Telkom Indonesia (TLKM IJ/Maintain) - Batam Demand Outruns Capacity

Our visit to NeutraDC's campus in KIIE and Telin's cable landing station in Nongsa confirmed that demand is not the bottleneck in Batam. BTM-1 starts operations in 4Q26 with its first 6MW phase, fully taken by Gorilla Technology, with the remaining 12MW due in 1Q27. A shift to modular construction merged BTM-2 and BTM-3 into a single AI-ready campus scalable to 100MW, already fully committed with c.260MW of demand interest, lifting planned Batam capacity to c.118MW from 54MW. TLKM targets c.60MW live by end-2026 (1H26: 49.9MW). Power sets the pace: new developments must build dedicated generation at c.IDR25bn/MW.

Telin holds capacity on 33 subsea systems spanning 429,167km, with 65Tbps sold, split 51% lease and 49% IRU. Utilization on owned cables exceeds 85% in most cases, led by IGG+SEA-US at 99% and SMW5 at 93%, while newly acquired systems still have headroom (BIFROST 60%, TOPAZ and PEACE 73%). With core routes nearly full, management plans to grow in three stages: upgrading existing cables, buying capacity on new systems, then building through consortiums. The new Nongsa CLS can host up to six cable systems, while the Manado gateway on SEA-US could cut US latency 10-36% and reduce reliance on Batam, which carries 90% of international traffic.

Management expects international bandwidth on the six major corridors to grow at a 24-30% CAGR through 2030, driven by enterprise IT spending, AI workloads and hyperscaler demand for route diversity. Annual price erosion on 100G wavelengths has eased from 18% over 2017-20 to c.10% for 2025-26E as supply struggles to keep up, and is lower still on tight routes such as Singapore-Europe. With volume up 24-30% against a c.10% price decline, we estimate the bandwidth revenue pool still expands +12-17% a year, making saleable capacity rather than price Telin's real constraint. 800G transponder upgrades are the quickest way to add capacity, while converting leases into IRUs should be cash flow positive but revenue dilutive.

We maintain our BUY on TLKM with a TP of IDR3,400, implying 4.2x FY27F EV/EBITDA. We see NeutraDC's fully committed Batam pipeline and Telin's highly utilized subsea routes as key growth engines, with data center capacity set to scale meaningfully from FY27F onward. At current levels the stock also offers an attractive dividend yield of c.8-9%, above the INDOGB10Y. Risks: power supply delays, execution risk on the new capacity buildout, faster than expected price erosion as consortium peers upgrade capacity, and slower AI demand.