DBS ISAT Lower margin, double capex

• Weak performance to continue into 1H10F. Cut FY09F-FY11F EBITDA margin 2ppt-3ppt
• Doubled our FY09F capex, with budget raised 133% to USD1.4b
• Slashed FY09F-FY11F core earnings by 29%-62%, and price target cut to Rp4k. Downgrade to FULLY VALUED

Weak till 1H10F.
ISAT’s change from volume- to valuefocused marketing would take time to bear fruit as
consumers would need time to adjust and appreciate ISAT’s better network quality since they are charged a higher tariff. Meanwhile EBITDA margin has taken a step
downward because of higher sites rental and higher electricity (increased by up to 50%) costs. Leases for sites, which usually have 5- to 10-year terms, are
gradually up for renewal. We trim EBITDA margins by 2ppt-3ppt for FY09F-FY11F to below 47% (FY08: 50%; 3Q09: 45%).

Surprising jump in FY09F capex budget to USD1.4b vs. earlier plan of only USD600m (2Q09 results briefing). Together with the lower EBITDA margin and higher financing cost for much larger capex, we slashed FY09FFY11F core net profits by 29%-62% (cut by 2%-42% for net profits inclusive of FX and lumpy items).

Downgrade to FULLY VALUED.
Core net profits are expected to fall in FY09F-FY11F resulting from higher depreciation charges and higher interest expenses (following a jump in capex). ISAT’s 6.3x FY10F EV/EBITDA and 28.7x FY10F PE is rich, for a company that has no growth and high debt level. ISAT’s net gearing is projected to jump to 1.4x in FY10F from 1.1.x in FY09F, on the back of aggressive capex (78% of FY09F revenues and 42% FY10F).