Citigroup Indosat; 3Q09 Results - Benefits From Strategy Shift Still Missing

3Q09 Results – Benefits From Strategy Shift Still Missing

 Hold/Medium Risk maintained — We believe markets looking beyond 2009 into 2010 earnings recovery are supporting the stock. However, weak 3Q09 results (net recurring profit of Rp102bn, -59%QoQ, -83%YoY) and the conf. call gave little comfort that ISAT’s strategy “volume” to “value” shift is paying off. Management does not plan to revisit strategy soon, indicating “long-term” nature of the strategy. Telkom stays our preferred pick in Indonesian telcos.

 Revenue recovery muted — Mobile rev. grew 6% QoQ, but stripping out interconnect rev. (+70%QoQ), mobile rev. fell 2.7% QoQ. Subscriber clean-up efforts have ended, though, with only 157K net reduction, and mgt pointing to growing subs base in 4Q09. MoUs have picked up in 3Q09 to 122 mins but RPMs edged lower again, a surprise given operators’ talk of price stability. We await TSEL’s/XL’s results next week to draw (revisit?) industry trends.

 Weak EBITDA margins — Of note in 3Q09 results was an unexpectedly large fall in EBITDA margins (-376bpsQoQ/-294bpsYoY) to a record low of 44.9% (Vs. Citi FY09 at 48%). Unfortunately, the declines appear structural rather than one-off. Management blames this on higher BTS site rental, utilities and seasonally higher marketing exp. No guidance forthcoming on expected margins ahead but mgt points to efforts to extract structural cost savings.

 No 2010 guidance given yet — To be unveiled sometime in November, we think. We were surprised to learn, though, that mgt expects FY09 cash capex at US$1.4bn (c.US$900m in 9M09), well ahead of US$600m guidance (which refers only to new commitments) which we and consensus assume.