Unwavering Momentum

2Q23 telco results. The three telco companies under our coverage posted combined revenue growth of +6.0% QoQ (+5.2% YoY) and net profit growth of +2,7% QoQ (-28.1% YoY) in 2Q23. Cellular business continued its positive growth, with combined revenue of IDR 37.3tn (+7.7% QoQ; +7.9% YoY)  driven by higher data payload (due to seasonality effect in 2Q) and better ARPU (due to higher subs quality). Data payload was recorded at 11,870 pb (+14,0% QoQ; +22,0% YoY), while ARPU rose to IDR 41k (+7.2% YoY). Overall, all three companies’ top lines were in line with our estimates and consensus (TLKM: SSI 48.8%, Cons: 47.9%; EXCL: SSI 50.5%, Cons 51.0%; ISAT: SSI 49.1%, Cons 48.9%). Regarding their bottom lines, ISAT managed to exceed expectations (SSI: 60.4%; Cons: 64.5%)  thanks to better margins; its EBITDA margin came in at 47.6% in 2Q23 (1Q23: 44.6%; 2Q22: 41.2%), while EXCL came in line (SSI: 51.0%; Cons: 54.3%), and TLKM’s core profit came in line with ours (SSI: 45.6%). After the release of 2Q23 results, we adjusted our NP for TLKM and ISAT by -4,4%/+22.0%, respectively, due to their soft results in 2Q (TLKM); its EBITDA margin saw a decline to 51.9% in 2Q23 (1Q23: 52.6%; 2Q22: 54.5%) due to higher network related cost. Meanwhile, ISAT managed to improve its EBITDA margin to ~47.6% in 2Q23 (1Q23: 44.6%; 2Q22: 41.2%), prompting us to adjust our TP accordingly.

Expect stronger results in 2H. We expect telco companies to book stronger results in 2H23, supported by: 1) trickle-down effect from the election period, which might increase data traffic (we noticed that data traffic in Malaysia, Thailand, China, and India went up by ~4-100% during their elections)  2) Positive trajectory in ARPU. We believe that competition dynamics are moving in a healthier direction since all the telco players are focusing more on raising their ARPU. Referring to our previous report of data update 6M23, as of June -23, the trend was still intact as we saw TSEL remove some of its bonus quota in its OMG package. The MNO players also stated that there was quite ample room to raise their headline prices further this year, considering the healthy traffic in data payload and positive trend in subs. As the competition in mobile market toned down, we expect the profitability for MNO players in Indonesia to continue its positive trajectory, to note, ISAT and TLKM current annualized ROIC vs. WACC saw a positive gap of ~7% (historical: -4.7%)  and ~9% (historical: ~8.3%) respectively while EXCL ROIC still slightly lower than its WACC with a gap of -0.7% (historical: -4.7%). We expect the overall improvement in MNO’s ARPU will benefit EXCL>ISAT> TLKM as our sensitivity analysis showed that every 5% hike in Data yield (IDR/MB) will uplift EXCL’s by EBITDA ~6%,>ISAT ~4% > TLKM ~2,8%. As of 1H23, legacy revenue contribution to the total topline for EXCL and ISAT was recorded at < ~5%, and TSEL’s was recorded at ~14%.

Overweight. We reiterate our Overweight call on the telco sector, as we believe that competition dynamics are heading toward a better trajectory, with all telco players focusing more on raising their customer base’s ARPU. Our pecking order in the sector is ISAT (TP: IDR 11,500)> EXCL (TP: IDR 2,700) > TLKM (TP: IDR 4,500), considering the impact of IoH’s network integration in 1Q23,  its subs quality, and its robust balance sheet that put IoH in an excellent position to participate in the spectrum auction in 2H23. For EXCL, we believe its undemanding valuation makes EXCL quite attractive at the moment, (currently trading at 4.2x EV to EBITDA (Disc to ISAT: 7.2%; Disc to TLKM: 31.4%). Downside risks: Lower-than-expected traffic growth and ARPU.