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Senin, 30 Mei 2011

Indosat, Stuck in the middle, initiate with U-PF - Tp4,900 - CLSA

Indosat has always been priced as a growth and pure wireless play (especially comparing to Telkom) but the problem is there just isnt much growth here. 2012 revenue is forecasted just to be 10% more than 2008 and more importantly, net profit is 10% less in the same periods. Despite gearing of over 1x, ROE has been dismal at only 6% (profit margins only at 5% compare to 16% for Telkom). There is just no growth and hardly generating any yield. Stuck in the middle between Telkom where they have a much more mature network and EXCL which has been a price leader with its supremely better operating efficiency. Only possible catalyst for ISAT is if they decide to spin off their tower biz (2nd biggest in Indo).

ISAT is stuck operating in a telecoms market with very poor dynamics – hypercompetitive (2nd lowest tariff market in Asia after India) and maturing rapidly (+70% mobile penetration).
This is reflected in the financials – current revenue growth of +3% is below half that of Indonesian inflation (+7%) a very worrying trend.
Recent results have been weak and in 17 of the past 21 quarters costs grew faster than revenues. We expect this to continue given limited levers to take cost-out from the business given a high percentage of fixed costs.
We are 10% below consensus but note consensus has not been a good guide - revising downwards FY11/FY12 estimates by a massive 60% and 50% respectively over past 3-4 years.
This stock is not cheap trading on 25x FY11CL PE versus its Indonesian and regional telecom peers. There is no dividend story here as surplus FCF will need to be used to reduce debt levels (current gearing 120%)

On the question why ROE so low…see the DuPont analysis below. While ISAT has higher financial leverage then TLKM obviously its profit margins are half that of TLKM and also has lower asset use efficiency

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