TLKM - Seeking holy grail of telco industry

 TLKM’s 1Q22 net profit increased 1.7% YoY to Rp6.1tn, representing 22.1% of our FY forecast 

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

 We reiterate our “BUY” call with 15% upside potential on a 12-month view on strong digital infrastructure and mobile leadership well as solid B/S 

Slower net profit growth, yet margin stabilized TLKM's net profit grew slightly 1.7% YoY to Rp6.12tn in 1Q22 (+3.9% QoQ), accounting for 22.1% of our FY estimate. This slower net profit growth than expected was due to unrealized loss of GOTO investment totaling Rp893bn in 1Q22. TLKM’s normalized net profit grew 11.3% YoY in 1Q22. Meanwhile, TLKM's revenue increased 3.7% YoY in 1Q22 to Rp35.2tn (-5.3% QoQ) or 23.2% of KBV FY2022E, boosted by data, internet and IT services, followed by Indihome. The company's operating margin contracted from 34.5% in 1Q21 to 30.1% in 1Q22 on the back of higher costs. Nevertheless, TLKM's EBITDA margin was relatively stabilized at 55.1% in 1Q22, compared to FY2022 estimate of 53.6%. Furthermore, TLKM's finance cost dropped 3.8% YoY to Rp945bn in 1Q22. Balance-sheet wise, TLKM's net gearing was improved to 0.5x in 1Q22. Eroded by persistent cannibalization impacts Telkomsel's net profit declined 31.8% YoY to Rp4.6tn (-31.9% QoQ). Meanwhile, revenues were flattish +0.2% YoY/-4.9% QoQ to Rp21.3tn as we suspect, due to intense competition, persistent impact from covid-19 combined with continued cannibalization. Nevertheless, unrealized loss of GOTO investment also drove operating margin to decline from 41.0% in 1Q21 to 29.8% in 1Q22. Furthermore, EBITDA margin contracted from 58.9% in 1Q21 to 57.7% in 1Q22. Amid higher customer additions by 3.2% YoY to 175 million, Telkomsel ARPU shrunk 4.7% YoY (-4.7% QoQ). In addition, Indihome continued to be growth driver whose revenue escalated 7.9% YoY, resulting in higher contribution to TLKM from 18.7% in 1Q21 to 19.5% in 1Q22. This was followed by 136,000 additions of new customer to 8.7 million, growing 5.3% YoY or 1.6% QoQ in 1Q22. The additions were considered slower than expected on the back of Islamic festivities during 1Q22. Aims to unlock value We expect TLKM’s revenue growth of 6% YoY in 2022, boosted by data, internet and IT services, and Indihome. Nevertheless, we anticipate competition in mobile segment to remain stiff this year, despite recent consolidation of ISAT-Hutch. To encounter stiff competition in mobile and decelerate legacy services decline, Telkomsel opts to stay relevant, provide personalized offers to its higher valued customers. For Indihome, we expect 10% growth subscribers in 2022 given better consumer spending and persistent trend of remote activities. Furthermore, TLKM strives to seek new sources of growth through local startup investments, tapping into higher-valued data center and cloud infrastructure. In particular, TLKM is in process to consolidate its data center entity under Telkom DC Co, starting with Hyperscale Data Center that is slated to competed in 2-3 years. The company has also set up strategic partnership with Microsoft that is able strengthen its digital portfolio by utilizing Hyperscale data center, targeting B2B and B2G clients. Reiterate BUY on the back of mobile and fixed broadband leadership We maintain our BUY call with a higher DCF-based price target of Rp4,850/share. The stock is currently traded at a 2022F PER of 17.7x and EV/EBITDA of 6.6x 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) solid balance sheet; 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 surrounding covid-19 situation; 3) interest rate hikes and 4) regulation changes.