Indonesia Company Update

10 February 2021 Communications | Telecommunications

Indosat (ISAT IJ) Buy (Maintained)

Tower Sale? Largest Operator Post Merger; BUY Target Price (Return): IDR7,000 (+21%) Price: IDR5,800 Market Cap: USD2,252m Avg Daily Turnover (IDR/USD) 92,120m/6.55m

• Maintain BUY and TP of IDR7,000, 21% upside. We note that Indosat still Analysts owns 5,000 towers post its 3,100 tower divestment in 2019, of which c.4,000 towers remain marketable and are ready to be sold in the near term. Based Michael Setjoadi on recent transactions, the company should receive up to c.IDR8trn +6221 5093 9844 proceeds from the tower sale. and CK Hutchison are continuing [email protected] merger talks that will likely be concluded by April, with a possible equity injection from the latter to the merged entity. Marco Antonius • About 4,000 out of 5,000 towers up for sale. Despite having to own/lease +6221 5093 9849 more towers than XL Axiata (EXCL IJ, BUY, TP: IDR3,850), ISAT has a lot [email protected]

of catching up to do in terms of improving network speed and capacity, all of which requires capex. For its 3-year capex for 2019-2022, management Share Performance (%) targets to reach nearly IDR10trn pa, hence the need to sell towers to YTD 1m 3m 6m 12m deleverage. Assuming IDR7trn tower sales proceed, 21F net gearing Absolute 14.9 (1.7) 177.5 142.7 156.6 should improve to 1.2x (from 2.3x) and NPAT to IDR5.4trn from IDR -159bn Relative 11.2 (0.8) 164.0 122.5 152.4 (-15% lower financing cost). Assuming the same colocation ratio of 1.9x is used as its previous sale of 3,100 towers in 2019 and at the market rate of 52-wk Price low/high (IDR) 1,200 – 6,375 IDR1-1.1bn/tenant, ISAT should receive close to IDR2bn/tower or up to IDR8trn in proceeds. There should also be a 10-year leaseback period at Indosat (ISAT IJ) Price Close Relative to Composite Index (RHS) IDR10m/tower – this is regarded as the benchmark based on the recent 6,680 318 terms of the Telkom (TLKM IJ, BUY, TP: IDR4,000) and EXCL transaction. 5,680 276

4,680 235 • Merger to conclude by April? So far Ooredoo and Hutchison are still in the midst of a discussion on the best possible terms, in addition to 3,680 193

respectively doing due diligence. Assuming there is a 100% spectrum 2,680 151 retention by the Government – which we believe is likely to happen – ISAT- 1,680 110 PT Hutchison 3 Indonesia (H3I) will have the largest spectrum in the

industry, at 145MHz, vs at 135MHz. ISAT is currently trading at 680 68

Jul-20 Jul-20

Apr-20 Apr-20 Oct-20 Oct-20

Jun-20 Jun-20 Jan-21 Jan-21

Feb-20 Feb-20 Mar-20

Nov-20 Nov-20 Dec-20 Dec-20

Aug-20 Sep-20

3x 2021F EV/EBITDA, with its 9M20 sales/EBITDA of IDR20.6trn/8.5trn, vs Aug-20 May-20 May-20 H3I of IDR7.3trn/1.7trn (1H20). With the current multiple, we assume ISAT Source: Bloomberg would be valued at roughly double H3I, which would be reflected in the percentage of ownership in the merged entity. If H3I were to maintain its ownership at a similar level to Ooredoo, it will have to inject IDR15-16trn. Meanwhile, the Government’s and H3I shareholder Garibaldi "Boy" Thohir’s stakes will most likely to be diluted. • Merger is negative for tower sector, but supported by a possible acquisition. Possible tower lease renegotiation to new sites should be inevitable for tower companies, especially Sarana Menara Nusantara (TOWR IJ, NR), which has the largest contract with ISAT and H3I. We estimate c.40% of TOWR’s revenue is contributed from H3I and ISAT, with a significant portion overlapping. Learning from past experience, ISAT-H3I (post-merger) will ask for a relocation of new sites in areas where there is an overlap. TOWR is still trading at 11-12x EV/EBITDA, 22-50% discount to local/regional peers, and may lead to a possible rerating as foreigners are allowed to invest directly in the telecommunications sector.

Forecasts and Valuation Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Total turnover (IDRb) 23,140 26,118 28,652 33,149 36,243 Recurring net profit (IDRb) (2,705) (2,169) (1,053) (159) 499 Recurring net profit growth (%) (353.5) (19.8) (51.4) (84.9) - Recurring P/E (x) na na na na 63.18 P/B (x) 3.0 2.6 2.5 2.5 2.4 P/CF (x) 4.43 2.89 2.75 2.76 2.99 Dividend Yield (%) 1.3 na na na na EV/EBITDA (x) 7.86 4.92 3.78 2.97 2.47 Return on average equity (%) (19.8) 13.0 4.8 (1.2) 3.9 InterestNet debt cover to equity (x) (%) 168.0 (0.82) 128.3 0.10 103.6 0.42 0.91 84.3 1.24 58.3

