EXCL - Betting on improvement

EXCL's 9M22 top line performance beat ours/consensus estimate at 76.2%-77.6% of 2022F. Despite 3Q22 earnings decline, operational performance showed meaningful improvement with ARPU reached its highest in 5Y at IDR40K/sub in 3Q22. This also brought 9M22 EBITDA to grow 2.3% yoy to IDR10.4 tn, representing 75.2%/72.8% of our/consensus forecasts. As a result, we raise our '22F EBITDA by 1.7%, while adjusting revenue estimate by 2.2%. We highlight that early 3G shutdown and convergence products of EXCL-LinkNet as its growth trajectories going forward. Maintain BUY, with a price target of IDR3,650, implying 3.5x 2023F EV/EBITDA, while it is currently trading at 2.6x, slightly above its -1SD 5-year historical mean. Beat estimates EXCL's 9M22 net profit decreased 3.5% yoy/23.0% qoq to IDR981.2 bn/IDR366.3 bn, accounting for 79.4%/74.3% of our/ consensus estimates. 3Q22 EBITDA slightly grew +2.3% qoq despite higher expenses +3.3% qoq on the back of interconnection costs. This also translates into 9M22 EBITDA of IDR10.4tn (75.2%/72.8% of ours/consensus estimates). As a result, EBITDA margin was relatively flattish at 48.4% in 3Q22 compared to 48.6% in 2Q22. Meanwhile, revenue came in at IDR7.52 tn in 3Q22, translating into 9M22 revenue of IDR21.6 tn, representing 77.6%/76.2% of ours/consensus forecast. EXCL's net gearing stood at 1.8x in 9M22. Enjoys healthy ARPU rebound The company's data and digital services grew 8.9% yoy to IDR18.09 tn in 9M22, boosted by gradual tariff hikes in 1H22. EXCL has enjoyed a healthy increase in ARPU by 8.1% yoy/2.6% qoq in 3Q22 to IDR40K/sub, or highest in 5 years as data yields were flattish +0.1% qoq, indicating that the downtrend has showed signs of abating since 1Q22. This was followed by growing data traffic 3.1% qoq in 3Q22, signifying subscribers’ shift to higher data package and improving data service. Focuses on value unlocking We expect EXCL likely to retain its positive performance in 4Q22 in line with seasonality ahead of year-end holiday coupled with industry’s move to adjust rates, prompting higher ARPU. This will translate into our upgraded 2022F revenue growth estimate to c.6% yoy. We are sanguine that industry consolidation has started to bear fruit, thus we expect 2023 revenue to grow 6% yoy on expectation of improving ARPU and data yields. Nevertheless, we are positive with EXCL’s 3G shutdown will improve efficiency for the long run particularly in the form of maintenance costs and frequency license fees. In addition, we believe that the incorporation of LinkNet in Axiata Group should push more FMC synergies especially on the form of convergence products and infrastructure sharing going forward. Reiterate BUY on the back of LinkNet synergies Given our forecast revision, we upgrade our price target of IDR3,650, implying 3.5x 2023F EV/EBITDA (+1SD historical mean). We reiterate BUY call on 1) improvement in ARPU; 2) efficiency efforts and lean operational; and 3) healthier balance sheet post-rights issue. However, we note several downside risks to our recommendation, including 1) intense competition in mobile; 2) high capex, prompting leverage and c/f risks.