TLKM - An attractive entry point

TLKM's 1H23 results were generally below ours/consensus by 1.2%-4.8% despite strong Telkomsel's digital service and improving operational metrics (ARPU +9.7% qoq; subs +1.5% qoq). Nevertheless, TLKM's O&M surged 11.5% qoq in 2Q23 on the back of higher spectrum fees as well as personnel costs. Given that, we re-adjust our forecasts by -0.7% to -5.8% for FY '23 and maintain our BUY call with lower TP of IDR4,420, implying 5.6x FY ’23 EV/EBITDA 2Q23 result misses estimates TLKM's 2Q23 EBITDA grew slightly 2.1% qoq, making up 1H23 EBITDA to decline 2.7% yoy to IDR38.4 tn, or missed ours/consensus at 47.6%/47.0%. Soft EBITDA was weighed down by operations and maintenance costs that surged 11.6% qoq/ 9.2% yoy on the back of continued efforts for network optimization following spectrum acquisition. It was higher than revenue growth of +3.6% qoq/ +2.1% yoy to IDR37.4 tn/ IDR73.5 tn. This figure also missed FY '23 ours/consensus by 1.2%/2.0% respectively. As a result, EBITDA margin contracted from 52.6% in 1Q23 to 51.9% in 1Q23 as evidenced by higher cash costs ratio by 77bps qoq to 48.1% in 2Q23. Despite that, TLKM managed to maintain its balance sheet at manageable level with net gearing at 0.6x in 1H23. Intensifying competition in fixed broadband TLKM's flat top-line growth was dragged by Telkomsel's significant legacy decline and flat Indihome qoq. Telkomsel's 2Q23 revenue grew 0.9% qoq in 2Q23 to IDR22.5tn, below peers that recorded a 7-8% growth qoq. Despite that, Telkomsel added 2.2mn subs qoq to 153.3mn subs. This was also followed by improving ARPU to 49.7K/sub or 9.7% qoq in 2Q23 thanks to better competition landscape as well as data yields +0.7% qoq. Meanwhile, we noted that tightening competition in fixed broadband market has put Indihome's ARPU to continue declining to IDR260K as well as more customers prefer more affordable 1P. Forecast readjustment on Indihome and higher costs We have made some tweaks for our FY '23 figures by -1.2% to -5.8% from our previous forecasts on the back of higher costs especially on O&M side and personnel. In addition, we also expect Indihome to continue to face mounting pressure from competition as other players are ramping up their fixed broadband presence which results in our more conservative ARPU projection. However we note that with low penetration of fixed broadband and Indihome’s dominant position in several areas, this should be able to improve monetization going forward. On mobile, we expect TLKM will continue to leverage momentum of improvement in 2H23 by maximizing its CVM for more personalized offerings to maintain its market share. Reiterate BUY on attractive valuation Reiterate our BUY call with lower target price of IDR4,420 (previously: IDR5,000), implying at 5.6x '23F EV/EBITDA, while currently is trading at 4.6x forward EV/EBITDA rather undemanding at below -1SD 5-year mean. We note several upside catalysts for TLKM, namely 1) improving market competition in mobile; 2) better costs efficiency and capex stemming from FMC initiatives. However, risks to our call included 1) intensifying competition in mobile and fixed broadband; 2) cost pressure especially for the initial stage of convergence roll-out.