Link Net Sailing In The Waves

We maintain our BUY recommendation on Link Net with a revised TP of IDR5,500 (from previous IDR6,250, 40% upside) given the company’s strong broadband market share of 67% and ability to capture growing broadband demand. We expect the company to generate revenue growth of 18%-19% YoY in FY16F-17F respectively, driven by subscribers growth. However, we expect ARPU to remain flat in FY16F as there are headwinds from heightened competition.

Positive outlook in FY16
We expect Link Net to generate strong revenue growth of 18%/19% YoY in FY16-17F respectively, driven mainly by subscribers growth as we expect ARPU to remain flat. We are of view that the company’s strategy to maintain their market share via new marketing strategy and focus on high GDP cities in Indonesia should help drive stronger subscribers growth in FY16F. Link Net’s management is seeking an approval to buy back up to 10% of its shares over the next 18 months and proposing a dividend at its upcoming AGM on April 15.

Cutting our subscribers growth assumptions on the back of heightened competition risks
Link Net’s FY15 earnings performance was affected by the slowdown in the economy and competition. We had previously estimated that competitive pressure will impact Link Net in 2017 given that most of the competitors have just established their business. However, we now note the aggressive price wars in the industry and have cut our subscribers growth assumptions by 5.2% and 9.4% respectively in FY16-17F but still expect subscribers growth of 18.2%/16.6% in FY16-17F. Our ARPU assumption remains at flat at IDR415,000 in FY16F.

4Q15 results in line with our expectations
Link Net reported 4Q15 earnings of IDR179bn (+21% QoQ; +30% YoY), bringing FY15 earnings to IDR639bn (+15% YoY) – which is in line with our estimates. Link Net 4Q15 revenue increased to IDR677bn (+4% QoQ; +16% YoY) – thanks to the 18% YoY growth in new broadband and pay TV subscribers. Meanwhile, the competition in the broadband industry has resulted in lower ARPU growth of 3% YoY in FY15 to IDR415,000 (vs 14% in FY14). Earnings also improved due to lower interest expense after the company paid its IDR80bn debt in FY15.  This resulted in a better net margin of 26.3% in FY15 (22.7% in FY14).

Maintain BUY with a lower TP of IDR5,500 (from IDR6,250)
We lowered our earnings estimates by 4-9% in FY16-17F respectively, on the back of the short term competition in the industry. We maintain our BUY call with lower TP of IDR5,500 for Link Net given the company’s strong broadband market share and ability to capture growing broadband demand. We expect Link Net’s performance to likely be muted in the short term due to macro headwinds. Our DCF-based TP is derived from WACC of 11.6% and terminal growth rate of 3%, implying 15.3x/12.6x FY16F/FY17F P/Es respectively.

Revising Our FY16F and FY17F earnings
We expect Link Net to continue to face pressure from the competition in the industry. We have cut our subscribers growth assumptions by 5.2% and 9.4% respectively in FY16-17F but still expect subscribers growth of 18.2%/16.6% in FY16-17F respectively. Our ARPU assumptions remains flat at IDR415,000 in FY16F due to competition and macro headwinds.