RHB Indonesia - Indosat - Hoping For Yield Improvement (Indosat, Indo Tambangraya) Unknown Selasa, 23 Mei 2017




Good morning,

Indosat – Hoping For Yield Improvement
ISAT’s 1Q17 results were in line with both our and consensus expectations. Its subscriber base and data revenue both maintained decent growth due to a successful rebranding. However, we have yet to see evidence of an effective monetisation of mobile data. Maintain NEUTRAL and our DCF-derived TP of IDR7,100 (WACC: 10.7%. TG: 1%) as we believe the stock rerating is done.


¨ Decent results despite of 1Q being a seasonally weak quarter. Indosat’s (ISAT) results were in-line with our and consensus expectations. Revenue and EBITDA recorded 7.0%/4.0% YoY growth, driven by progress across all segments. EBITDA margin of 42.5% was lower QoQ (44.5% in 4Q16) due to the IDR83bn amount of one-off charges. Management mentioned that a normalised EBITDA margin should be around 43.6% and guided for similar EBITDA margins in the quarters ahead.
The cellular segment recorded a revenue growth of 6.6% YoY, driven by data revenue growth of 40.5% YoY which more than offset the decline in its voice and SMS revenue. Data yield managed to stay flat (IDR14.8K/GB) on the back of 11.4% QoQ in data traffic, owing to its bonus data reduction since 4Q16.
¨ New churn rate policy distorted operating numbers. ISAT recorded a high quarterly net prepaid subscriber growth of 10m while blended ARPU saw a sharp decline of 11.4%/17.8% QoQ/YoY. This was caused by an increase in the churn rate from 30 days to 60 days in 1Q17 which otherwise boosted the subscriber base when compared to the preceding quarter. ISAT revealed that the actual numbers for the new subscribers growth were much lower.
¨ Data yield improvement still uncertain. When asked about data monetisation, management sounded less optimistic on an industry-wide data price increase citing intense competition. As a backup plan, management stated that grabbing market share was another way to growth. We believe that another data price war is unlikely at this juncture. The current industry data yield of USD1-2 per GB is amongst the lowest in the ASEAN countries that we cover.
¨ Maintain NEUTRAL. We believe ISAT’s improved operational growth numbers which led to a valuation rerating have been largely priced in. Moreover, outperformance looks less likely without any substantial improvement in data yield and ARPU. We are wary that ISAT’s network ultilisation is now the highest amongst the Indonesian Telcos under our coverage. Our DCF derived TP of IDR7,100 implies a FY17 EV/EBITDA of 4.4x.
¨ Risks. Key upside risks are an ARPU/data yield improvement and higher than industry subscriber growth rate. Key downside risks are loss of subscribers due to erosion of network quality, renewed price competition and failure in managing voice plus an SMS revenue decline. (Norman Choong, CFA, Jeffrey Tan)

Link to report: Indosat : Hoping For Yield Improvement
Link to daily report: Indonesia Morning Cuppa 230517



Company Update:

Indo Tambangraya (ITMG IJ, Not Rated), Key takeaways from analyst meeting

Following are key takeaways from Indo Tambangraya’s analyst meeting:

¨ No clear strategy in acquiring new coal assets. Based on discussion with management, we get impression that Indo Tambang does not have a clear strategy in acquiring new coal assets. However, management indicates that it may increase its limited coal reserve by converting some part of its coal resource to coal reserve.
¨ Indo Tambangraya aims to maintain coal production at current level in years ahead. Indo Tambangraya’s coal production keep decreasing from 29.4m tonnes in FY13 to 25.6m tonnes in FY16 (FY17 target of 25.5m tonnes). Although its coal reserve in Jorong mine site would be depleted by 2018F, Indo Tambangraya aims to maintain its coal production at current level ahead.
¨ Its FY17F total cost is estimated to increase to USD54/tonne (vs 1Q17 of USD51.6/tonne). Management guides that its FY17F total cost per tonne would higher than in 1Q17 due to higher stripping ratio in the remaining year (Stripping ratio: FY17F= 10.5x vs 1Q17= 9.4x).
¨ Realised capital expenditure around USD5.6m in 1Q17. Indo Tambangraya allocates USD60.3m for FY17 capex, which would be used for building infrastructure in mine sites and replacement of heavy equipment for its-owned mining contractor PT Trust. As of 3M17, Indo Tambang has spent capex around USD5.6m.
¨ No rating. Currently, Indo Tambang is traded at consensus FY17F and FY18F P/E of 6.38x and 6.42x, respectively. (Hariyanto Wijaya, CFA, CPA)

Sector Update:

Oil and Gas – A Peek Into 2018
If events move in the direction that we expect, we may enter 2018 with a stronger oil market. Still, 2018 may possibly be a challenging year for the sector, with more supply coming from OPEC, Russia, the US, Canada and Brazil. As we expect demand growth to be moderate, at 1.3-1.2mbpd for 2017 and 2018 respectively. Such an influx of new supply could put pressure on the oil market further. We maintain our crude oil price forecast of USD60/bbl for 2017-2018 and keep our NEUTRAL sector weighting.

¨ At the 25 May OPEC meeting, expect the production cut to be extended. We and the market expect the extension of production cuts would be more likely than not. We expect the production cut to last at least another nine months, with a decrease of 1.8mbpd. Iran has already said that it will do whatever Organization of the Petroleum Exporting Countries (OPEC) members agree to, as its exports have already reached the 2.5mbpd pre-sanction level. Saudi Arabia and Russia have already announced that they are willing to extend the production cuts through to Mar 2018, and Saudi Arabia has announced that all are now on board for such an extension.
It is also possible that the production cut could include other countries and may be larger than the 1.8mbpd currently agreed upon. Should this happen, it would be positive for the markets. Egypt and Turkmenistan, which produce 700kbpd, may be included in the agreement to cut production. However, we have not factored such possibilities into our assumptions.
¨ The cut may lead to a supply deficit of 0.9mbpd for 2017. Risks include:
i. Higher production (production cuts are less and last a shorter time than what the markets expect);
ii. Higher-cost producers lifting their levels of oil production more than expected;
iii. Demand becoming softer than expected.
These would lift inventory and prolong the time taken to rebalance the oil market.

¨ Oil producers that may dampen the outlook for the sector are still Libya, Nigeria and the US. We expect the maximum additional output from these countries to be 1.8mbpd. Libya and Nigeria are factors that are vulnerable to political unrest, while in the US, oil producers are more price-sensitive. We also believe Canada and Brazil, which are expected to add around 0.3mbpd to supply in 2017-2018, may affect the outlook for the oil market.

¨ 2018 could be a more challenging year. The OPEC/non-OPEC production cut agreement is expected in 1Q18. After this, we expect OPEC, Russia, the US, Canada and Brazil to raise their production levels. We expect additional supply for the year to be at 1.9mbpd, vs a conservative estimate of 1.2mbpd. Oversupply for the year could possibly be 0.7mbpd. If demand is as high as what the US Energy Information Administration (EIA) expects, ie 1.6mbpd, then it is possible that the oversupply could be lower, at c.0.3mbpd.
With such prospects, production cuts may need to be more of a permanent fixture. It is possible that producers may have to revert back to a quota system, as, without such mechanism, markets may collapse again. We do not rule out the possibility of this happening, going forward. (Kannika Siamwalla, CFA)


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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia

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