DBS Indosat: QoQ improvement masked by derivative losses (Hold; Rp4,650; TP Rp5,500; ISAT IJ)

At a Glance
· 2Q10 EBITDA was in line, while net profit was below expectations due to derivative losses
· Cellular business is improving, but non-cellular business needs more attention
· No change to our below-consensus forecasts; Indosat is the cheapest Indonesian telco with negatives priced in

Comment on Result
2Q10 EBITDA of Rp2.4tn (+6.8% q-o-q) was within our expectation but slightly below the market’s Rp2.5tn estimate. On a positive note, EBITDA margin improved to 48.9% in 2Q10 from 47% in 1Q10 as the company cut personnel and G&A expenses.

Net profit of Rp9tn (down 96.7% q-o-q) was far below our and market expectations due to (i) Rp165bn marked-to-market related losses on derivatives versus only Rp98bn loss in 1Q10, and (ii) significantly lower Rp10bn forex gain compared to Rp359bn in 1Q10. For operating metrics, the company added only 0.1m cellular subscribers, but this was expected after is added over 6m in 1Q10.

Recommendation
Cellular business improving, but non-cellular needs more attention. Cellular revenue improved 7.7% q-o-q, reflecting Indosat’s success in growing its cellular business. Meanwhile, non-cellular business (19% of total business) fell 9% q-o-q; management needs to manage its non-cellular business better.

Indosat is cheapest telco with negatives priced in. Trading at 5x FY10F EV/EBITDA, Indosat is the cheapest telco in Indonesia . We are retaining our FY10F earnings because it is already 8-10% below consensus estimates. We do not see a big catalyst emerging in next 2-3 months, but we are pinning our hopes on new chief commercial officer, Mr. Laszlo Barta, to launch more effective plans.