EXCL - Banking on transformation

EXCL's 1Q23 EBITDA and revenue were largely in line with ours/consensus’, arriving at 23-24%. Early debt repayment has resulted in 140bps lower costs of finance to 6.6%, bringing 1Q23 net profit jumped +56.7% qoq/+44.4% yoy, yet still lag estimates. In order to focus on FMC penetration, EXCL is to forge strong ties with Link Net, aiming to accelerate targeted roll out of 8 mn home passes in the next 5 years. Reiterate BUY. 1Q23 results relatively in-line EXCL's 1Q23 EBITDA was relatively in line with ours/consensus at 23.0%/23.1%, despite declining by 7.1% qoq to IDR3.8 tn. The decline in 1Q23 EBITDA was caused by a surge of 40.8% qoq in infrastructure expenses as it frontloaded network costs on top of renegotiation of contracts, resulting in EBITDA margin contraction to 47.5% from 51.1% in 4Q22. Meanwhile, EXCL's early debt repayment of IDR5 tn from rights issue proceeds has resulted in finance costs reduction by IDR210 bn qoq in 1Q23. This also brought its annualized CoF lowered from 8.0% in 4Q22 to 6.6% in 1Q23 and led to higher net profit +56.7% qoq /44.4% yoy, which lag ours/estimate. Additionally, EXCL's gearing ratio improved as net debt/EBITDA down to 0.6x in 1Q23. Leveraging on better network 1Q23 revenue was flat at IDR7.55 tn or +11.9% yoy, arriving at 24.3%/24.4% of ours/estimates amid an uptick of 1.1% qoq of data revenue. This was boosted by higher data traffic and additions of subs base +0.7% qoq to 57.9 mn, which outperforms its peers (ISAT -3.6% qoq; TSEL -3.7% qoq). In addition, monthly data consumption increased strongly by 3.9% qoq/+12.8% yoy in 1Q23, signifying its better network capability and value preposition. On the flip side, however, data yield continued to slide -3.4% qoq as we assume was part of EXCL's strategy on data package upscale, yet it also yielded escalating blended ARPU to IDR41.3/sub in 1Q23. Eyes on structural transformation EXCL has rolled out plans to take partnership with Link Net to higher level. With this structural transformation, EXCL will become a Serve Co, focusing on converged mobile, fixed and content products, while LinkNet will be aimed to expand fiber infrastrcture as Fiber Co. The partnership is aimed to accelerate penetration with targeted 8mn home passes in 5 years to come. As part of transformation, EXCL will have access to LINK's fiber footprint by being an anchor tenant that we believe allowing it to have potential flexibility of pricing and in return, LINK will transfer its users as well as receive EXCL’s fixed broadband asset. Management expects to conclude the tranformation at year-end. However, management remains mum on the mechanism of the transfer. Reiterate BUY on structural transformation We maintain our BUY call with lower target price of IDR2,800 (previously: IDR3,300), implying 3.2x 2023F EV/EBITDA or above -1SD historical mean. Structural transformation will allow EXCL to sharpen its focus on expanding fixed broadband and accelerating scalability in combining its cellular service, while also minimizing risks on its balance sheet.