RHB Indonesia - Indosat - Underinvestment Poses a Medium Term Risk Unknown Kamis, 10 Agustus 2017




Good morning,

Indosat – Underinvestment Poses a Medium Term Risk

Indosat posted a strong growth QoQ in revenue, EBITDA and net profit of 7.3%/15.3%/251% respectively, due to a stabilised ARPU, continued strength in data revenue growth and cost discipline. That said, we are concerned on a dovish tone on ramping up capex, regardless its acknowledgement of capacity constraints. With a similar data pricing and a less optimal network than its competitors’, we see increased risks of subscribers’ churn and a spike in capex, undermining further rerating potential for Indosat. Maintain NEUTRAL and a DCF-derived TP of IDR6,600 (WACC: 10.7%, TG: 1%).


¨ Good results but in-line with our/consensus expectations. Revenue, EBITDA and net profit recorded a growth YoY of 8.4%/10.5%/83.2% respectively. EBITDA margin improved YoY from 43.3% to 44.2% on better monetisation of its cellular business and a relatively flat QoQ costs base.
Data revenue recorded a stronger sequential growth of 18.5% QoQ (1Q17: 13.1%) on the back of a 17.8% QoQ data traffic growth; data yield was stabilised at IDR15K after some price hike in 2Q17. Interestingly, the revenue from voice recorded a sequential growth of 3.4%. Revenue from SMS continues its double-digit decline trajectory, at -13.5%. Indosat added 700K prepaid subscribers in 2Q17. Management maintained its guidance of mid to low 40s EBITDA margin, a high single digit revenue growth for FY17F and potentially a higher dividend payout, due to the higher net profit base.
¨ Have “fully squeezed the lemon” but dovish on upsizing capex plan. Much to our expectation, the results call highlight was on Indosat’s strategy to act on its network capacity that has lagged behind peers’. Although management acknowledged a high network utilisation, a high upcoming data traffic growth and the need to add more capacity, Indosat maintained its FY17F capex guidance of IDR6tril and guided numbers of BTS net adds to be similar to the current trajectory. The above might eventually cause erosion of network quality. Indosat might risks subscriber churn, given similar data pricing to its closest competitor and the sector’s growing emphasis on raising prices. Ultimately, we believe pricing power is a function of branding built upon marketing and/or network quality.
¨ Maintain NEUTRAL We believe the above might dampen medium term outlook and limit Indosat’s rerating potential. Moreover, outperformance looks less likely without any substantial improvement in data yield and ARPU. In case Indosat decides to ramp up its capex, the short term margins might take a hit. Our DCF derived TP of IDR6,600 implies a FY17/18F EV/EBITDA of 4.4/4.0x.
¨ Key risks. Key upside risks are ARPU/data yield improvement and a higher than the industry’s subscriber growth rate. Key downside risks are a loss of subscribers due to erosion of network quality, renewed price competition and failure in managing voice/SMS revenue decline. (Norman Choong, CFA, Jeffrey Tan)

Link to report: Indosat : Underinvestment Poses a Medium Term Risk
Link to daily report: Indonesia Morning Cuppa 100817

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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT RHB Sekuritas Indonesia

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