Link Net Ready To Run

Despite its operational performance facing short-term headwinds from new entrants like Telkom IndiHome and MNC Play Media, we remain positive on Link Net, given:
1. Its expansion into a new city (Malang) from July, plus Medan and Batam (3Q16);
2. New re-marketing strategy and improved product quality.
Maintain BUY with a higher IDR6,100 TP (from IDR5,500, 26% upside) after rolling forward our valuation base to 2017.

Malang expansion first, more to come
In July, Link Net launched its broadband and cable services in Malang (East Java). Since then, the company has rolled out 40,000 homes passed vs the target market of 120,000-150,000. The expansion will not stop there. In September, it plans to roll out its services in Medan and Batam. We view this strategy to focus on high GDP cities as advantageous, as the improved customer profile will lead to additional subscriber growth and lower churn rate.

Maintain additional subscribers forecast…
We maintain our forecast for additional subscribers of 162,000, 175,000 and 185,000 in FY16-18 respectively, as we believe Link Net will maintain its additional subscribers target on the back of a new re-marketing plan and expansion into new cities.

…but cut ARPU growth
However, we factor in fierce competition from other players by lowering our ARPU growth in FY17-18 to 0.2%/2.3% (from 3.3%/2.9%) respectively. In our view, Link Net has a better customer profile and loyalty when compared to its competitors, given its presence in high GDP cities.

We therefore maintain our FY17-18 churn rate of 2.2%/2% respectively
We also expect penetration rates to improve to 30% by end-2017 (2016: 27%).

Maintain BUY, with a higher TP of IDR6,100 (from IDR5,500)
We maintain our BUY call with a higher DCF-based IDR6,100 TP after we roll over our valuation base. Our TP implies 16x/13x FY17-18 P/E’s respectively. Risks to our call include lower ARPU and increased competition.

2Q16 results in line with our expectations
Link Net reported 2Q16 earnings of IDR209bn (+24% YoY), bringing 1H16 earnings to IDR396.8bn (in line with our/consensus estimates of 51%/49% respectively). Revenue rose 13% YoY, driven by higher contribution from broadband business.

Improved penetration rates
There was a healthy pick up for broadband in 2Q16 with 21,000 new subscribers (1Q16: 15,000), whilst cable TV new subscribers increased to 23,000 (1Q16: 17,000).

With the slowdown in home passed expansion, penetration rates improved in 2Q16 to 28.3% (1Q16: 27.6%). We expect even better penetration rates in 2H16 on the back of a new re-marketing strategy and improved product quality.

Factoring In Higher Competition
Lowering assumptions on ARPU growth
New players, such as Telekomunikasi Indonesia’s (Telkom) (TLKM IJ, BUY, IDR5,000) Telkom IndiHome and MNC Play Media, have aggressively entered the broadband business.

Therefore, we expect competition to be intense in 2017. As a result, we cut our ARPU growth assumptions to IDR430,000/IDR440,000 (from IDR443,000/IDR456,000) in FY17-18 respectively. However, we maintain our assumptions on additional subscribers, given:
i. Link Net’s expansion into three new cities (Malang, Medan and Batam), which will provide higher additional subs commencing 2017;
ii. Link Net’s customer profile – we think that customers in high GDP cities are more loyal, which will in turn cut churn rates (declined to 2.1% in 2Q16 vs 2.2% in 1Q16);
iii. The new re-marketing strategy – via partnering with the company’s subsidiary property companies by providing broadband services.

Valuation & Recommendations
Maintain BUY, with DCF-based TP lifted to IDR6,100. We roll forward our valuation base to FY17, with TP raised to IDR6,100. This is premised on:
i. A risk-free rate of 8%;
ii. A market risk premium of 5%;
iii. An equity beta of 0.8;
iv. Terminal growth of 1.5% or 11.6% WACC.