FROM EQUITY RESEARCH DESK

IDEA OF THE DAY

Pakuwon Jati : Investment Property Remains an Underappreciated Growth Driver; Resume Coverage with a Buy Rating (PWON.IJ Rp 454; BUY TP Rp 640)

·         We believe PWON’s malls assets are poised to reap benefits from the current sectoral trend and will cushion its weak condo marketing sales.

·         We expect a stable recurring revenue growth at an avg. of +10% p.a. in FY24F-FY29F with pre-sales of +7%, reflecting the weak condo market.

·         We resume coverage with a Buy rating and a higher TP of Rp640, as we include new projects but with a slightly higher disc. of 58% to RNAV.

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Macro Strategy : 2025 Proposed Budget: The Groundwork for Transition

·         The 2025 budget facilitates a smooth transition, allowing the immediate inclusion of the new government's key initiatives.

·         High tax growth remains the primary revenue source as non-tax revenue declines, with a focus on expanding the tax base.

·         The conservative macro assumptions include a 2.5% deficit projection (vs FY24’s 2.7%), despite a high 7.1% yield assumption in FY25.

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RESEARCH COMMENTARY.

EXCL Acquires Linknet's Residential Business for Rp1.875tr; Expected to Boost Revenue and NP, Enhancing EXCL's FMC Strategy.

·         The revised LINK prospectus suggests that EXCL will spend Rp1.875tr (for 750k subscribers or Rp2.5mn/subs) to take over LINK's residential or B2C business unit.

·         The deal optics appear accretive to value in XL’s P&L. We see also EXCL achieving a margin of 60%+, before OPEX related to content costs, marketing, labour; and regulatory costs related to the Fixed BB residential business. XL should absorb this OPEX by leveraging its own cost structure and aim for an XL EBITDA margin not far below from the 50.1% average in last 8 quarters, 52.3% in 2Q24.

·         LINKNET guides to potentially incur incremental net earnings of Rp139bn (previous prospectus est. 308bn) compared to not proceeding with the deal, hence XL may potentially avoid incurring losses from its 19.22% minority stake.

·         Moreover, we think that the cost of the deal of Rp1.875tr is affordable for EXCL given the expected Rp9tr oFCF (EBITDA-CAPEX) in our FY24F and 2.4x ND/EBITDA. Moreover, we do not exclude the possibility for XL to trade some of its own homepasses with LINK and reduce the cost of the deal.

·         Probable reason for the low cost of LINK subs, is that LINK still uses coaxial cables to connect to large number of homepasses.

·         We expect a new set date for GMS shareholders to approve this deal. (Niko Margaronis – BRIDS)

Industry and INTP Jul24 Volume

Industry volume:

·         Jul24: +14.1% mom/+3.8% yoy, mostly from Central Java (+15% yoy), Banten (+16% yoy), Kalimantan (+21% yoy), and Nusa Tenggara (+7% yoy)

·         6M24: +2.5% yoy

·         Jul24 bag/bulk growth: -0.9% yoy/+15.5% yoy

INTP:

·         Jul24: +23.3% mom/+10.7% yoy, 52% of our estimate (inline). Demand came mostly from Central Java (+52% yoy), Kalimantan (+32% yoy), and Nusa Tenggara (+22% yoy)

·         6M24: +10.7% yoy

·         Market share: Jul24 at 30.6% (+220 bps mom)

Comment: overall strong volume growth for industry and INTP. Bag market performed better in non-Java (Jul24 industry/INTP: +1%/+5.7% yoy) vs Java (Jul24 industry/INTP: -2.9%/+0.3% yoy). However, bulk market still drives the aggregate growth. Based on our price tracker, the bag segment ASP was relatively flat in Jul24. Due to in-line volume vs seasonality, we think prices could be sustained in short-term. (Richard Jerry, CFA & Christian Sitorus – BRIDS)

Positive First View from Government Budget 2025 Revenue; Supports ICT by Reducing Fee Collections

1.     The state revenue budget for Kemkominfo in 2025 is expected to decrease by -4.7% yoy to approximately Rp21tr, compared to the 2024 outlook. This reduction is attributed by the state to the anticipated lower collection of spectrum license fees. Notably, these fees constitute around 12% of IOH's and XL's topline in 2Q24, and approximately 5%/7% for Telkom/TSEL, respectively.

The aforementioned may not be taking into consideration the following:

• The XL-SF merger may or may not require returning part of the spectrum to Kemkominfo in the new mergeCo.
• The state budget may not have incorporated a potential 700MHz spectrum auction that is due.
• However, it may incorporate a potential overhaul in how fees are charged (Telcos have suggested there are such talks), hence the downward trend in the fees.

2. Additionally, state revenue from USO fees is expected to decline from Rp3.9tr to Rp3.7tr, a 7.3% yoy reduction.

3. Furthermore, the budget outlines plan to simplify licensing processes, introducing a Fast-Track service for frequency licensing.

4. The foregone tax revenue in the ICT sector is projected to increase by 14% yoy to Rp6.4tr. However, it remains unclear whether this will effectively provide the intended tax incentives to attract data  centers and Foreign Direct Investment (FDI), particularly in response to Malaysia's Johor pro-FDI / Data center strategy.

5.State budget priorities lie in expanding 4G coverage in the 3T cities. No considerations mention for 5G rollout. (Niko Margaronis – BRIDS)

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