ISAT - Reaping low hanging fruit from synergy

ISAT's 1H23 results came in line with EBITDA achieving 50.7%/51.0% of ours/consensus. The company's strong performance was underpinned by better cost efficiencies and data quality improvement stemming from intensified synergy following MOCN integration, in addition to better market competition. As a result, we raised ‘23F revenue and EBITDA forecast by 0.5% and 2.1%, respectively. Maintain BUY with a higher TP of IDR10,075 based on 4.1x ‘23F EV/EBITDA, still lower than 3-years high at 4.4x. Maintain BUY Outstanding 2Q23 results ISAT’s 2Q23 EBITDA beats ours/consensus at 51.5%/51.0% as it rose 14.0% qoq to IDR6.1 tn. As a result, EBITDA margin expanded strongly 310bps qoq in 2Q23 to 47.7% from 44.6% in previous quarter. Furthermore, 2Q23 revenue grew 6.6% qoq to IDR12.7 tn, bringing 1H23 revenue to IDR24.7 tn, exactly in-line with ours. Solid revenue figure was underpinned by strong cellular and data segment that surged 6.5% qoq/8.4% yoy in 2Q23/1H23. The company also managed to demonstrate better efficiency from synergy as cash cost was mostly flat in 2Q23 or stayed at 52%. In addition, the company’s leverage was manageable in 1H23 with net gearing at 0.3x. Banking on market improvement The company’s strong top-line was boosted an improvement of its key operational metrics, especially on mobile where ISAT took advantage of more rationalized market. ISAT’s ARPU increased 8.5% qoq to IDR35.8K, which was followed by healthy subs addition by 1.5mn, growing 1.5% qoq/4.0% yoy in 2Q23/1H23. Meanwhile, data traffic jumped 16.8% yoy, signifying better network capacity and maximized utilization of spectrum post-merger. Aims to fully realize synergy In-line with better-than-estimate performance, ISAT maintains its revenue growth estimate to mid-high single digit with over c. 40% EBITDA margin. Meanwhile, we slightly revise up our ISAT’s FY ’23 revenue and EBITDA by 0.5% and 2.1%, respectively with higher margin of 73.4bps compared to our previous forecasts, as we expect healthier market conduct to continue in 2H23. The company is also eyeing to increase capability through data analytics of its own app to improve customer quality by personalized offerings. This will also be supported by ISAT’s network capability as MOCN integration is now available across ISAT’s network. In addition, the company is on track to realize core integration in ex-Java and Java area by 2024, allowing it to fully maximize synergy potential. Reiterate BUY on better cost efficiencies We maintain our BUY call with upgraded target price to IDR10,075 (previously: IDR9,350) as we adjust our EV/EBITDA ‘23F to 4.1x, yet it is lower than its 3-year high multiple at 4.4x. We highlight several upside risks to our call including 1) improving cost structure; 2) better leverage profile and; 3) 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 continued market repair. Yet, risks to our call included 1) mobile competition; 2) delayed fixed broadband roll-out