TLKM - More upside expected

TLKM's 1Q23 EBITDA decreased 2.8% qoq/2.0% yoy to IDR19.0 tn, slightly below ours/consensus, despite an improvement in margin on lower O&M and marketing. However, 1Q23 revenue dropped 6.1% qoq to IDR36.1tn, or also slightly below estimates at 23.2%. Despite the slowdown, management has not changed revenue guidance of mid-single digit growth, expecting more acceleration in 2H23 following FMC service as well as Eid impact. Maintain BUY call with target price of IDR5,000. 1Q23 result misses estimates TLKM's 1Q23 net profit jumped 54.0% yoy to IDR6.4 tn, supported mainly by adjustment in investment value in GOTO. Excluding non-core items, net profit came in at IDR6.10 tn or - 19.2% qoq/11.8% yoy in 1Q23, arriving at 22.1% of ours/consensus. Furthermore, EBITDA decreased 2.8% qoq/2.0% yoy to IDR19.0 tn, accounting for 22.7%/22.6% of ours/consensus, although margin expanded to 52.6% in 1Q23 from 50.8% in 4Q22 thanks to better cost efficiency, reflected by lower cash cost 9.5% qoq given reduced O&M and marketing expenses. However, lower cost was in-line with soft revenue growth -6.1% qoq/2.5% yoy, dragged by TSEL's digital -6.3% qoq and legacy -4.5% qoq combined with decelerating Indihome +0.9% qoq/+5.0% yoy. Intensifying competition in fixed broadband Soft TSEL's performance was demonstrated by contraction in ARPU by 6.3% qoq to IDR45K/ sub coupled with falling data yield to IDR4.30/MB in 1Q23 which in our view also clouded by very competitive market. Furthermore, data traffic also dropped by 1.8% qoq as subs continuously dropped to 151.1 mn in 1Q23 that management said to be part of less productive subs cleansing. Meanwhile, Indihome's ARPU subsided qoq to IDR264K/sub in 1Q23 on the back of intensifying competition in top tier cities and post pandemic impact that encouraged subscribers to downgrade to more affordable package esp. 1P. Despite this, it is worth noting that fixed broadband subs growth by 1.5% qoq/7.0% yoy which we deem to be solid, signifying its appeal in the market. Expecting more upside from integration Management still retains guidance of mid-single growth in 2023 with enterprise and wholesale segments becoming trajectory. Although showing signs of softness in 1Q23, improvement in mobile is expected in upcoming quarters on Indihome-TSEL integration slated to be completed in 2H23 and factoring in Eid festive season in 2Q23. Management is hopeful that integration of Indihome-TSEL could allow it to better sharpen and maintain its dominance in both mobile and fixed broadband segments through more cutting edge product thanks to infrastructure synergy. Additionally, management also expects further opex on maintenance and marketing as well as capex savings in coming years with IDR5 tn of additional EBITDA by 2027. Reiterate BUY on FMC service roll-out We reiterate our BUY call with target price of IDR5,000, implying 6.3x '23F EV/EBITDA, while it is currently trading at 5.4 EV/EBITDA, or rather attractive. Integration of Indihome under TSEL should become a strong catalyst for growth especially in consumer segment beside its wholesale segment. Nevertheless, we note several risks to our call included 1) intensifying competition in mobile and fixed broadband; and 2) persistent decline in legacy service.