■ New management driving revenue growth: Indosat lost 3.0 p.p. of cellular revenue market share during ownership and management transition in 1H09. However, new CEO Harry Sasongko has identified the key areas of weakness (marketing, core network constraints) and has begun to address them. Indosat grew cellular revenue by 12.2% QoQ in 4Q09 and we expect 13.8% YoY cellular revenue growth in FY10 – faster than market.
■ Profitability to rise on high operational gearing: The new management team is also actively crunching operating costs and capex (Indosat’s chronic problem area). We forecast consolidated YoY EBITDA growth of 16.7% in FY10, together with a 44.0% decline in consolidated capex to Rp6.5 tn.
■ We expect cash flow to break even during FY10: Rising EBITDA should facilitate Indosat’s first ever positive cellular operating free cash flow (OPFCF) result in FY10, positive consolidated OPFCF and positive consolidated free cash flow to equity. We note that a similar turnaround was experienced by the number three player Excelcom during FY09, and Excelcom shares rerated sharply as a result.
■ Cash flow valuation attractive: We have revised up our FY10 cellular revenue and EBITDA forecasts by 1.9% and 1.5%, respectively, and revised down our FY10 cellular capex forecasts by 7.6%. As a result, our DCF-based target price has been revised up by 11.8% from Rp6,350 to Rp7,100. While the FY10 P/E ratio looks high, we expect earnings to grow at 30.2% compound into FY11 and FY12, and for Indosat to deliver an 10.1% free cash flow yield in FY11. We maintain our OUTPERFORM rating.
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