[Indonesia] Telecommunication Indosat Buy (ISAT IJ) (Maintain) 3Q20 review: Strong top-line growth, yet net loss TP: IDR3,050 recorded in 3Q20 Upside: 51.7% Mirae Asset Sekuritas Indonesia Lee Young Jun [email protected] Turn to net loss in 3Q20 High finance cost dragging down earnings improvement In 3Q20, Indosat (ISAT) booked a net loss of IDR116.4bn (vs. net profit of IDR47.3bn in 3Q19). While revenue increased by 8.8% YoY, EBIT and EBITDA grew by 39.0% YoY and 8.2% YoY, respectively. ISAT booked meaningful positive EBIT for two consecutive months, but bottom line turned negative as top line was not enough to cover finance cost. We think ISAT needs one to two fiscal years to sustainably exceed the breakeven point. Thus, we expect negative earnings to continue in 4Q20 and 2021. Of a note, cumulative 9M20 net loss came in at IDR457.5bn, achieving 34% and 48% of our and the consensus’ full-year estimate each. Data traffic as the key driver of 3Q20 operational highlights revenue growth ISAT booked strong revenue growth (8.8% YoY, 3.1% QoQ) in 3Q20 on the back of growing subscriber base and data traffic. ISAT added 3.2mn subscribers, bringing total subscribers to 60.4mn. Data traffic growth remained solid at 4.8% QoQ (1.6mn TB in 3Q20). However, quarterly ARPU decreased from IDR33.2k in 2Q20 to IDR32.3k in 3Q20, which we attribute to low cost-effective packages amid COVID-19. In 3Q20, ISAT’s total number of BTS decreased once again to 117k. This was largely driven by 2/3G (-15k QoQ), while ISAT added 7k 4G BTS to support 4G services. As 4G data traffic accounted for 92% of total traffic, we think investment in 4G will continue going forward. This is also a good indication for ARPU improvement as ARPU generated from 4G subscribers is normaly 20% higher. In 3Q20, ISAT spent CAPEX of IDR2.7tr, bringing the cumulative figure to IDR5.9tr. By looking at the quarterly spending ability, we think CAPEX of IDR8.8tr in 2020 is reasonable. ISAT allocated c.85.5% of the capex for cellular to support data services demand. Despite net loss achieving 34% of our forecast, we maintain our net loss forecast of IDR1.3tr as we think top-line growth in 4Q20 will be slower than 3Q20, which could enlarge net loss. Big upside potential Maintain TP at 3,050; Buy call All in all, we reiterate our Buy recommendation on ISAT with a target price of IDR3,050, which was derived using a DCF valuation. Our target price implies a FY20F EV/EBITDA of 5.0x, based on our estimates. Key data (D-1yr=100) JCI ISAT Share Price (11/3/20, IDR) 2,010 Market Cap (IDRbn) 10,922.2 120 110 Consensus NP (21F, IDRbn) -745.8 Shares Outstanding (mn) 5,433.9 100 90 NP Mirae Asset vs. consensus (21F, %) N/A Free Float (%) 20.7 80 EPS Growth (21F, %) -6.3 Beta (Adjusted, 24M) 1.4 70 60 P/E (21F, x) NM 52-Week Low (IDR) 1,190 50 40 Industry P/E (21F, x) 14.2 52-Week High (IDR) 3,550 30 11/19 1/20 3/20 5/20 7/20 9/20 11/20 Benchmark P/E (21F, x) 13.6 Share performance Earnings and valuation metrics (%) 1M 6M 12M FY (Dec.) 12/16 12/17 12/18 12/19 12/20F 12/21F Absolute 0.5 -6.5 -37.2 Revenue (IDRbn) 29,185 29,926 23,140 26,118 26,845 29,401 