RHB Indonesia Morning Cuppa - 10 August 2016 - (Indosat)

Good morning,

Indosat: Awaiting New Catalyst

We think:

1. The sharp rally in the share price of 42% (+42% over the past 12 months) has priced in the mid-term positive prospects on the stock;

2. Indosat’sstrong growth in 1H16 is likely to normalise going forward with the realignment of post Lebaran packages.

Positive catalysts will come from the active sharing regulation.Maintain NEUTRAL with a higher IDR6,700 TP (from IDR5,650, 8% upside) after rolling forward our valuation base to FY17. Our TP implies 3.5x/3x FY17-18 EV/EBITDA respectively.

♦ Active sharing regulations being finalised.Indosat expects the active network collaboration with XL Axiata (XL)Axiata (EXCL IJ, BUY, TP: IDR4,900)to contribute towards capex/opex savings in the longerterm. We gathered from management that the regulation on active sharing, ie spectum pooling and radio access network (RAN) sharing, is being finalised by the Government and is likely to be made offiicial soon. There are no restrictions in terms of network site locations to be shared, although the greatest benefits can be extracted from outside Java where PT Telekomunikasi Selular (Telkomsel) is dominant.

♦ Improvement in balance sheet from debt rebalancing.Indosat’s USD debt has fallen significantly to USD227.5m (1H15: USD1.7m) – representing 14% of overall debt. Accordingly, net debt/EBITDA has declined to 1.85x in 1H16 (1H15: 2.22x).Management is targeting to reduce its USD debt exposure to 10% in the longer term.

♦ A good quarter. Indosat reported strong 2Q16 revenue, EBITDA and subscribers (subs) growth of 9%/12%/18%YoY respectively. This was aided by the new Freedom Combo plans introduced in early 2016, strong Lebaran uptake and the improvement in commercial execution with an expanded 4G footprint. We expect revenue and EBITDA growth to normalise in 2H16 as the promotional packages are progressively removed. We expect subs additionto ease given the high base of Lebaran sign-ups and maintain our topline growth assumptions of 8.8%/10.9%/9.1% for FY16-18 respectively

♦ NEUTRAL call maintained with higher DCF TP. We roll forward our valuation base to FY17 with TP raised to IDR6,700 (from IDR5,650). We think the sharp price appreciation (+42% over the past 12 months) has baked in the improvement in Indosat’s operational momentum to some extent.

♦ Our preferred exposure to the Indo telco sector remains Telekomunikasi Indonesia (Telkom) (TLKM IJ, BUY, TP: IDR5,000) given its superior fundamentals. We also like XLas a laggard play with the latter’s recovery posing a key downside risk to Indosat. Other key risks include:

i. Stronger-than-expected competition;

ii. Higher-than-expected capex. (David Hartono)

Link to Daily report: Indonesia Morning Cuppa - 100816

Media Highlights:

Economics

Retail sales index decreased to 2.6% YoY in July

Corporates

Government to post a moratorium for cement plant

The Ministry of Industry is in the midst of preparing a moratorium for cement investment in Indonesia on the back of excessive cement production. The ministry of Industry, Airlangga Hartarto stated that the ministry will propose a modification on the Negative Investment List to limit foreign investment in cement plants. The moratorium is planned to be imposed for the next five years to limit the production of cement in Java Island. Currently, Java contribute to 56% of total cement production, compared to Sumatra at 22%, Sulawesi at 8%, Kalimantan 7% and Bali and Nusa Tenggara at 7%. (Kontan)

Comment: The above news is positive for existing cement companies since it should reduce national overcapacity condition. This situation may trigger cement companies to stop lowering its selling price. Our top picks on the sector is Semen Indonesia (SMGR IJ, Neutral, TP: IDR9,000). Semen Indonesia' Rembang plant could be the latest new cement plant in Java. Semen Indonesia is constructing a new green field cement plant in Central Java which completion has reached 95%. The company said that it has obtained legal permit for this new plant construction.(Andrey Wijaya)

Heavy Equipment production recorded a decrease of 35% in 1H16

Nationwide production of heavy equipment recorded a decrease by 35% YoY in 1H16 amid the low global commodity prices. Hinabi, the association of heavy equipment manufacturers and distributors in Indonesia stated that the production decline to 1,471 units compared to 2,256 units in 1H15. Hinabi chairman stated that the accelerating infrastructure development has not led any increase in heavy equipment sales as contractor and developers continue to use older heavy equipment and using rental services. Previously, Hinabi set a production target of 4,000 units this year but is now expecting the realisation to fall short at year end. (Jakarta Globe)

Comment: Weak heavy equipment sales may become a short-term noise for United Tractors (UNTR, BUY, TP:IDR20,900). However, heavy equipment sales only contribute around 26% of United Tractors’ consolidated earnings. The key drivers of its earnings are mining contracting and coal mining, which should grow in FY17F due to positive impacts of recovering coal price (current coal price (Newcastle) =USD64 per tonne vs bottom of coal price of USD 47 in January 2016).We think now it’s time to accumulate the counter as it is still the beginning of upcycle United Tractors’ share price.(Hariyanto Wijaya, CFA, CPA)

Alam Sutera aims to sell IDR1.1trn land to domestic investors

Matahari Department Store appointed new CFO

Siloam Hospital International opened 3 new hospitals

Serpong-Balaraja construction to start in 4Q16

Kawasan Industri Jababeka recorded IDR470bn marketing sales

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