ISAT - Pushing greater synergy

We maintain our bullish view on ISAT for '23/'24F on hopes of improving network capabilities and synergy. Also, the company’s initiative to divest tower assets should also lead to better operational costs. We adjust upwards our '23/'24 forecasts with moderate EBITDA lift by 1.9% and 4.8%, respectively. Reiterate BUY with higher TP of IDR8,550. Beating estimates ISAT's 4Q22 EBITDA surged 9.6% qoq to IDR2.69 tn, which was attributable to lower cash expenses of 3.6% qoq on declined cost of service. Although, FY2022 EBITDA margin declined to 41.6% from 44.2% in FY2021, this translated into FY2022 EBITDA of IDR19.5 tn, representing 100.4%/101.3% of ours/ consensus. Furthermore, ISAT recorded a tepid growth in 4Q22 revenue by 1.8% qoq and brought FY22 revenue to IDR46.7 tn (+48.9% yoy), though still 1.7% ahead our estimate. Balance sheet wise, ISAT showed meaningful improvement with net gearing stood at 0.4x in FY2022. Data-driven growth ISAT's 4Q22 top line was mostly propped up by data service growth of 2.6% qoq, which, in our view, was likely more on seasonal factor. The data traffic jumped higher +6.7% qoq, resulting in data yield to decline slightly to IDR2.8K/MB in 4Q22, which also may have indicated heightened competition during that period. Conversely, we highlight that ISAT posted the highest quarterly growth rate of new subscribers post-merger by 3.5 million (+3.5% qoq), owed to better network capability and competitive pricing. Nevertheless, ISAT’s 4Q22 ARPU was slightly lower by 1.8% qoq. Reaping up more benefits from integration ISAT has struck deals with Dayamitra Telekomunika (MTEL; non-rated) and DHOST in regards to sales of 997 towers and 633 indoor infrastructures valued at IDR2.12 tn for total transactions. The transactions are expected to help improve operational costs especially for maintenance cost, on top of one-off net gain. However, leaseback scheme may lead to higher finance charges in 1Q23. In addition, the operational improvement should also be achieved by ongoing network integration expected to complete by March ‘23. Meanwhile, we like ISAT's expansion strategy to penetrate high growth provinces such as Nusra, Kalimantan and Papua given higher penetration and intense competition in Java. The expansion will also be supported by stronger network capabilities, reflected by additions of 9,480 4G BTS in 4Q22, or the highest growth since merger. Reiterate BUY on improving cost efficiencies In line with improvement, we reiterate our BUY call with upgraded target price to IDR8,550 (previously: IDR8,250), implying 3.8x '23F EV/EBITDA (-1SD 5Y historical mean). Our forecast revision is based on 1) expectation on improved efficiencies; 2) better leverage profile and 3) management's focus on better customer experience, coverage expansion and competitive pricing should bolster growth. However, we note several downside risks to our call, namely 1) tight competition and 2) higher capex spending for network expansion.