TLKM - One step ahead towards convergence

TLKM's 4Q22 net profit increased 27.5% qoq to IDR4.2tn, mostly on the back of declined non-controlling interest pertaining to unrealized loss of GOTO investment. Despite loss of subs, TSEL maintains healthy growth in digital business as data yield improves better than industry, also followed by higher ARPU. Indihome 4Q22 subs growth was 2.2% qoq, higher than expected, leading to FY22 growth of 7.1% yoy, higher than management’s target. Maintain BUY call with target price of IDR5,000. FY22 EBITDA in line with estimates TLKM FY22 core profit jumped 27.4% yoy, achieving 106.1%/110.6% of ours/consensus. 4Q22 EBITDA was slightly down 2.4% qoq to IDR19.53tn due to surging O&M and interconnection on seasonality, although FY22 EBITDA was at IDR79.0tn, representing 98.6%/99.6% of ours/consensus. Furthermore, TLKM's revenue grew 4.2% qoq to IDR38.4 tn in 4Q22, driven by network and other telco +34.5% qoq boosted by tower business; and interconnection +20.7% qoq. Focused on high valued subs TSEL's revenue increased 1.3% qoq to IDR22.9tn in 4Q22, driven by continued growth in digital business +4.8% qoq as data yield ticked up 1.2% qoq or better than industry's. This was also followed by higher ARPU of 48K (7.8% qoq) or the highest in over 5 years, reflecting the company's initiative to lead market repair. Meanwhile, subs loss decelerated to -1.9% qoq/-10.9% yoy, in line with TSEL's strategy to maintain high valued subs. On the flip side, TSEL's EBITDA margin plunged 340bps to 55.5% in 4Q22 due to high O&M in line with efforts to strengthen 4G network service. On Indihome, revenue grew 1.03% qoq although ARPU was down to IDR265K or -0.4% qoq. Nevertheless, subs growth accelerated by 2% qoq in 4Q22, which is in line with management's target yoy subs growth of c.7%. The next upside story from FMC On mobile, management expects the growth driver will be coming from digital services amid economic normalization, higher data demands and growing digital economy. We also see that spectrum refarming of 2.1Ghz concluded last year could also bring improvement in capacity and quality, which is imperative for data payload boost. Meanwhile, management's focus on high valued customers may mean subs deceleration could still continue, although TSEL strives to maintain c. 50% market share. To kick start FMC initiative, TLKM have rolled out IndiHome Halo bundling, allowing subs to purchase mobile quota under a single billing system, in addition to Orbit, a fixed wireless product on TSEL network. We are sanguine Indihome-Telkomsel integration, due in July '23, could be a strong upside story for TLKM given strong leadership in both segments. Reiterate BUY on improving pricing and transformation initiatives We reiterate our BUY call with a lower DCF-based target price of IDR5,000 (previously: IDR5,200), implying 6.0x '23F EV/EBITDA, while it is trading at 5.0x ‘23F EV/EBITDA or fairly undemanding. Encouraging signs of data repricing and ARPU should lead to healthier growth for mobile consumer segment in addition to transformation initiatives under 5 bold moves. We refine our ’23 and ’24 figures on continuous decline on legacy, while expecting strong drivers from Indihome, and enterprise segments.