ISAT rekomendasi jual

Indosat



Leaner but debt ridden



Maintain SELL

We maintain our recommendation to SELL with a new Target Price of Rp4,950, reflecting tight competition in the sector, the company's high gearing and the need for continuous capex to stay competitive. Indosat is taking steps to improve its operating efficiency (as achieved through tower sales for example) and to lighten its balance sheet. Although Indosat has not disclosed the net impact of the tower sales transaction, we believe that the operational impact is likely to be minor even though Indosat will benefit from approximately Rp3.6tn of cash received upfront. These funds can be used to reduce gearing. Yet challenges remain and Indosat will have to work hard to defend its market share from other operators, especially aggressive competitors like XL Axiata, Axis and 3.



Gearing remains high

Among the incumbents, Indosat has the highest net gearing (116% as of December 2011). This compares to net gearing of 75% for XL Axiata and only 17% for Telkom. Going forward, Indosat has limited room to reduce its gearing given stagnant EBITDA of around Rp9.0-9.5tn per year. Yet to keep up with technological developments and to undertake further business expansion, Indosat needs to spend around Rp6tn per year on capex. That leaves free cash flow of around Rp3.0tn per year to service debt and make tax payments. Interest expenses are about Rp1.6-1.7tn each year. As Indosat's current debt level is about Rp23.4tn with an average maturity of only 4.7 years, the company will need to refinance some of its debt.



Least efficient operator

Although Indosat remains the second largest telecommunications operator in the country, it is less efficient and less productive than its peers. Indosat is ranked second in terms of revenues share and market share yet its productivity per subscriber and EBITDA margin are lower than the comparable figures of Telkomsel and XL. Indosat's revenues per subscriber are only Rp396k per year, or below the industry average of Rp430k per year. And in FY11, Indosat's EBITDA margin was 45.7%, lower than either Telkomsel's 56.8% or XL's 49.0%. To address this issue, Indosat has put in place a voluntary retirement program which the company expects to lead to a normalized EBITDA of 48.1%. All in all, Indosat has 55Mhz of bandwidth, similar to Telkomsel's, but shared among only 51.7mn subscribers compared to Telkomsel's 107mn subscribers. While XL only has bandwidth of 25Mhz, it is used by 46mn subscribers, indicating greater efficiency in fixed cost components.