New board member appointed
Indosat’s shareholders have appointed a new board member, Erik Meijer, as Commercial Director, effective as of June 2012. Erik Meijer has gained extensive experience in the industry with incumbent Telkomsel and the so-called challenger Bakrie Telecom with notable success. With this appointment, Indosat should be better able to focus on its commercial strategy and execution speed. Nonetheless, Indonesia remains a complex market with intense competition. As such, it is vital that Indosat develops a customized strategy from cluster to cluster without adversely affecting the company’s grand strategy. The ultimate goal should be to gain market share by taking effective and timely marketing initiatives. The past couple of quarters have been difficult for Indosat and the company has struggled to challenge its competitors. Yet with the new commercial director now appointed, we expect positive results to filter through to the financials in 2H12.
No 3G spectrum issue
The Ministry of Communications and Information will soon auction another two slots (5 Mhz each) in the 3G spectrum. With the increasing growth in data, this spectrum has greater strategic importance for future business expansion. Nonetheless, Indosat has not indicated much interest in the auction since it feels it has sufficient spectrum to keep up with the data demand growth. Its plans are to optimize usage of the 900Mhz frequency since a new technology has been implemented to utilize 900Mhz for 3G. Indosat owns 2 blocks (10Mhz) in the 900Mhz frequency, or more than its main rivals Telkomsel (7.5Mhz) and XL (7.5Mhz). With slots in the spectrum becoming increasingly scarce, there is less chance of a price war in data, in our view. Nonetheless, since investment costs are tending to drop, operators need to come up with innovative offers that strike the right balance between quality and pricing.
Slim chance of M&A
Indonesia’s telecommunications market is a bit overcrowded with 10 operators. Some consolidation has taken place among the small players, most notably between Mobile 8 and Smart and between Bakrie Telecom and Sampoerna Telecom. However, Indosat has indicated that it is unlikely to seek any M&A opportunities. Note that the main motive for incumbents to seek M&A opportunities with smaller players is to acquire more spectrum. However, in Indosat’s case, the company feels that it has sufficient spectrum at the current time. Other assets such as customers and networks would be less valuable for the incumbents. As such, consolidation is more likely to take place among the smaller players. Quite simply, if Indosat can improve its service quality and come up with more attractive offers, then it stands to gain when unsatisfied subscribers using the services of smaller players decide to switch to other operators.
Upgrade to BUY
We upgrade our recommendation to BUY with a Target Price of Rp4,950, implying PER FY12-13 of 19.9-14.4x and EV/EBITDA FY12-13 of 4.3-3.7x, reflecting: 1) the expectation of an improved commercial strategy with the appointment of Erik Meijer and 2) the fact that the stock price has corrected significantly. We expect an improvement in earnings entering 2H12.
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