Indosat; Margin guidance slightly disappointing; Buy; Rp5,350; TP Rp6,200 prev Rp6,800; ISAT IJ - DBS Vickers

Margin guidance slightly disappointing
• Normalized EBITDA in line with our expectations.
• We lower FY11F EBITDA by 4% after reducing margins to 48% (prev 49%).
• Potential sale of towers should be the key catalyst. Maintain BUY with TP lowered to Rp 6200.

Normalized EBITDA was in line with our expectations. 1Q10 reported EBITDA of Rp2224bn (flat y-o-y) was 5-6% lower than our expectations. However, normalized EBITDA was up 5% excluding voluntary separation scheme (VSS) cost. Normalized EBITDA margins stood at 48% versus 47% in 1Q10 due to lower marketing and commission costs as a result of distribution channel restructuring, in our view.

FY11F EBITDA margin guidance slightly disappointing. Management issued guidance for FY11F consolidated, cellular and non-cellular revenue growth of 7%-11%, 8%-12% and 3%-6% respectively. Guidance was also issued for EBITDA margin of 46%-48% and capex of IDR 5.8tn-6.8tn. We project group revenue to grow by 8% in FY11F driven by cellular revenue growth of 9% (slightly higher than industry estimate of 8%) and non-cellular growth of 3%. We project 48% EBITDA margins due to adverse impact from (i) new 2G-spectrum fee regime, diluting margins by c.50 bps (ii) 1Q11 launch of voluntary separation scheme (VSS) diluting FY11F margins by 100-150 bps.

FY11F EV/EBITDA is at a 20% discount to XL. Potential sale of towers would be a catalyst for Indosat. We estimate that if Indosat sells its entire tower portfolio, its share price could benefit by 25-30%. However, Indosat may not sell its entire portfolio. Maintain BUY with revised DCF-based (WACC 12%, terminal growth 3%) TP of 6200.