ISAT - Ready to take off

ISAT reported in-line performance in 1Q23 with flattish data traffic and yield despite a continued decline in ARPU qoq. Given that, the company is maintaining FY23 growth guidance of 5-6% yoy on better network quality and coverage expansion following the completion of MOCN integration. With improved cost efficiency on synergy, ISAT aims to achieve c.50% EBITDA margin in the future. Maintain BUY with upgraded TP of IDR9,350. 1Q23 result relatively in-line ISAT's 1Q23 EBITDA slightly dropped 1.0% qoq, yet grew 21.7% yoy to IDR21.7 tn or relatively in-line with ours/consensus at 24.4%/23.8%. Better cost optimization drove EBITDA margin +60bps qoq to 44.6% in 1Q23 on the back of lower cash cost, reflected by decreased maintenance cost on radio frequency fee as well as marketing cost due to seasonality. Finance costs escalated 13.1% qoq on lease, impacted by leaseback schemes of tower. Additionally, G&A plunged 59% qoq in 1Q23 on training, provision of receivable and professional fees. Nevertheless, revenue also decreased 2.3% qoq/+9.9% yoy to IDR11.95 tn in 1Q23, achieving 24.1%/23.7% of ours/consensus. Balance-sheet wise, ISAT's net gearing improved to 0.2x in 1Q23, thanks to a higher cash position following tower sales. Pinning hopes on industry betterment ISAT recorded a 3.6% qoq decline subs base to 98.5 mn in 1Q23 that management said to be part of efforts on healthier market conduct. This led to flattish data traffic in 1Q23 despite higher data usage to 11.3 GB/user or +12.6% yoy, which was also signifying benefit from improving network capability that have been completed in March '23. Nevertheless, we highlight dropping blended ARPU of -2.9% qoq and data yield by -1.5% qoq could have been indication of intensifying competition. However, we highlight increasing blended ARPU +2.8% yoy in 1Q23 may have been sign that industry is moving into good direction. Banking on core integration ISAT managed to complete network integration in March '23, or in 5 quarters, faster than expected which involved over 46K sites. With this completion, it is expected to improve customer experience thanks to wider coverage and lower latency that we believe will provide more upside especially customer growth and ARPU. Furthermore, better efficiency can also be achieved on top of further synergy expected to save USD400 mn in next 3 years post-merger. Furthermore, ISAT is aiming to expand fixed broadband segment, eyeing 10% of market share by 2026, banking on country's low fixed internet penetration with management planning on using light asset model, enabling it to be more capex efficient. Reiterate BUY on improving cost efficiencies We maintain our BUY call with upgraded target price to IDR9,350 (previously: IDR8,550), implying 3.8x '23F EV/EBITDA (-1SD 5Y historical mean). We highlight several upside risks to our call including 1) expectation on improving cost structure; 2) better leverage profile and 3) management's focus on better customer experience, coverage enhancement and competitive pricing relative to peers that should provide an ample room for more upside going forward especially in the event of market repair.