Telco: 2Q24 preview: expect the best momentum on IOH; TLKM and EXCL to focus on their catalysts (OVERWEIGHT)

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Telco

2Q24 preview: expect the best momentum on IOH; TLKM and EXCL to focus on their catalysts

We expect a robust and strong 2Q24/ 1H24 net profit momentum for IOH, while we expect TLKM and EXCL to have fewer ST catalysts.
We estimate TLKM and EXCL to offer limited margin upside in 2Q24, while IOH shall realize leverage and margin expansion (100bps+, Qoq).
ISAT remains our top pick with room for upgrade. We have a BUY rating on TLKM & EXCL, trading at low multiples offering positive catalysts.

Expect a robust 2Q24 NP growth from IOH; TLKM and XL to sustain profits

We expect IOH to deliver a robust 2Q24 net profit growth, driven by potential operational and financial momentum from better ARPU (to ~39k) and subscriber growth. We expect Telkom to deliver steady 2Q24 net profit, mainly driven by its non-mobile segments. We expect EXCL to largely preserve its 1Q24 NP performance, but with limited 2Q upside as its EBITDA margin subsides to 50%, in line with FY24 guidance from the 1Q24 high.

More growth catalysts for IOH in FY24, softer growth for EXCL & TLKM

We forecast IOH 2Q24 revenue to grow at rates of ~4%qoq/ ~10%yoy. We believe IOH may deliver the largest growth due to its rigorous expansion in ex-Java, supported by strong network capacity (based on Opensignal June ‘24 findings), while offering fewer discounts to capitalize on the price increases, we saw in Nov23. We expect TLKM’s growth to be supported by non-mobile as TSEL underperformed the sector, according to Telkom’s CFO. Meanwhile, we expect XL to reach ≤ 3% qoq growth in 2Q24 as we see fewer catalysts.

Expect 2Q24 EBITDA margin expansion for IOH and volatile EBITDA for TLKM

We expect IOH to deliver EBITDA margin expansion of >100bps qoq by realizing operational leverages, which should lead toward achieving its guidance of FY24 49-50% (1Q24: 47%). Amid its “5 bold moves”, Telkom undergoes business rationalization in both TSEL and its data centers businesses, which may cause volatility in its reported EBITDA, although core EBITDA should remain largely steady. We expect XL’s 2Q24 EBITDA to remain steady, at best, on a qoq basis.

IOH and XL 1H24 earnings to beat cons. FY est. Telkom should be well inline

We expect the telcos’ 1H24 earnings to be in line with their FY24 guidance. If our 1H24 forecast is confirmed, we expect IOH’s FY24 NP to beat ours and cons est.; Similarly, despite the flattish 2Q24 NP est., we believe EXCL still has pathway to outperform Cons est. (in line with ours). On the other hand, we see Telkom’s NP trajectory to be in line with Cons FY est.

IOH remains our top pick, while TLKM and EXCL offer catalysts to BUY

IOH remains our top pick due to its strong operating momentum, hence it offers the possibility to outperform. Meanwhile, we expect TLKM to see softer growth as it lays key foundations to secure sustainable growth for later in 2H24, FY25 and beyond. We maintain a BUY rating on TLKM with a TP of Rp4,400, trading at an undemanding valuation of 4.0x EV/EBITDA. We also see EXCL trading at an undemanding valuation (12.7x PE), despite offering key catalysts (FMC with LINK & merger). Downside risks are price competition, prolonged execution in TSEL 5 bold moves, delays in IOH’s ex-Java penetration, delays in proposed EXCL-FREN merger to cause stock overhang.

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