Relative -3.3 -17.0 -19.6 EBITDA (IDRbn) 12,864 12,763 6,500 9,856 10,351 11,728 Net Profit/(loss) (IDRbn) 1,105 1,136 -2,404 1,569 -1,333 -1,249 EPS (IDR) 203 209 -442 289 -245 -230 BPS (IDR) 2,609 2,727 2,233 2,523 2,265 2,037 P/E (x) 11.5 11.2 NM 8.1 NM NM P/B (x) 0.9 0.9 1.0 0.9 1.0 1.1 EV/EBITDA (x) 3.0 3.0 5.9 3.9 3.7 3.3 ROE (%) 8.6 8.3 -19.1 13.1 -11.1 -11.7 ROA (%) 2.1 2.2 -4.6 2.7 -2.2 -2.1 Source: Company data, Mirae Asset Sekuritas Indonesia Research estimates Analysts who prepared this report are registered as research analysts in Indonesia but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. November 4, 2020 Indosat Figure 1. Average Revenue Per User (ARPU) Figure 2. Number of subscribers and smartphone penetration (IDR000) (ISubscriber mn) Subscribers (L) Smartphone penetration (R) (%) 35 120 85 30 80 100 75 25 80 70 20 65 60 15 60 40 55 10 50 5 20 45 0 0 40 3Q15 3Q16 3Q17 3Q18 3Q19 3Q20 3Q15 3Q16 3Q17 3Q18 3Q19 3Q20 Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Company data, Mirae Asset Sekuritas Indonesia Research Figure 3. Data usage Figure 4. Capital expenditure (CAPEX) (TB) (IDRbn) 1,400,000 5,000 1,200,000 4,500 4,000 1,000,000 3,500 800,000 3,000 2,500 600,000 2,000 400,000 1,500 1,000 200,000 500 0 0 3Q15 3Q16 3Q17 3Q18 3Q19 3Q20 3Q17 3Q18 3Q19 3Q20 Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Company data, Mirae Asset Sekuritas Indonesia Research Figure 5. Quarterly earnings Figure 6. EV/EBITDA (IDRbn) (x) 2,000 6.0 1,500 5.5 +2 ST.DEV 1,000 5.0 +1 ST.DEV 500 4.5 0 4.0 Mean -500 3.5 -1 ST.DEV -1,000 3.0 -2 ST.DEV -1,500 2.5 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 11/15 5/16 11/16 5/17 11/17 5/18 11/18 5/19 11/19 5/20 Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research Mirae Asset Sekuritas Indonesia Research 2 November 4, 2020 Indosat Table 1. 3Q20 earnings review (IDRbn, %) 3Q19 4Q19 1Q20 2Q20 3Q20 YoY QoQ Revenue 6,561.5 7,264.5 6,523.1 6,928.6 7,140.3 8.8 3.1 Gross profit 3,488.1 3,848.8 3,656.6 4,030.6 3,944.0 13.1 -2.2 SG&A 683.4 1,230.3 1,276.6 980.6 908.0 32.9 -7.4 Depreciation 2,378.4 2,480.7 2,467.6 2,493.8 2,443.5 2.7 -2.0 EBIT 426.2 137.8 -87.6 556.2 592.5 39.0 6.5 EBITDA 2,804.7 2,618.5 2,380.0 3,050.0 3,035.9 8.2 -0.5 Net finance cost 670.4 734.2 652.7 664.7 792.2 18.2 19.2 Others 300.7 36.6 230.7 356.8 59.0 -80.4 -83.5 Pretax profit/(loss) 56.6 2,008.4 -509.5 248.4 -140.7 -348.8 -156.6 Net profit/(loss) 47.3 1,853.6 -605.6 264.5 -116.4 -346.1 -144.0 Source: Company data, Mirae Asset Sekuritas Indonesia Research Table 2. Mirae’s and consensus’ estimates (IDRbn, %) 9M20 (a) Mirae Asset 2020F (b) Consensus 2020F (c) (a)/(b) (a)/(c) Revenue 20,592.0 26,844.9 27,849.0 76.7 73.9 EIBTDA 8,466.0 10,351.1 11,013.0 81.8 76.9 Net profit/(loss) -457.5 -1,332.7 -951.7 34.3 48.1 Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research Mirae Asset Sekuritas Indonesia Research 3 November 4, 2020 Indosat Indosat (ISAT IJ) Income statement (summarized) Balance sheet (summarized) (IDRbn) 12/18 12/19 12/20F 12/21F (IDRbn) 12/18 12/19 12/20F 12/21F Revenue 23,140 26,118 26,845 29,401 Current Assets Gross profit 