CLSA Indosat upgrade, easing pressure

Our analyst Wilianto upgrades Indosat (ISAT IJ) from Underperform to Outperform. The new TP is Rp5,300 (from Rp4,500).

Due to the crisis, the mobile industry is consolidating and financing is much harder to get. Even the no 3 operator Excelcomindo (EXCL IJ) has its capex capability constrained. Tariff is also stabilizing. The mobile industry here is moving towards a duopoly structure, with Telkom and Indosat being the main players.

ISAT is also attractive because the stock is underowned, thanks to QTel tender offer last month. In term of valuation (PER), although ISAT is trading at premium to TLKM (ISAT is a purer mobile player, should help to explain premium over TLKM), it is still not expensive compared to regional peers. Expectation is also low. And if we are right about the duopoly structure emerging, tariff/ARPU stabilization will translate into much higher profitability for ISAT as the company has high operating leverage.

Key points from the report:
· Upgrade to OPF (from UPF): improving outlook + favorable valuation after 16% share price correction post tender offer last month.
· No change in our earnings forecast.
· Easing competition pressure + end of price war potentially boost ISAT’s earnings and cash flow due to high operating leverage.
· The expected industry consolidation and lack of capex capability by #3 Excelcomindo and some smaller operators mean market will return closer to duopoly structure.
· Debt and capex capability: Net debt to EBITDA still manageable at 1.7x v.s. 3.5x of EXCL. Bond holders have agreed to raise debt covenant from 1.7x debt/equity to 2.5x. Still room for capex.
· Target price raised from Rp4,500 to Rp5,300 implying target valuation of 15x PER 09CL.
· Our 2009CL earnings forecast is based on reasonably conservative assumption with net add expectation of only 6m (half of last year), 11% decline in Arpu, and lower margins.