GOTO - Seeing light at the end of the tunnel

A hawkish monetary stance by global central banks did not turn out all bad for GOTO as we have witnessed it moving into profitability faster than previously anticipated. During 4Q22 call, management emphasized initiatives for cost rationalization and monetization to continue. Those initiatives are seen to have borne fruit as it reported improvement in the quarter. We initiate GOTO with BUY on SOTP-based target price of IDR150/share. Still on the track GOTO 4Q22 Contribution Margin (CM) came in at IDR0.6 tn or -0.4% of GTV, which was better than management's lower range guidance of -0.5%. An improvement in CM was mostly derived from the significant reduction in sales and marketing expenses by nearly 50% qoq. Meanwhile, GTV growth was mostly flattish +0.6% qoq to IDR161.9 tn, driven by financial service and e-commerce, while gross take rate increased to 3.9% in 4Q22 compared to 3.7% in the previous quarter. Furthermore adj. EBITDA loss was improved at -IDR3.1 tn or -1.9% of GTV, on-track with management's aspiration to turn positive by 4Q23. However, GOTO's net loss tripled to IDR19.6 tn in 4Q22 on loss of goodwill impairment and share-based compensation. Seeing improvement across the board The company's operational improvement was largely driven by on-demand service that turned positive CM in 4Q22, or rising 180bps qoq. This, unfortunately, is accompanied with GTV growth slowdown +0.4% qoq amid moderation in food delivery. On e-commerce, take rate increased from 3.2% in 3Q22 to 3.4% in 4Q22 as Tokopedia expanded value-added service offerings and take-rate, reflected by improvement in CM at -0.7% compared to - 1.1% in 3Q22. Fintech GTV rose 1.5% qoq to IDR98.6 tn, while take rate slightly improved to 0.5% in 4Q22. Here comes ‘year of efficiency’ GOTO's grand strategies come down to two things: cost rationalization and optimized monetization. On cost rationalization: It strives for leaner and more efficient organization, opening possibility of headcount reduction going forward, as well as winding down noncore business such as Mitra Tokopedia and seeking divestment opportunities. Meanwhile, to optimize monetization: GOTO aims to tap deeper into high value customers by rollingout GoCarLuxe and GoCorp for on-demand service; enhancing VAS offerings e.g advertising on Tokopedia, continued monetization for merchants and sharpening promotion target; as well as taping into digital lending business offered through synergized GoJek and Tokopedia platforms. Such strategies, however, may come with a caveat that management expects to see moderation in 1H23, yet it could accelerate in 2H23 as product scale up starts to kick in. On fintech service, we see that GOTO’s strength lies on its superior AI technology and synergies with Bank Jago (ARTO, non-rated), to ensure prudence in risk management and optimum credit scoring. On top of that, low take rate should provide an ample room for growth over the long run amid large population of unbanked and unbankable. Initiate with BUY on healthier and more sustainable growth We initiate GOTO with a BUY and target price of IDR150/share. We employ SOTP (Sum of the Parts) based valuation where we exercise separate method of valuations for each segment. We use a 4.3x for FY2023E P/revenue for on-demands, 0.2x FY2023E P/GTV for eCommerce and 0.1x FY2023E P/GTV for financial services. The stock is currently trading at ‘23E P/GTV of 0.17x and ’23E P/Revenue 7.3x.