FROM EQUITY RESEARCH DESK

IDEA OF THE DAY

Equity Strategy: Growth headwinds priced in, but we prefer defensive and ‘quality’ amid lingering uncertainties

• We project a softer FY24 EPS growth outlook of +3% yoy (vs. +5% prev.) amid slowing growth in 2Q24 but see limited further downside risk.
• JCI’s current 1.8x PBV (22% disc. to 10-year mean) seems unwarranted as we forecast FY24 ROE to fall only slightly to 9.5% (vs. 10y avg of 10%).
• We lower our FY24-end JCI target slightly to 7,670 (vs. 7,830 prev.); our stock picks favor defensive and quality names.

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RESEARCH COMMENTARY

ISAT IJ: IOH's CEO recent interview with Bloomberg.

Key takeaways:

• USD800-900mn annual capex in recent years with 60% going to ex-Java where in the next 3-4yrs there will be 21-22mn first time internet users from rural areas.
• M&A: Inorganic opportunities looking to acquire small fixed BB operators that need scale after proper due dilligence.
• The CEO sees Starlink as a complementary service to mobile. The LEO satellite economics make no sense at all. He sees collaboration upside helping IOH with its backhaul and transport in remote areas.
• NVIDIA’s first set of GPUs will be available in Indonesia. CEO Pak Sinha will make sure this is accompanied with investment in human capital.
• new IOH perspective.

Comment: There should +/- 400 small fixed internet providers in Indonesia and their acquisition will help IOH scale up quickly. But the risks and time needed related to such M&A may or may not outweigh the benefits. On Starlink, we concur at this point but technology improves constantly and can reduce costs making LEO more meaningful in the long-term. (Niko – BRIDS)

MTDL IJ (non-rated): Confident of reaching Rp25tr of revenue in FY24 from its distribution and S&C biz. Expecting better margins and meeting 10%yoy FY24 bottom line growth.

We hosted MTDL's 1Q24 earnings call. Key takeaways

• MTDL’s topline grew 12%yoy in 1Q24, driven mainly by growth in smartphone sales. The GP margin was lower due to a higher smartphones contribution (+158%yoy). The Infinix brand gained market share and ranked no. 4 – 5, with MTDL reaping the upside.
• FY24 company guidance remains for 13%yoy revenue growth or Rp25tr and 10%yoy growth in the bottom line with recovering profitability as the elections period has passed. (1Q fulfilled 20%/21% of FY revenue/NP). As per seasonality the pent-up growth will be seen mostly in 2H. 
• The consumer segment was slow in 1Q24 (some of MTDL’s vendors had supply limitations imposed by the government). But MTDL already received the approvals, and secured import entry for the coming quarters. The consumer segment will increase in the coming quarters as the dealers are trying to restock the products (PCs & laptops) with better liquidity to attract more brands offering them better payment terms.
• Solutions and consulting revenue was soft due to the uncertainty caused by the elections with companies postponing capex, but the company sees recovery going past the election period.
• MTDL’s S&C segment was soft caused by the general election influencing corporate business and capex. it is expected to rebound in the next half of 2024. The cloud revenue grew 6%yoy but is expected to grow by 10-15% for 2024. 1Q24’s Commercial segment grew single-digit, but that too should see more uplift.
• ⁠A JV with FPT Vietnam is still under discussion with a view that MTDL becomes the reseller of FPT’s products like chatbots and other AI products.  MTDL is going to visit FPT this June to discuss further.
• No major M&A on the horizon yet due to high valuations. MTDL will therefore propose extraordinary dividends above a 30% earnings payout from its policy of 20-30%.

Comment: MTDL trades at 9.9x PE as per its FY24 guidance, with a potential to rerate with tailwinds in S&C. (Niko -BRIDS)

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