TLKM - Dawn of the new convergence era

TLKM's 9M22 revenue and EBITDA came in-line within ours and consensus' expectation at 72%-74% of 2022F, however 3Q earnings declined 54.5% to IDR3.27 tn, mainly dragged by other items, bringing 9M22 earnings of IDR16.6 tn or only represents 61.3%/63.6% of ours/consensus. Given that, we cut our '22F earnings by 6% while slightly revising our revenue and EBITDA forecasts by around 1%. FMC will further drive TLKM’s competitive edge thanks to solid infrastructures. Maintain BUY, with a DCF-derived target price of IDR5,200, implying 6.3x 2023F EV/EBITDA, while it is currently trading at 5.1x 2023F EV/EBITDA, above -1SD 5-year historical mean. Earnings below expectations TLKM's 3Q22 net profit plunged 54.5% qoq to IDR3.27 tn, translating into 9M22 net profit of IDR16.6 tn (-12.1% yoy). The figure represents 61.3%/63.6% of our/consensus estimates. Plunging net profit in 3Q22 was mostly due to unrealized loss in GOTO investment. Furthermore, EBITDA lowered 0.2% qoq to IDR20.01 tn in 3Q22 with EBITDA margin of 54.2%/54.6% in 9M22 . Meanwhile, revenue slightly grew 0.3% qoq to IDR36.9 tn or 2.7% YoY in 9M22 to IDR106.04 tn, accounting for 71.9%/72.4% of our/consensus forecasts that was driven by data, internet, and IT service by +4.3% qoq/+6.1% combined with flattish Indihome revenue +1.1% qoq/+6.4% yoy in 3Q22/9M22. The company’s B/S remains manageable with net gearing of 0.28x in 9M22. Stiff competition remains persistent Telkomsel's 3Q22 net profit slid 20.9% qoq to IDR5.4 tn, while EBITDA grew +2.4% qoq to IDR12.9 tn. The 3Q22 revenue was flattish at IDR22.6 tn as it saw persistently declined legacy services -2.1% qoq, while it booked a tepid 1.9% qoq growth in data services in the midst of market competition. Telkomsel’s data yields managed to expand 2.7% qoq in 3Q22 in line with higher ARPU +3.8% qoq. Nevertheless, Telkomsel's number of subs decreased 5.8% qoq to 159.6 mn in 3Q22. On fixed broadband, Indihome’s ARPU declined 0.4% qoq/1.8% yoy in 3Q22/9M22, while subs growth was slowing down +1.6% qoq/6.8% yoy in 3Q22/9M22 that was due to eased mobile restrictions, in our view. Convergence is the new thing We cut our 2022F net profit by 6% to IDR25.5tn amid higher non-operational item expenses. However, we expect higher 4Q22 seasonality especially for data traffic could boost data yields qoq. For fixed broadband, we view increased outdoor activities may prompt Indihome sign up to slow down, thus we expect subscribers to register 7% growth this year. Meanwhile, we welcome Telkomsel-Indihome merger as a part of Fixed-Mobile Convergence (FMC) slated to complete in 1Q23 and InfraCo initiatives, in our view, will maximize benefits of synergy, result in more efficient capex and operational costs, leverage competitive edge and monetize assets. Reiterate BUY on mobile and fixed broadband leadership We maintain our BUY call, with a DCF-derived target price of IDR5,200, implying 6.3x 2023F EV/EBITDA, boosted by 1) leadership in mobile and fixed broadband; 2) strong advantage in infrastructure; and 3) manageable leverage ratio. Nevertheless, several downside risks to our recommendation, including 1) intense competition in mobile; and 2) high capex.