastructure more efficiently, such as cellular towers and broadband networks. It can reduces competition, increases capacity, and optimizes resources. This also aids them in investing in new technologies like 5G with more controlled costs.
Moreover, by reducing the number of players in the market, consolidated companies can gain greater bargaining power over suppliers and can set more stable prices in the market.
Recently, FREN conducted a rights issue to raise IDR 8.6 tn, which will likely be used to strengthen the company's financial position. The firm has planned a relatively modest capital expenditure of IDR 2 tn for 2024, indicating a focus on consolidating and optimizing its resources post-fundraising.
This merger and acquisition activity could be highly beneficial for both parties, particularly for EXCL. By integrating FREN's assets and capabilities, XL can significantly expand its service reach and enhance its network infrastructure.
FREN and EXCL share overlapping coverage areas, which presents a unique opportunity to enhance operational efficiency and service quality. In Indonesia, where spectrum costs are high, collaboration between these companies could lead to significant cost savings.
As the telecommunications industry evolves rapidly, EXCL's strategy to expand market share by entering new markets and merging businesses with Sinarmas, which boasts a substantial customer base, is seen as a crucial move. This integration will not only fortify EXCL's market presence but also leverage Sinarmas' existing customer relationships to boost growth.
Considering the decrease in EXCL's net gearing from 1.7 to 1.2, EXCL would be in a stronger position to continue its expansion should the merger takes place.
This improvement in the capital structure not only reduces financial risk but also enhances EXCL's capacity to allocate financial resources to strategic investments that support long-term growth and technological development.
If you look at the chart below, with the current stock price (yesterday's last price: 2,300), it is evident that the stock remains undervalued when considering the substantial margin of safety between current price and its intrinsic value.
Source: Sucor Research
This gap not only underscores the stock's undervaluation but also signals a compelling buying opportunity.
With all these positive prospects, our analysts have raised the target price for EXCL to IDR 3,500.