Link Net All Hands On Deck

We maintain our BUY call on Link Net with an unchanged DCF-based IDR5,500 TP (30% upside)
Our TP implies 7.4x FY16F EV/EBITDA, which is attractive given its 5-year EV/EBITDA CAGR of 13%. We also like its focus on driving net subs and overall penetration in the firm’s existing cities. In 2Q16, ARPU is expected to strengthen. This is due to the ARPU hike in April. At the last AGM, management approved a dividend of IDR42/share, or a 20% payout ratio, which is to be paid on 19 May.

Focus on driving net subscribers (subs) and penetration
Link Net is to slow down its Homepass expansion in FY16. It guided for its fibre-optic network to achieve 120,000-150,000 subs (2015: 200,000). In order to improve its penetration rate and returns, the company is to focus on driving net subs growth in its existing cities by:
i. New re-marketing activities;
ii. Collaborations with property developers;
iii. Providing new bundle packages to the customers.
Meanwhile, we foresee 2Q16 ARPU strengthening on April’s price hike.

AGM approval
Management approved the payment of a dividend in May amounting of IDR127bn, or IDR42/share. This represents a 20% dividend payout ratio, or a 1% yield (based on 2 May’s share price). The date for cum dividend was 22 Apr, while ex-dividend was 25 Apr. Dividend payment is slated for 19 May. Furthermore, Link Net also plans to conduct a share buyback amounting to as much as 10% of the company’s issued and paid-up capital or a maximum of 304m shares.

1Q16 results in line with our expectations
Link Net reported 1Q16 earnings of IDR188bn, which represents 24% of our full-year forecast. Revenue was a bit weak during this quarter on the back of softening business from enterprise clients and seasonality. The net adds for broadband and cable TV remained stable at 32,000 in 1Q16. The penetration rate rose slightly to 27.6% due to the slower Homepass expansion. However, ARPU was slightly down to IDR402,000 due to the dilution from new account bookings (NABs).

Maintain BUY and IDR5,500 TP (30% upside)
We maintain our BUY call with an unchanged DCF-based TP of IDR5,500. Despite, its operational performance facing headwinds from new entrants and short-term macroeconomic conditions, Link Net is in a good position to capture Indonesia’s rising broadband demand. This is given its strong audience share numbers, in our view.

Our TP implies FY16F P/E of 16.3x and 7.4x EV/EBITDA, which looks attractive given the company’s 5-year EBITDA CAGR of 13%. Potential upside catalysts are a recovery in the macroeconomic conditions and strong earnings growth in FY16. The downside risks to our call are a macroeconomic downturn, weaker IDR, increased competition and ARPU pressure.