ISAT - Mark the beginning of new era

• ISAT’s 1H22 reported net profit tumbled 41.8% YoY to Rp3.3tn in 1H22 

• We expect the company’s revenue and EBITDA of Rp42.4tn and Rp18.5tn in 2022, respectively 

• We re-initiate with “BUY” call with 12% upside potential on a 12-month view on better outlook post-merger, better pricing and hyperscale expansion. 

Stronger than expected ISAT’s revenue grew 50.3% YoY in 1H22 to Rp22.53tn (+7.2% QoQ in 2Q22). The figure represents 53.1% of our FY forecast. Furthermore, the company also recorded a solid EBITDA of Rp9.2tn in 1H22 (9.5% QoQ in 2Q22) post merger. Nevertheless, EBITDA margin was down from 45.2% in 1H21 to 40.7% in 1H22 (41.2% in 2Q22) due to impacts of the merger. Meanwhile, ISAT’s reported net profit of Rp3.26tn in 1H22, plunging 41.8% YoY. Yet, it skyrockted QoQ from Rp128.75bn to Rp2.33tn in 2Q22. By taking out one-off gains, normalized profit was Rp149.3bn in 1H22 (Rp105.6bn in 2Q22). Balance-sheet wise, ISAT net gearing ratio was improved to 1.6x in 1H22. Improved KPIs ISAT's stellar top-line growth was driven by a jump in subscriber post-merger by 59.5% YoY in 1H22 to 96.2mn (1.7% QoQ in 2Q22). The higher subscribers also became primary driver for data service revenue bump +59.9% YoY to Rp17.8tn (+9.7% QoQ in 2Q22). Data service contribution to revenue was also up to 78.9% in 1H22 (74.1% in 2Q22) from 74.1% in 1H21, accompanied by higher 4G user proportion of 72.8% to total subs compared to 66.3% in previous year. Nevertheless, ARPU was relatively stabilized YoY to Rp33,500 in 1H22, yet higher by 9.4% QoQ in 2Q22 to Rp35,000. Meanwhile, data yield was flattened at Rp2,900 in 2Q22. Bringing better future We expect ISAT's 2022 revenue of Rp42.4tn, boosted by higher data revenue. Although, we opine that the competition remains intense for throughout 2022, the merger will re-shape industry for the better, providing room for providers to improve the prices going forward. Furthermore, ISAT reported a smooth infrastructure integration with around 12,000 sites have been integrated as of August, which is ahead of initial plan. By accelerating network integration, we expect it will be fully realized earlier than 2 years period. We are optimistic that the merger will bring improvement in the area of customer base, better quality networks, higher coverage, and better efficiencies. Meanwhile, ISAT through subsidiary BDx, along with Lintasarta have formed a JV to tap into hyperscale data center, gaining momentum from rapid demand of cloud and corporate digitalization. Reiterate BUY on the back synergies and hyperscale expansion We re-initiate our coverage with a BUY recommendation with a price target of Rp8,000/share, implying 2022 PER of 12.3x and EV/EBITDA of 6.4x. We are sanguine with ISAT’s outlook buoyed by 1) stronger customer base; 2) hyperscale data center expansion through JV; 3) infrastructure integration and transformation post-merger that should result in better efficiencies; and 4) pricing improvement following improved purchasing power. However, we note several downside risks to our recommendation including 1) competitive market in mobile; 2) leverage risks; 3) high inflation that may weaken purchasing power and 4) interest rate hike.