PT Link Net Tbk. Indonesia Company Guide

Transcription

1 Indonesia Company Guide Version 1 Bloomberg: LINK IJ Reuters: LINK.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 26 Mar 2018 BUY Last Traded Price ( 23 Mar 2018): Rp5,000 (JCI : 6,210.70) Price Target 12-mth: Rp6,200 (24% upside) (Prev Rp6,000) Analyst Sachin MITTAL sachinmittal@dbs.com What s New 4Q17 EBITDA of Rp522bn (+13% y-o-y, +3.6% q-o-q) was in line with expectations Trading at a 30% discount to peers EV/EBITDA despite projected 13% revenue and 11% EBITDA growth in FY18 Expect broadband penetration to rise in FY18 to allay market concerns Maintain BUY with a revised target price of Rp.6,200 Price Relative Forecasts and Valuation FY Dec (Rpbn) 2016A 2017A 2018F 2019F Revenue 2,954 3,399 3,842 4,271 EBITDA 1,727 2,001 2,230 2,504 Pre-tax Profit 1,089 1,339 1,516 1,757 Net Profit 819 1,007 1,140 1,321 Net Pft (Pre Ex.) 819 1,007 1,140 1,321 Net Pft Gth (Pre-ex) (%) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) 1,339 1,531 1,866 2,120 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): 0 2 Consensus EPS (Rp): Other Broker Recs: B: 7 S: 1 H: 0 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Penetration levels to dictate the share price Trading at a valuation discount despite strong growth potential. Link Net is set to benefit from rising broadband adoption in Indonesia and its strategy of cherry picking affluent households. We expect competition to remain stable given lower returns on invested capital (ROIC) for new network rollouts, limiting the number of players in a region to two. Management expects 13%-14% revenue growth in FY18, higher than our previous projection of ~10%. We project revenue and EBITDA CAGR of 11.5% and 11.2% respectively over FY17-20F. The stock is trading at 29% and 30% discounts in terms of PE and EV/EBITDA vs. peers, respectively. Where we differ. Rise in broadband penetration and rational competition. The sluggish share price performance can be explained by flattish broadband penetration (28.5%) in Link Net s coverage area in FY17, versus expectations of a rise. However, we expect the penetration to rise to 28.7% in FY18 and 29.2% in FY20 as majority of its subscribers are on stricter billing criteria already. We also foresee stable competition as we estimate that ROIC on a new rollout is just 7% with 30% penetration. This may explain why MyRepublic, a new entrant, is rolling out its network in Tier-2 cities instead of competing in the areas of Link Net. In areas where Link Net is present (40% overlap with IndiHome fibre of Telkom), competition is rational. Link Net enjoys >100% ROIC in existing areas but <7% ROIC in new areas, sustaining its aggregate ROIC above 25%. Potential Catalyst. Increased penetration rates over the next 2-3 quarters could allay market concerns. Potential growth in penetration levels over the next 2-3 quarters (Link Net s FY18 projected broadband penetration rate is 28.7%) would signal Link Net s ability to effectively market its services. Valuation: Maintain BUY with a revised TP of Rp6,200. Our FY18F/19F EBITDA has been raised 0.5%/2% on the back of better than expected revenue growth guidance. Our revised TP is based on DCF with WACC of 10.2% and terminal growth of 3%. Key Risks to Our View: Broadband penetration in existing coverage areas may not rise. If Link Net is not able to improve broadband penetration in its existing areas, it will lead to lower growth than our estimates. At A Glance Issued Capital (m shrs) 3,043 Mkt. Cap (Rpbn/US$m) 15,213 / 1,103 Major Shareholders (%) PT First Media 33.8 Asia Link Dewa Pte Ltd 33.5 Free Float (%) m Avg. Daily Val (US$m) 0.20 ICB Industry : Telecommunications / Fixed Line Telecommunications ed: JS / sa:ma, PY, CS

2 WHAT S NEW Higher home passes and flat penetration. The company added 174K home-passes in FY17 versus our estimate of 153K and much higher than 153K in FY16. As a result, penetration of homes passed remained stable at 28.5% in FY17 (our estimate 28.9%) with addition of ~49,000 subscribers versus 64,000 in FY16. 4Q17 EBITDA was in line, net profit ahead of our estimates. Revenue of Rp894bn (+10.5% y-o-y, +4.6%) in 4Q17 was marginally below our estimate. This was due to lower subscriber additions of 9,000 (-40% y-o-y) in 4Q17 vs. ~13,000 subscribers added on average over the past four quarters due to the impact of stricter billing period of 60 days versus 90 days previously. This also reflected FY17 ARPU rising 3.4% y-o-y to Rp421K as low ARPU customers churned out. 4Q17 EBITDA of Rp522bn (+13% y-o-y, +3.6% q-o-q) was in line and was supported by lower content cost partially offsetting the impact of higher marketing and other expenses. Management guidance for revenue growth and capex is higher than our estimates. FY18 guidance of 180K new home passes is ahead of our earlier 170K estimate. FY18F capex guidance of Rp tn is also ahead of our previous Rp1tn estimate. More importantly, the company has guided 13-14% revenue growth in FY18F versus our 10% estimate previously. Link Net expects a pick up in subscriber additions in FY18, as majority of its subscriber base is already cleaned up. We estimate 56K subscriber additions in FY18. With stable EBITDA margins and rising depreciation expenses, we estimate 13% earnings growth in FY18F. Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq Revenue Cost of Goods Sold (181) (181) (186) Gross Profit Other Oper. (Exp)/Inc (326) (332) (354) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (16.7) (9.4) 1.98 nm nm Exceptional Gain/(Loss) Pre-tax Profit Tax (71.5) (82.4) (88.5) Minority Interest Net Profit Net profit bef Except EBITDA Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBS Bank Page 2

