Danareksa Equity Snapshot – ISAT, 28 November 2018
Niko Margaronis |
The main takeaway from our conference call with ISAT is that Ex-Java areas are seen as a land of opportunity for contender telcos given the investment appetite in other islands. Our view is that the incumbent’s presence has paved the way for data services which should allow contenders to enter more quickly and ride on that footprint.
Ex-Java is a land of opportunity. ISAT’s CEO provided reassurances that ex-Java expansion is on track through strengthening of the company’s presence in South Kalimantan and South Sulawesi which showed 26% and 14% growth respectively after being launched in September. The company had already established a presence in Lampung in earlier quarters. ISAT targets 80% 4G population coverage by end-18 (56% in June, 71% currently), while ex-Java 4G coverage is targeted at 60% (vs. 27% at the beginning of 2018) by expanding further into adjacent areas of those ex-Java cities. Additionally, user download speed has improved by 50%yoy. The management says the growth is continuing in 4Q18, relying on ex-Java coverage expansion.
Positive pricing sentiment maintained. The management sees that data prices have increased overall in the industry including theirs, referencing the growth in its 3Q18 ARPU to Rp21.6k (+35.8%qoq, +5.1%yoy). We think ISAT’s rhetoric has been consistent so far in terms of pricing improvements post sim-reregistration, while we also notice that data yields in 3Q have stabilized.
US$2 bn of capex planned. The company is still devising its financing plan for its US$2 bn capex (~Rp29 tn) for the 2019-21 period while its internal budget sets the FY19 target at Rp10.3 tn. The company has net debt / EBITDA of 2.5x in 3Q18 and its key debt covenant is 4x. The company indicated that the ratio will remain elevated as more financing for capex will only partly be compensated from EBITDA growth.
Management guidance explained. The management has changed the FY18 EBITDA margin guidance to the mid-30s from the high-30s given the challenging 1H18. Part of its digital transformation will be to attain more efficiencies in OPEX and CAPEX. Capex guidance is maintained at Rp8 tn, having spent about Rp4.86 tn in 9M18, while the personnel costs came down in 3Q18 due to fewer employees, while G&A expenses increased due to one-off bad debt provisions. ISAT has provided guidance for FY18 revenues to grow below the industry level. The drivers going forward will be a combination of an increasing subscriber base by improving: a) its overall customer experience and b) network coverage and better rationalization of data prices.
BUY maintained. The above reaffirms our view of a turnaround in the company’s fortunes, following an improvement in the 3Q revenues. We await: a) updates on the company’s funding (tower disposals may be on the cards) and b) how KPIs will develop given 3Q 4G BTS additions of 1,570 vs. EXCL’s 3,160. BUY maintained with a TP of Rp3,100, with limited downside risk.