EXCL - Pinning hopes on convergence services

• EXCL’s 1H22 normalized profit increased 15.1% YoY to Rp648bn, or 178.8% QoQ 

• We expect net revenue growth of c.4% YoY, EBITDA margin of c. 50% in 2022 

• We reiterate our “BUY” call with 30% upside potential on a 12-month view on improved pricing and fixed broadband expansion 

Better than expected result EXCL's normalized net profit grew 15.1% YoY to Rp648bn in 1H22 (+180.7% QoQ), accounting for 52.4% of our FY estimate. The higher net profit was attributable to better-than-expected revenue growth of 8.5% YoY to Rp14.01tn in 1H22 (+8.8% QoQ in 2Q22) or 50.6% of our 2022F. Nevertheless, EBITDA margin declined from 50.0% in 1H21 to 47.8% in 1H22, mostly due to higher interconnection and other direct expenses, although it increased in QoQ basis from 47.1% in 1Q22 to 48.6% in 2Q22 emphasizing better efficiency. Furthermore, the company's finance costs was relatively stabilized at Rp1.19tn despite higher debt. Meanwhile, EXCL's net gearing ratio stood at 1.9x in 1H22. Helped by strong data performance EXCL's higher net revenue was largely driven by data and digital services by 9.0% YoY to Rp12.9tn in 1H22 (8.8% QoQ in 2Q22). Due to high concentration in smartphone subs, we note that EXCL was able to reduce the impact of persistent decline in legacy revenue. Nevertheless, we highlight that the company's data yield was stabilized at Rp3,300/GB in 2Q22 as total traffic was up QoQ to 1,983 PB. Meanwhile, EXCL also booked a higher average monthly usage by 28.7% YoY (+5.1% QoQ). In the midst of stiff competition in mobile, EXCL managed to improve its blended ARPU by 5.6% YoY in 1H22 (8.3% QoQ in 2Q22) to Rp39,000/user (Rp38,000/user in 2Q22), signifying stronger purchasing power thanks to eased mobility restrictions and Eid festivities. This was also followed by a growth of subscribers by 0.4% QoQ and 0.8% YoY to 57.2 million. Bringing more value We expect EXCL's revenue growth of 4% YoY in 2022, bolstered by data and digital services. Despite better purchasing power, we believe that competition in mobile will remain intense. On the other hand, we view positively the company's efforts to carry out 3G shutdown expected to conclude by year-end, while optimizing 4G and 5G networks will bring better efficiencies in the forms of spectrum, license fees, equipment and field maintenance costs. On the other hand, the company will launch promotion such as device bundling to retain remaining customers on 3G, yet we think that may impact insignificantly to cost thanks to high concentration of 4G customers. Therefore, we expect EBITDA of c.50% in 2022. Furthermore, we are bullish on Link Net acquisition that will enable it to strengthen fixed broadband segments through XL Home, as well as for convergence, content, and infrastructure synergies as well as minimize capex spending going forward. To strengthen capital structure and leverage, EXCL plans to undergo rights issue with issuing 2.74bn shares. Reiterate BUY on the back of ARPU improvement and Link Net acquisition We maintain our BUY call with a DCF-based price target of Rp3,500/share. The stock is currently traded at a 2022F PER of 30.1x and EV/EBITDA of 4.6x We are optimistic with EXCL’s outlook buoyed by 1) improving mobility and purchasing power; 2) expansions to ex-Java and strengthened fixed broadband business; 3) 3G network shut down, leading to better efficiency; and 4) higher concentration of 4G customers, may reduce impact of legacy revenue decline. However, we note several downside risks to our recommendation including 1) competitive market in mobile; 2) leverage risk; 3) high inflation that may weakens purchasing power and 4) interest rate hike.