Indosat Ooredoo Hutchison (ISAT IJ) - Inline 1Q24 earnings; well-positioned for more ex-Java monetization and operating leverage upside

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Indosat Ooredoo Hutchison (ISAT IJ)

Inline 1Q24 earnings; well-positioned for more ex-Java monetization and operating leverage upside

Inline 1Q24 net profit of Rp1.26tr (+339% yoy) on resilient revenue amid seasonality and ongoing ex-Java expansion with a stable EBITDA margin.
IOH is firm on its commitment to scale up ARPU to Rp40k by 2Q24 with Opensignal attesting to its 4G network prowess.
We maintain our BUY rating with an unchanged forecast and TP of Rp13,300 amid the intact growth outlook.

Ongoing ex-Java expansion delivers subs / traffic / and revenue growth.

IOH delivered 1Q24 net profit of Rp1.26tr (-6%qoq, +339%yoy), inline at 23.8%/24.4% of our FY24F est/the cons. This reflects resilient revenue growth amid 1Q seasonality (Rp13.8tr, +0.5%qoq, +15.8%yoy), well inline with the FY estimates (forming 24.9%/25.1% of ours FY est/the cons). 2G BTS further increased in 1Q24 indicating ex-Java expansion where legacy is still in demand. 1Q24 subs rose to 100.8mn (+2.3mn qoq) though with lower ARPU of Rp37.5k.

Well positioned to unlock operating leverage on strong foundations.

EBITDA reached Rp6.5tr in 1Q24, with a stable EBITDA margin of 47%, despite rising OPEX in the cost of services (up by 1.12%qoq, 3.19%yoy relative to revenue). These increases are primarily due to higher rent and partnership costs as IOH is expanding its customer reach through its new sites in ex-Java. Marketing costs started to normalize from the 4Q23 peak with the effects to last into the Lebaran period, we believe. These should position IOH to generate operating leverage in 2Q24.

The mgmt has confidence in ARPU, ex-Java expansion, fixed BB, and AIaaS.

Mgmt highlighted Indonesia’s low-ranked position in ARPU, consumer cellular spent, and data traffic in East Asia. These suggest significant upside potential and justify: a) the reason IOH invests in ex-Java, and b) IOH’s reiterated commitment to deliver close to Rp40k ARPU by 2Q24. Moreover, Opensignal makes the case for the IOH network that challenges the incumbent’s dominance in ex-Java (Link). IOH also recently completed the integration of the fixed BB subs acquired in Nov23 into its sales and product teams. These should drive value and growth creation alongside IOH's continued ambitions for AIaaS.

Reiterate Buy rating on strong growth outlook amid a robust network.

We reiterate our Buy rating on IOH with a TP of Rp13,300 with unchanged FY24-26F estimates amid inline 1Q24 earnings. Despite the current 5.0x EV/EBITDA valuation (32% prem vs. 3.8x average), we see upside from its 2G/4G network prospects to expand and monetize better. Its financial leverage improved further due to its robust CF and room for spectrum purchase and dividend payout. Key risks mainly stem from delays in business implementation and competition.

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