FOONG Choong Chen

Relase date: November 28, 2018
  • 3Q18 results missed despite EBITDA recovery and lower core net loss qoq.
  • Mobile service revenue growth jumped 12% qoq in 3Q18, surpassing peers.
  • Maintain Add with a 27% lower target price of Rp3,600.

3Q18: EBITDA rebounds qoq; core net loss improves slightly

3Q18 EBITDA recovered 5.2% qoq (-49.2% yoy) on higher revenue, after a sharp fall in 1Q-2Q18. 9M18 EBITDA missed expectations at 63%/58% of our/Bloomberg consensus FY18 forecasts. Core net loss narrowed 5.0% qoq to Rp790bn. 9M18 core net loss of Rp2.1tr was behind our/consensus FY18 forecasts of -Rp1.5tr/-Rp1.0tr. Key variance: lower-than-expected revenue. For FY18, Indosat lowered its EBITDA margin guidance to mid-30% (previous: high-30%), and has indicated FY19F capex could be at Rp10.3tr.

Mobile revenue improves qoq, outperforms peers

After four weak quarters, 3Q18 mobile service revenue jumped 12.1% qoq (-29.4% yoy), outperforming Telkomsel’s +10.6% and XL’s +4.5% qoq. Data revenue resumed growth, up 10.0% qoq (-13.1% yoy), driven by sustained traffic growth (9.2% qoq) and 0.7% qoq (-48.0% yoy) increase in data yields to Rp6.5/Mb. Voice/SMS revenue continued its structural decline, down 3.5%/18.8% qoq (-38.4%/62.6% yoy). Lower upfront discounts and loyalty programme costs on easing competition also helped drive qoq revenue growth.

EBITDA margin eased marginally qoq largely due to one-offs

3Q18 EBITDA margin eased 0.3% pt qoq (-14.6% pts yoy) to 28.8%, mainly from higher general & administrative cost (IFRS 9 implementation led to one-off bad debt charges of Rp120bn, while 2Q18 benefited from a Rp80bn reversal). This was partly offset by lower staff (2Q18 was hit by one-off employee settlement of Rp60bn) and marketing cost.

EBITDA may fall 48% in FY18F before rising in FY19-20F

We cut our FY18F/19F/20F EBITDA by 17%/19%/16% to factor in lower mobile revenue and margin, after a weaker-than-expected 3Q18. We expect FY18F mobile revenue to ease 26.9% due to loss of subs after the prepaid SIM registration and a shift in Indosat’s distribution strategy. As such, we project FY18F EBITDA to fall a steep 47.8%, before rising 18.9%/17.2% in FY19/20F as mobile revenue growth resumes. We forecast FY18/19/20F core net loss of Rp2.55tr/Rp1.95tr/Rp1.36tr.

Maintain Add with a 27% lower target price of Rp3,600

We lower our DCF-based target price toRp3,600 (WACC: 12.3%) after factoring in our earnings cut. Indosat is tradingat an FY19F EV/EBITDA of 4.7x, which is at a 2.3% premium (+0.1 s.d.) over its5-year mean. A key potential re-rating catalyst is the delivery of improved revenue/EBITDAfrom 2H19F onwards. A key risk is worse-than-expected price competition. Wecontinue to prefer XL and Telkom.

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