DBS Indosat: Hold; Rp4,550; TP Rp5,500; ISAT IJ

2Q10 below market expectations

Indosat's 1H10 result highlight was released yesterday. 2Q10 EBITDA of Rp2.4tr (up 6.8% qoq) was inline with our expectations but below market expectations. Net profit of only Rp9bn (down 96.7% qoq) was much below our and market expectations. While the company did not indicate the reason for lower profit, we believe that higher depreciation and forex losses could be the key reasons.

EBITDA margins improved to 48.9% in 2Q10 from 47% in 1Q10, due to cost cutting efforts. Operationally the company added only 0.1m cellular subscribers, disappointing but mostly expected after over 6m additions in 1Q10. Full results would be released on 24th August followed by conference call.

DBS Indosat: Hold; Rp4,950; TP Rp5,500; ISAT IJ

Bond buyback
ISAT confirmed to buyback bonds with maturity in 2010 and 2012 amounting to US$ 344m in this coming July 31, 2010 after majority of bondholders stated their commitment to sell their bonds. The decision is made after ISAT successfully sold its guaranteed senior notes with proceed of US$ 650m, which will be allocated to refinance those matured bonds. ISAT shifted its focus from heavy capex allocation in the last three years to loan restructuring and refinancing. Big capex spending has squeezed the
profitability in the midst of stiff competition among telecom operators.

We maintain Hold for Indosat as we think the company may not be ready yet to monetize its subscriber base and needs better execution on the ground.