11,096 13,775 14,255 15,805 Cash and Cash Equivalents 1,045 5,881 643 652 SG&A expenses 4,596 3,919 3,904 4,076 AR & Other Receivables 3,059 3,054 3,121 2,701 Depreciation & Amortization 8,249 9,570 10,052 11,009 Inventories 48 29 38 41 EBIT -1,749 286 299 719 Other Current Assets 3,755 3,480 3,627 3,884 EBITDA 6,500 9,856 10,351 11,728 Non-current Assets Net Interest Income (Exp.) -2,089 -2,679 -3,403 -3,543 Investment in Associates 1,794 1,622 2,013 2,436 Forex Gain (Loss) -150 75 39 19 PPE 36,899 42,753 42,447 41,574 Others 1,324 1,337 1,214 1,070 Intangible/Other Assets 6,539 5,993 7,489 8,860 Net Gain from Inv in Associates - - - - Total Assets 53,140 62,813 59,376 60,148 Pretax Profit/(loss) -2,664 1,587 -1,851 -1,734 Current Liabilities Income Tax 578 43 370 347 AP & Other Payables 7,592 6,341 3,408 3,399 Minority Interests 319 61 -148 -139 Short-term Financial Liabilities 9,068 10,735 13,176 13,579 Net Profit/(loss) -2,404 1,569 -1,333 -1,249 Other Current Liabilities 4,380 5,054 2,769 3,160 Non-current Liabilities Growth (%) Long-term Financial Liabilities 17,886 22,580 26,724 28,409 Gross Margin (%) 48.0 52.7 53.1 53.8 Other Non-current Liabilities 2,077 4,397 1,503 1,518 EBIT Margin -7.6 1.1 1.1 2.4 Total Liabilities 41,003 49,106 47,581 50,064 EBITDA Margin (%) 28.1 37.7 38.6 39.9 Capital Stock 543 543 543 543 Net Margin (%) -10.4 6.0 -5.0 -4.2 Additional Paid in Capital 1,547 1,547 1,547 1,547 Retained Earnings 8,497 10,144 8,733 7,485 Non-controlling Interests 962 984 994 1,004 Stockholders' Equity 12,136 13,707 12,307 11,068 Cash Flow Statement (Summarized) Key Performance Indicators 12/18 12/19 12/20F 12/21F (%) 12/18 12/19 12/20F 12/21F CFO 4,162 10,589 2,817 9,878 P/E (x) NM 7.0 NM NM Net Profit -2,404 1,569 -1,333 -1,249 P/B (x) 0.9 0.8 0.9 1.0 Depreciation 8,249 9,570 10,052 11,009 EV/EBITDA (x) 5.9 3.9 3.7 3.3 Change in Working Cap 4,451 368 -5,754 256 EPS (IDR) -442.4 288.7 -245.2 -229.8 Others -6,453 -979 0 0 BPS (IDR) 2,233.4 2,522.5 2,264.8 2,036.8 CFI -5,452 -8,883 -10,745 -11,497 DPS (IDR) 73.0 0.0 0.0 0.0 Capex -9,289 -10,146 -8,859 -9,702 Payout Ratio (%) -16.5 0.0 0.0 0.0 Others 3,837 1,263 -1,886 -1,795 Dividend Yield (%) 3.6 0.0 0.0 0.0 CFF 660 3,131 2,690 1,629 Revenue Growth (%) -22.7 12.9 2.8 9.5 Chg in Financial Liabilities 1,650 8,033 4,007 2,387 EBIT Growth (%) -144.7 -116.4 4.6 140.3 Chg in Equity 408 -76 10 10 EBITDA Growth (%) -49.1 51.6 5.0 13.3 Dividends Paid -397 0 0 0 EPS Growth (%) -311.6 -165.3 -184.9 -6.3 Others -1,001 -4,826 -1,327 -768 AR Turnover (x) 6.5 8.5 8.7 10.1 Increase (Decrease) in Cash -630 4,836 -5,238 9 Inventory Turnover (x) 341.0 675.8 799.3 748.5 Beginning Balance 1,675 1,045 5,881 643 AP Turnover (x) 3.6 3.7 5.5 8.6 Ending Balance 1,045 5,881 643 652 ROA (%) -4.6 2.7 -2.2 -2.1 ROE (%) -19.1 13.1 -11.1 -11.7 Current Ratio (x) 0.4 0.6 0.4 0.4 Net Debt to Equity Ratio (x) 2.0 1.8 2.9 3.5 Interest Coverage Ratio (x) 3.1 3.7 3.0 3.3 Source: Company data, Mirae Asset Sekuritas Indonesia Research estimates Mirae Asset Sekuritas Indonesia Research 4 November 4, 2020 Indosat Appendix 1 Important Disclosures & Disclaimers