A Year of Transformation

1Q23 telco results. The three telco companies under our coverage posted cumulative revenue growth of -4.5% QoQ (+5% YoY) and cumulative net profit growth of +35% QoQ (-24% YoY) in 1Q23. The positive YoY revenue growth in 1Q23 was mainly driven by the cellular business (-3.9% QoQ; +5.4% YoY) (in line with our FY23F estimate of ~5-6%) with data traffic growth to 10.4 PB (-1.2% QoQ; +17.2% YoY) and relatively stable ARPU of ~IDR 39 thousand (+8.2% YoY; +0% QoQ ), supported by more ‘mature’ competition. Overall, all three companies’ top lines were in line with our estimates and consensus (TLKM: SSI 23.3%, Cons: 23.1%; EXCL: SSI 24.2%, Cons 26.2%; ISAT: SSI 23.8%, Cons 24.2%). Regarding their bottom lines, TLKM fell short of estimates in 1Q23 (SSI: 20.5%; Cons: 23,0%) due to higher opex coming from higher consultation fees and the increase in AFDA (~+100% YoY), while EXCL’s net profit (SSI: 15.7%, cons: 15,6%, 5-year average: 16,3%) and ISAT’s core profit came in line with ours (SSI: 30%). This year, TLKM is projected to record a one-off gain from its investment in GOTO of ~IDR 1.2tn (based on SSI’s TP for GOTO of IDR 150/share). After the release of 1Q23 results, we adjusted our NP for TLKM and ISAT by –13,6%%/-16.9%% respectively due to the soft result in 1Q (TLKM) and lower-than-expected one-off gain from tower sales (ISAT; ~IDR 700bn, previous estimate: IDR 1-2 tn). We also adjusted our TPs accordingly.

FMC initiatives. EXCL recently announced its structural transformation plan (XL as Serve Co and LINK as Fiber Co), where LINK’s FBB subs will be migrated to EXCL while its fiber asset will be carved out to LINK for better utilization (the transformation is expected to be completed by the end of 2023F). TSEL and Indihome also did a spinoff of FBB business, which is expected to increase its Capex efficiency, trimming it down to 20-22% of revenue (historical: ~25% of revenue) while boosting its EBITDA and topline growth to ~IDR 5 tn in 2027F. We expect the FMC initiatives to reduce those companies’ churn rate, just like in Europe (after the launch of their FMC initiatives, the churn rate of telco subscribers in European telco companies fell ~14%- 26% within 5-8 years). Regarding the pricing strategy, we expect the competition in the Indonesian FMC market will be relatively the same as in the cellular market, considering the low penetration of fiber (~30%) might lead to somewhat heated competition, enticing prospective subscribers to make their decision based largely on prices. Nonetheless, we expect the initiatives will be ARPU-accretive, particularly for MNO players in Indonesia, since they might have more flexibility to adjust their FMC package pricing (due to the value-for-money factor), giving them better overall ARPU (prepaid ARPU comparison: Indonesia: USD 2.7; Malaysia: USD ~7; Singapore: USD 6; German: USD 6)

Overweight. We reiterate our Overweight call on the telco sector, as we see potential positive catalysts from the trickle-down effect in 2H23 from the election, as well as more mature competition in the industry. Our pecking order for the sector is ISAT (TP: IDR 10,500)>TLKM (TP: IDR 5,000) > EXCL (TP: IDR 2,700), considering the impact of IoH’s network integration in 1Q23, its inorganic subscriber growth, and its robust balance sheet that put IoH in an excellent position to participate in the spectrum auction in 2H23. Downside risks: Lower-than-expected traffic growth and ARPU.