3 CRITICAL DATA POINTS TO WATCH Penetration levels to increase as network matures. Penetration, defined as the number of subscribers using Link Net s services within areas of coverage, still hovers around ~28.5%, suggesting ample room for subscriber growth in the future. According to the company, areas with new network roll-outs have recorded penetration levels of ~10% in the first year, which could rise to 20%-30% over the next 2-3 years. So there is a lag in subscriber additions and revenue generation after the initial deployment of the network. Link Net has provided coverage to ~806,000 homes over the past four years, representing 40.0% of its current coverage base. As Link Net beefs up its marketing efforts in these regions, we could see faster growth in Link Net s subscriber base. As ~70% of capex is incurred on providing blanket coverage to new regions, new subscriber additions in existing regions recorded incremental ROICs of over 100%, according to our calculations. Hence, the increase in penetration via subscriber additions in regions with existing coverage remains a critical factor for Link Net to maintain its growth momentum. Our projections of EBITDA CAGR of 11.2% from FY17A-FY20F assume penetration levels to rise by 70bps to 29.2% in FY20. Link Net may fall short of our expectations if it fails to penetrate deeper in regions with existing coverage going forward. Broadband Penetration Bundled ARPU Total RGUs Penetration levels have edged up except in % 28.5% 28.0% 27.5% 27.0% 26.5% 26.0% Link Net Penetration 27.6% 27.3% 27.2% 27.1% 27.3% 28.7% 28.9% 28.5% 28.7% 28.3% 28.3% 28.5% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Source: Company, DBS Bank Source: Company Data, DBS Bank ARPU to edge up in the near term. Given the low penetration of fixed broadband and high capex involved in providing fixed coverage in Indonesia, we do not expect more than two players to compete in the same geographical markets. As a result, we believe much of the competition Link Net is likely to face would come from TLKM s IndiHome, which is marketed at a slight discount to Link Net s services. First-mover advantage, Link Net s superior quality of service and above-average purchasing power of customers in areas that have already been provided with blanket coverage, should translate to improving ARPU for Link Net. We have projected a 2% growth in ARPU for FY18 to reflect this. Page 3

4 Appendix 1: Broadband Penetration and ARPU are most critical factors. In the critical factor analysis, we have conducted using quarterly data since 2014, and we have seen Link Net share price movements follow penetration rates and blended ARPU. We believe penetration has had a higher impact on share prices than blended ARPU however. Higher penetration generally indicates better asset utilisation (due to higher % of households using Link Net network) without a significant increase in capex which has a positive impact on ROICs of the company. In addition, higher ARPU also has a positive impact on earnings as it drives better revenues and margins. Share price vs penetration 8, % Share price (IDR) 7,000 6,000 5,000 4,000 3,000 2,000 1, % 28.0% 27.5% 27.0% 26.5% Penetration % Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Share price Penetration Share price vs ARPU 8, ,000 7, ,000 Share price (IDR) 6,000 5,000 4,000 3,000 2, , , , ,000 IDR/User/Month 1, , ,000 Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Share price ARPU Sources: Company data, Reuters, DBS Bank Page 4

5 Balance Sheet: Strong balance sheet and cash flow generation. Link Net has consistently maintained a net cash position with fairly low levels of debt, providing room for future expansions. For FY18, Link Net has guided for capex of ~Rp tn which we believe the company should be able to fund comfortably through its operating cash flows. Link Net started paying dividends in FY15 with a payout ratio of 20% which increased to 35% in FY16 but decreased to 15% in FY17. With strong cash generation, we expect the management will be able to meet its guided payout ratios (~50%) over the next 1-2 years. Share Price Drivers: Rising adoption and premium positioning to drive share price. The carrier's strategy of cherry picking affluent households and its premium branding has allowed Link Net to secure premium ARPU. We believe competition is also likely to remain stable given the relatively lower ROIC of new network rollouts potentially limiting the number of competitors in a region to two. Management expects robust growth in revenues of 13%- 14% in FY18 as Link Net continues to accelerate roll outs and penetration in regions with existing coverage. We expect Link Net to record a revenue and EBITDA CAGR of 11.5% and 11.2% respectively over FY 17 to 20F. Despite strong growth prospects, the counter is trading at 29%/30 discount in PE and EV/EBITDA vs peers. Bull-case TP of Rp7,150. In our bull-case scenario, we have assumed higher demand growth for high-speed broadband and pay TV in Indonesian metros along with lower-thanexpected competition levels in areas of new roll-outs. We believe this would lead to a faster uptake of Link Net s services with surging penetration rate of 29% in FY18F. Benign competition in roll-out areas would also translate to faster growth in blended ARPU to Rp431k in FY18. This would result in a TP of Rp7,150 Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Forward PE Band (x) Bear-case TP of Rp4,800. In our bear-case scenario, we have assumed lower growth for high-speed broadband and pay TV along with escalated competition in new rollout regions. We believe this would lead to a slight drop in penetration levels by FY18 from current year while escalated competition in new regions would lead to a faster contraction of blended ARPUs to Rp417k in FY18 This would result in a TP of Rp4,800 Key Risks: Broadband penetration in existing coverage areas may not rise depressing growth. If Link Net is unable to improve broadband penetration in existing areas due to competition or poor marketing, EBITDA growth will lag our projections. PB Band (x) Company Background Link Net is a leading residential fixed broadband and Pay TV operator in Indonesia. Source: Company, DBS Bank Page 5

