TLKM - Peeking into the future

• TLKM’s 1H22 net profit increased 6.9% YoY to Rp13.3tn, representing 49.2% of our FY forecast 

• We expect revenue growth of 6% YoY, EBITDA margin of 53.6% in 2022 

• We reiterate our “BUY” call with 16% upside potential on a 12-month view on strong digital infrastructure and mobile leadership well as solid B/S 

Relatively in line with estimate TLKM's net profit grew 6.9% YoY to Rp13.31tn (+17,6% QoQ to Rp7.2tn), accounting for 49.2% of our FY estimate. The improvement of bottom-line performance in 1H22 was mainly driven by data, internet and IT service that increased by 4.4% YoY/7.5% QoQ in line with normalized mobility. Nevertheless, legacy services continue to drop 11.7% YoY/-3.7% QoQ in 1H22, which contributed 12.9% of TLKM's revenue. Furthermore, EBITDA margin also improved from 54.3% in 1H21 to 54.8% in 1H22, on the back of controllable costs, in particular operations, maintenance and telco services. TLKM also booked lower finance costs by 5.4% YoY to Rp1.95tn in 1H22. The company's balance sheet remained solid in 1H22 with net gearing of 0.3x. Improvement in Telkomsel ARPU Telkomsel's net income tumbled 10.6% YoY to Rp11.4tn in 1H22 (+48.7% QoQ to Rp6.8tn). This was followed by soft growth in revenue by 1% YoY to Rp43.6tn (+5.0% QoQ to Rp22.3tn) in the midst of continued shifting from legacy services to data. In contrast, digital business revenue grew 5.2% YoY/ 7.0% QoQ in 1H22. Furthermore, EBITDA margin also declined from 58.7% in 1H21 to 57.1% in 1H22. The number of customers declined 3.0% QoQ to 169.7 million in 2Q22 as ARPU improved, growing 6.8% QoQ to Rp41K. On the other hand, revenue of Indihome went up 7.4% YoY to Rp13.8tn (+1.9% QoQ to Rp6.98tn). Indihome added 288,000 of new customers in 1H22 to 8.9 million or growing 7.2% YoY, yet still lower than our expectation. However, Indihome ARPU remained stable YoY in 1H22 at Rp270K. Reaching beyond telecommunication business We maintain TLKM's revenue growth estimate of 6% YoY in 2022, boosted by improvement in mobile segment and Indihome. Amid intense competition in mobile segment, Telkomsel strives to maintain its market share while aiming for healthier growth by leveraging network superiority, and providing offering for its high valued customers. For Indihome, we expect lower customers additions this year amid normalized mobility, yet ARPU to be relatively stable YoY following efforts to enrich its bundling offerings and push to upgrade. As part of its transformation plans, TLKM-Singtel have inked partnership to develop data center business especially a Hyperscale data center located in Batam and expand fixed-mobile convergence through future hybrid products. To capture long term growth, Telkomsel seeks to develop digital ecosystem through INDICO that will be focused on health tech (Kuncie), gaming (Majamojo) and edutech (Fita). Reiterate BUY on the back of mobile and fixed broadband leadership We maintain our BUY call with a higher DCF-based price target of Rp5,200/share. The stock is currently traded at a 2022F PER of 19.1x and EV/EBITDA of 6.7x We are sanguine with TLKM's outlook buoyed by 1) leadership in mobile data and fixed broadband; 2) network and data infrastructure advantage; 3) enterprise and WIB segments thanks to growing digitalization, tower and other digital infrastructure; 4) collaboration with startups and other techno giant to expand digital ecosystem, and source of new growth; 5) manageable leverage ratio; 6) attractive valuation relative to its peers and 7) improved consumers spending. However, we note several downside risks to our recommendation including 1) competitive market; 2) lower-than-anticipated consumer power due to uncertainty; 3) interest rate hikes and 4) regulation changes.