v Downgrade to Sell — We cut our rating to Sell from Buy with a new target price of Rp4000 based on our DCF model. Our downgraded EPS estimates are 46-54% below consensus on higher depreciation, opex and interest as we think the street is too optimistic on Indosat’s prospects in the absence of active company guidance. Release of a weak 2Q10 numbers may act as a catalyst for de-rating.
v Elevated cash capex will weigh on performance — Management recently guided for cash capex to reach US$1-1.2bn for FY10 as compared to its guided budgeted capex of US$550-700m as previous years’ capex backlog is filled. This will weigh on network, depreciation and financing charges as well as NPV in the absence of material revenue uplift from network expansion due to competition.
v Rising gearing levels — Given the material cash capex requirements, we find the company needing to further tap the debt market contrary to regional trends of deleveraging and capital management for telcos. We see gearing further rising to a
high 1.4x for FY10 from 1.2x in FY09. This high degree of leverage should prevent the company from any meaningful return of capital over the next 3 years.
v No growth, low yield, no recovery yet — Due to increased network and financing costs, we see FY10 profits diving 43% YoY. Room for recovery for FY11 will be limited given continued cost pressures and slowing revenue growth on market saturation and competition. Amongst the Asian telcos we cover, Indosat presents the weakest earnings growth momentum combined with soft yield for FY10-12.
v No sign of a revenue turnaround — Our channel checks yield no material improvement on Indosat to signal a turnaround in revenue/subscriber momentum. Without revenue outperformance, we see limited capacity to lift profit and EBITDA margins. This makes it particularly expensive at 28x FY10-11 PER with a yield of just 2%. With this report, we transfer coverage of Indosat to Arthur Pineda.
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