6 Link Net is trading at 29% to its regional peers in PER terms Source: Thomson Reuters, DBS Bank Link Net is trading at 30% to its regional peers in EV/EBITDA terms Source: Thomson Reuters, DBS Bank Page 6

7 Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F Broadband Penetration Bundled ARPU Total RGUs 890 1,024 1,120 1,227 1,346 Segmental Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F Revenues (Rpbn) Broadband Internet 1,460 1,670 1,920 2,161 2,392 Pay Tv 940 1,086 1,243 1,400 1,549 Others Total 2,564 2,954 3,399 3,842 4,271 Income Statement (Rpbn) FY Dec 2015A 2016A 2017A 2018F 2019F Revenue 2,564 2,954 3,399 3,842 4,271 Cost of Goods Sold (570) (637) (707) (811) (904) Gross Profit 1,994 2,317 2,693 3,031 3,367 Other Opng (Exp)/Inc (1,060) (1,195) (1,336) (1,501) (1,621) Operating Profit 935 1,122 1,357 1,530 1,745 Other Non Opg (Exp)/Inc Associates & JV Inc (20.9) Net Interest (Exp)/Inc (57.5) (32.7) (17.5) (14.4) 11.2 Exceptional Gain/(Loss) Pre-tax Profit 856 1,089 1,339 1,516 1,757 Tax (217) (271) (332) (376) (436) Minority Interest (0.2) Preference Dividend Net Profit ,007 1,140 1,321 Net Profit before Except ,007 1,140 1,321 EBITDA 1,429 1,727 2,001 2,230 2,504 Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM Source: Company, DBS Bank Page 7

8 Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 Revenue Cost of Goods Sold (181) (169) (171) (181) (186) Gross Profit Other Oper. (Exp)/Inc (326) (322) (327) (332) (354) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (16.7) (3.8) (6.3) (9.4) 1.98 Exceptional Gain/(Loss) Pre-tax Profit Tax (71.5) (77.6) (83.6) (82.4) (88.5) Minority Interest Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) (0.6) 3.4 Net Profit Gth (Pre-ex) (%) (1.6) 6.8 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 3,493 3,807 4,117 4,410 4,767 Invts in Associates & JVs Other LT Assets Cash & ST Invts ,408 1,800 Inventory Debtors Other Current Assets Total Assets 4,438 5,055 5,766 6,767 7,580 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity 3,667 3,963 4,524 5,514 6,265 Minority Interests Total Cap. & Liab. 4,438 5,055 5,766 6,767 7,580 Non-Cash Wkg. Capital (299) (441) (511) (519) (530) Net Cash/(Debt) ,326 1,717 Debtors Turn (avg days) Creditors Turn (avg days) , , , Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 1, , ,365.5 Z-Score (X) Source: Company, DBS Bank Page 8

9 Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017A 2018F 2019F Pre-Tax Profit 856 1,089 1,339 1,516 1,757 Dep. & Amort Tax Paid (271) (243) (352) (357) (414) Assoc. & JV Inc/(loss) Chg in Wkg.Cap (11.0) (10.7) Other Operating CF (46.5) (9.2) (175) Net Operating CF 1,182 1,561 1,547 1,847 2,091 Capital Exp.(net) (1,108) (746) (971) (1,006) (1,129) Other Invts.(net) Invts in Assoc. & JV (19.2) Div from Assoc & JV Other Investing CF Net Investing CF (1,128) (745) (971) (1,006) (1,129) Div Paid 0.0 (128) (286) (150) (570) Chg in Gross Debt (96.8) (68.7) (48.7) (48.7) 0.0 Capital Issues 0.0 (386) (15.4) Other Financing CF (7.9) (8.1) (7.2) Net Financing CF (105) (591) (358) (199) (570) Currency Adjustments 17.3 (4.0) Chg in Cash (33.2) Opg CFPS (Rp) Free CFPS (Rp) Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Sachin MITTAL Page 9

10 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 26 Mar :40:04 (SGT) Dissemination Date: 26 Mar :42:21 (SGT) Sources for all charts and tables are DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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