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Danareksa Equity Snapshot - ISAT, 23 Maret 2020
March 23, 2020 16:46

Indosat still generates low ARPU, has 2020 borderline EBIT at best, carries high debt, and this results in net losses. However, we still like Indosat for its high capex intensity in 2019-20 in a market that appears to be underinvested and which can help boost its ARPU. 4Q19 performance was testament of its capex efforts with potential revenues momentum build-up. Nonetheless, we add to the risk premium amid the Covid-19 pandemic to arrive at a lower DCF valuation with TP of Rp2,400. Maintain BUY.  

Indosat weakest in our coverage, as it generates the lowest ARPU from a base of 55mn subs. Nonetheless, Indosat's 4Q19 took the market by surprise with revenues growth of +14.0%qoq - better than expected. In 4Q19, it did not take on a lot more subs as in the past, it increased its ARPU, and it says it discontinued the sale of unlimited data plans, which we believe to be happening. Seeing these trends, Indosat is moving in the right direction and will continue to do so even during Covid-19 because Indosat is high on the capex “drug”. Indosat is pushing forward seeing underinvested markets, and is able to turn around its financially weak position riding possibly momentum in the making with 4G. We may see a bit of a pause in its ICT revenue, but we figure the mobile segment (new offers such as ruangan guru for distance learning) may compensate for the time being.

Cashflow position will continue to be challenging. We expect 2020 EBITDA to be in the vicinity of Rp11.2tn and a capex program of Rp9tn. Indosat’s total debt amounts to Rp21.6tn and in relation to its FY19 EBITDA position, ISAT’s leverage has improved significantly. There is approx. Rp5.7tn coming due, expecting to be refinanced at improved rates or even deleverage. ISAT’s cash in FY19 was Rp5.9tn which ballooned from tower divestments, which translates to FY19 net debt/EBITDA of 1.6x. Potentially borderline ISAT EBIT won’t cut it for the finance costs - includes financial leases, (interest coverage of 0.8x) but its cash position should handle it in 2020.

Downside in capex deliveries looming. Looking ahead, Indosat advises there may be capex delays. ISAT’s capex is significant and equivalent to a high capex/revenues ratio of 38.8%, and we think EBITDA upside much hinges on network improvements. Manufacturers may also see costs rising, an additional challenge down the road. However, given that 4G capex has become mainstream, (5G rollouts is key driver in foreign markets) we believe the sector and ISAT may leverage its supply chain from a number of equipment makers.  

Maintain BUY. Indosat prospects have improved, becoming quite investible as it can realize much upside based on our valuation. As we do not know how business and consumer sentiment are developing during Covid-19, we add to the risk premium in our DCF valuation. We maintain our BUY recommendation but with a lower TP of Rp2,400. As consumer sentiment gets weaker, users may opt for relatively more affordable options which Indosat still continues to offer.


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