Telco
4Q23 preview: Telcos to deliver tangible quarterly topline growth with broadly in-line earnings
- IOH may see 4Q23 revenue growth (+3.9%qoq) provided that it absorbs its capex budget, while we expect margins to continue to improve.
- Expect TLKM & EXCL to deliver 4Q23 revenue growth of 4.0%/1.5% qoq but with opex potentially weighing on the 4Q23 margins.
- ISAT is our top pick for expected earnings improvements, while EXCL is an attractive merger target and has value unlocking potential.
Telcos’ tangible qoq revenue growth on improved networks and seasonality
Telkom, IOH and XL may deliver revenue growth in 4Q23, with some pressure on EBITDA margins (only IOH may deliver higher 4Q23 margins), assuming their remaining capex budgets are fully absorbed. Telco network KPIs have further improved (per 2H24 Opensignal), suggesting power to exert better prices and monetization.
Telkom network leadership to drive revenue but with normalizing margins
We expect TLKM to deliver 4Q23 adj. net profit of ~Rp6.3tr (-12%qoq, -11%yoy), or Rp25.8tr in FY23 (flattish yoy), in-line with the consensus. However, we expect TLKM to book revenue of Rp39.3tr in 4Q23 (+4.0%qoq. +2.2%yoy), hence FY23 revenue of Rp150.5tn (+2.2%yoy), while the consensus is for higher 4Q growth at +6.1%qoq. TLKM should absorb all its capex budget (24-25% capex/sales) to support its network leadership agenda. Thus, the EBITDA margin may normalize in 4Q23 at 53.5% (lower -130bps qoq) as OPEX may rise along with the capex absorption, while the consensus is for a 53.1% EBITDA margin.
IOH’s ex-Java expansion to boost revenue, but we expect less profit vs. cons
We expect IOH to generate 4Q23 adj. net profit of ~Rp1.0tr (+6%qoq, +19%yoy) vs. consensus of ~Rp1.28tr (+36%qoq, 53%yoy). Our 4Q23 estimate is for revenue of Rp13.3tr (+3.9%qoq, 8.9%yoy), inline with the consensus. Nonetheless, we are more conservative below EBIT expecting more financial leases to transpire as IOH rolls out more sites (ISAT spent only 60% of its FY23 capex budget in 9M23, expecting full absorption in 4Q23). The 4Q23 IOH EBITDA margin should gravitate to 48% as it unlocks more merger synergies.
XL Axiata 4Q23 revenue growth but with lower margins
We expect EXCL to deliver 4Q23 adj. net profit of ~Rp310bn (-14%qoq, +63%yoy), with FY23 net profit expected at Rp1.32tr, slightly lower vs. cons profit. We expect EXCL to meet our revenue estimate for 4Q23 of Rp8.2tr (+1.5%qoq, +8.9%yoy), vs. the cons 4Q23’s considerably lower estimate of Rp7.8tr, which is unwarranted in our view. We, however, expect financial leases to continue to weigh on EXCL’s earnings as it pursues FMC. The 4Q23 EBITDA margin may reach 49.5% (-110bps qoq) inline with company guidance.
Maintain sector Overweight on a sustainable growth outlook
We believe the sector has good prospects with TLKM and ISAT to see better revenue momentum in 4Q23 and 1H24. Our top pick is ISAT, which trades at 5.4x EV/EBITDA with possible earnings upside to offer room for a TP upgrade. EXCL is emerging as an attractive option in light of the confirmed merger discussions. EXCL and TLKM also offer opportunities trading at -1SD from mean EV/EBITDA.
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