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ISAT - 4Q19 Update

TOP LINE GROWTH POTENTIAL

In 4Q19, ISAT recorded revenues of Rp7.3T, representing 98% of our 2019F estimate, and growing by +14% (Y/Y) and +10.7% (Q/Q) from Rp6.4T and Rp6.6T in 4Q18 and 3Q19, respectively. 4Q19 EBITDA stood at Rp2.7T, representing 92% of our FY19 estimate, and down by -6.6% (Q/Q) as a result of one-off personnel cost in 3Q19, which inflated 3Q19 EBITDA margin to 42.7%. Bottom line, ISAT’s net profit was recorded at Rp1.85T.

 

Widening network coverage, yet beware of tightening competition

We notice that in 2019 there is a significant increase in ISAT’s data traffic by almost +72% (Y/Y), underpinned by significant 4G BTS addition to 48 thousand from 17 thousand in 4Q18, in line with the Company’s aim to close network gap. However, ISAT stopped selling its unlimited portfolio package to new users in 4Q19 and recently to existing users in order to prevent confusion in the market, the management said. As a result, 4Q19 ARPU rose to Rp28,300 from that of 4Q18 at Rp24,600, which, if it is paired by the fact that ISAT’s customer base has recovered post prepaid SIM card registration period, reflects the Company’s strong top line growth potential. Yet, the management also mentioned that the pricing competition is in fact getting fiercer, as some smaller players introduced unlimited data package. We see that tighter pricing competition in the market should be regarded as one of the key risks moving forward.

 

Cost-cutting efficiency, coupled with network expansion

We think that ISAT has succeeded in cutting its operational costs, underpinned by more rational pricing, as seen from EBITDA margin improvement to 37.7% in 2019 from 28.1% in 2018. Recently, on February 14th, ISAT commenced its structure reorganization by laying off 677 employees, although the Company has offered severance package to the employees, most of them have agreed on the offering. Going forward, the Company expects that by rightsizing its organization, ISAT could benefit from better competitions among employees and deliver better customer service and experience.

 

In addition, ISAT has no plan on stopping its network expansion, as it stands. In 4Q19, capex/revenue stood at 49.6%, and the Company allocates a capital expenditure budget of Rp8.5T – Rp9.5T this year, flat if compared with that of 2019 at Rp10.1T. Coupled with organization rightsizing, it is safe to assume that we could see more efficient operational cost this year, although fiercer pricing competition may undermine the aforementioned assumption. Still, we see that ISAT’s bottom line this year may need support from its tower pestment, if it does happens.

 

Valuation

We reiterate our BUY recommendation with slightly improved TP of Rp3,900/share (previous: Rp3,800/share), as we like ISAT’s widened network coverage, coupled with improved ARPU. Key risk to monitor is tighter pricing competition within the market.

Thu February 27Th, 2020

Disclaimer

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