Source: Company data, RHB

See important disclosures at the end of this report 1

Indosat Indonesia Company Update

10 February 2021 Communications | Telecommunications

Financial Exhibits

Asia Financial summary (IDR) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Indonesia Recurring EPS (497.85) (399.12) (193.86) (29.21) 91.80 Communications DPS 73.00 - - - - Indosat BVPS 1,948.32 2,251.37 2,361.27 2,332.06 2,423.87 ISAT IJ Return on average equity (%) (19.8) 13.0 4.8 (1.2) 3.9 Buy Valuation metrics Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Valuation basis Recurring P/E (x) na na na na 63.18 Our 12 month TP of IDR7,000 is based on 10-year DCF P/B (x) 3.0 2.6 2.5 2.5 2.4 valuation, with a WACC assumption of 9.7% and FCF Yield (%) (4.5) 13.3 6.8 5.6 7.6 terminal growth of 1% Dividend Yield (%) 1.3 - - - -

EV/EBITDA (x) 7.86 4.92 3.78 2.97 2.47 Key drivers EV/EBIT (x) na 169.48 45.42 18.51 11.47 i. Strong data growth momentum; ii. Fast network deployment; iii. Divestment of tower ownership. Income statement (IDRb) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Total turnover 23,140 26,118 28,652 33,149 36,243 Key risks Gross profit 16,164 19,049 21,218 24,549 26,840 i. Price wars; EBITDA 6,500 9,856 12,101 14,472 15,964 ii. Unfavourable regulations; Depreciation and amortisation (8,249) (9,570) (11,093) (12,152) (12,521) iii. Slow network deployment and expansion; Operating profit (1,749) 286 1,008 2,320 3,443 iv. Stretched balance sheet. Net interest (2,089) (2,679) (2,280) (2,449) (2,696) Company Profile Pre-tax profit (2,664) 1,587 844 (130) 747 Taxation 578 (43) (186) 32 (187) Indosat provides telecommunication services. ISAT offers data communication, broadband, messaging, Reported net profit (2,404) 1,483 597 (159) 499 voice calling, roaming, and networking services Recurring net profit (2,705) (2,169) (1,053) (159) 499

Cash flow (IDRb) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F

Change in w orking capital 4,719 26 3,793 1,806 (414)

Cash flow from operations 7,119 10,907 11,472 11,438 10,537 Capex (8,534) (6,714) (9,315) (9,686) (8,143) Cash flow from investing activities (9,078) (9,122) (12,289) (13,729) (12,282) Cash flow from financing activities 1,330 3,051 (1,459) 1,668 2,847 Cash at beginning of period 1,675 1,045 5,881 3,605 2,982

Net change in cash (630) 4,836 (2,276) (623) 1,102 Ending balance cash 1,045 5,881 3,605 2,982 4,084

Balance sheet (IDRb) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Total cash and equivalents 1,045 5,881 3,605 2,982 4,084 Tangible fixed assets 36,899 42,753 44,926 47,998 49,555 Total investments 1,794 1,568 1,720 1,990 2,176 Total assets 53,140 62,813 63,601 68,491 72,240 Short-term debt 6,355 7,529 3,245 3,249 3,300 Total long-term debt 15,075 15,932 15,281 11,887 9,550 Total liabilities 41,003 49,106 49,201 54,080 57,214 Total equity 12,136 13,707 14,400 14,411 15,026 Total liabilities & equity 53,140 62,813 63,601 68,491 72,240

Key metrics Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Revenue grow th (%) (22.7) 12.9 9.7 15.7 9.3 Recurrent EPS grow th (%) (353.5) (19.8) (51.4) (84.9) 0.0 Gross margin (%) 69.9 72.9 74.1 74.1 74.1 Operating EBITDA margin (%) 28.1 37.7 42.2 43.7 44.0 Net profit margin (%) (10.4) 5.7 2.1 (0.5) 1.4 Dividend payout ratio (%) (16.5) 0.0 0.0 0.0 0.0 Capex/sales (%) 36.9 25.7 32.5 29.2 22.5 Interest cover (x) (0.82) 0.10 0.42 0.91 1.24

Source: Company data, RHB

See important disclosures at the end of this report 2

Indosat Indonesia Company Update

10 February 2021 Communications | Telecommunications

Figure 1: Telco operators’ spectrum

Source: Company data, RHB

Figure 2: H3I’s key metrics Figure 3: ISAT’s key metrics Hutch 3 Indonesia ISAT HKDm 2017 2018 2019 6M20 IDRbn 2,017 2018 2019 6M20 9M20 Revenue 7,049 7,314 7,804 3,952 Revenue 29,926 23,140 26,118 13,452 20,592 EBITDA 1,185 1,636 2,581 899 EBITDA 12,763 6,500 9,856 5,430 8,466 EBITDA Margin 17% 22% 33% 23% EBITDA Margin 43% 28% 38% 40% 41% EBIT 873 1,067 1,800 430 EBIT 3,910 (1,749) 286 469 1,061 EBIT Margin 12% 15% 23% 11% EBIT Margin 13% -8% 1% 3% 5%

Subscribers (m) 75 49.8 45.5 48.8 Subscribers (m) 110 58.0 59.3 57.2 60 BTS 24,170 28,000 4G BTS 7,179 17,050 48,048 52,776 59,969

Source: Company data, RHB Source: Company data, RHB

Recommendation Chart

Date Recommendation Target Price Price Price Close 2021-01-08 Buy 7,000 5,900 8,760 Recommendations & Target Price 2019-08-07 Buy 4,000 3,360

7,760 na

2,800 2,800 4,000 7,000 6,600 6,600 2019-03-27 Neutral 2,800 2,590 6,760 2017-08-09 Neutral 6,600 6,650 5,760 Source: RHB, Bloomberg 4,760 3,760 2,760 1,760 760 Buy Neutral Sell Trading Buy Take Profit Not Rated Feb-16 May-17 Aug-18 Nov-19

Source: RHB, Bloomberg

See important disclosures at the end of this report 3

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