DBS Indosat: Fully Valued; Rp5,600; TP Rp5,400; ISAT IJ

Issuing USD500m-USD800m to fund capex
According to the media, Indosat (ISAT) plans to issue USD500m-USD800m (Rp4.5tr-Rp7.2tr) in debt papers to finance its capex this year. Part of the proceeds would be used to refinance debt that are due this year, which amounts to Rp4.5tr. We are not surprised at the speculated amount because we expect ISAT to spend USD1.1b (Rp10tr) for capex this year. The company is highly geared at 1.3x net debt to equity, which we forecast to increase to 1.4x this year.

Separately, ISAT announced headline figures for its 1Q10 performance, which indicated marginally weaker net profit vs. preliminary numbers that were issued last month. Basically, its 1Q10 result came in below street consensus by >20%, and we expect the market to downgrade ISAT. Also, we noted that ISAT’s 1Q10 FWA (fixed wireless access) suffered 26% y-o-y crash in ARPU (to Rp19k), in addition to 2% y-o-y decline in subscriber base (to 689k users).
Until a full set of 1Q10 result is available, we are maintaining our FULLY VALUED call on ISAT with a DCF-based price target of Rp5,400. We expect the market to remain bearish on ISAT.

DBS Indosat: Fully Valued; Rp5,500; TP Rp5,400; ISAT IJ

Thin margins, risk of price war
• ISAT will continue to focus on its data division, where there is growth potential
• Raised FY10F-FY11F net profit by 31% and 64%, respectively
• Risk of another price war in the SMS segment, but ISAT is still highly geared
• Raise TP to Rp5, 400 after rolling over valuation window to FY11F, but maintain

FULLY VALUED
Focus on data. ISAT continues to focus on its data division where there is growth potential. It has climbed back from a weak 1H09 when it churned out low ARPU subscribers, and is back on its feet with 4Q09 revenue growing 11% q-o-q and EBITDA margin widening 5ppt. Consequently, we raised FY10F revenue growth to 9% (vs. 5%) and EBITDA margin to 48% (vs. 46%).

But lingering risk of another price war. Although the data strategy has worked for ISAT, we are concerned that it has entered another round of price war in Indonesia , but in the SMS segment (vs. voice previously). Telcos are offering free SMS (e.g. 100 a day) at minimal or negligible costs. Hence, we raised ISAT’s FY10F capex to USD1.1b (vs. USD840m) in anticipation of higher traffic volumes.
High gearing casting a shadow. We also raised our target price to Rp5,400 (12% WACC; 1% terminal growth), but maintain our FULLY VALUED call. ISAT’s FY10F net gearing of 1.3x and 2.7x net debt/EBITDA are high, while its thin 7% net margin makes it vulnerable to margin and revenue swings. Also, it is trading at high 22x FY10F PE and 6x EV/EBITDA multiples.