The Opportunity Window: Upgrading Indosat to Buy

Indosat Ooredoo Hutchison (ISAT IJ) presents a compelling opportunity as it navigates recent market challenges. The report by PT Maybank Sekuritas Indonesia highlights an upgrade to a ‘BUY’ rating following a period of sell-off, attributed partly to the alleged illegal activation of SIM cards in Bogor. The report anticipates that concerns have been priced in, with revenue and EBITDA projections aligning with forecasts. The upgraded target price (TP) of IDR2,900 implies a 34% upside from the current share price of IDR2,200.

Addressing the Bogor SIM Activation Issue

The fraudulent SIM activation case in Bogor raised questions about Indosat’s subscriber growth sustainability. However, the issue is primarily linked to dealership practices rather than the company’s operations. To mitigate these challenges, Indosat is transitioning to a partnership model, investing IDR952 billion in 9M24 to establish direct subscriber access through Mitra IM3 and 3Kiosk channels. This strategic pivot is expected to enhance product agility and leverage AI-driven pricing strategies.

Navigating Subscriber Volatility

Indosat reported a 2% decline in subscribers in 3Q24, with numbers hovering around 98.7 million. The report estimates that around 10 million new phone numbers were generated in 9M24, with a potential churn rate of 9-10%. Despite this volatility, the focus remains on revenue growth, data traffic, and yield, anticipating a minor impact from the fraudulent activation case on 4Q24 results.

Financial Performance and Market Position

Indosat’s 9M24 revenue and EBITDA were in line with forecasts, providing a cushion against further sell-off. The market’s concerns about Average Revenue Per User (ARPU) and subscriber growth are contrasted with positive expectations for revenue and EBITDA margin growth in FY25/FY26, with forecasts of 5.2% and 4.8% revenue expansion, respectively.

A Comprehensive Financial Outlook

The report projects a FY25/FY26 revenue growth of 5.2%/4.8% YoY, with EBITDA margins stabilizing at around 49%. The transition to a partnership model and the development of the company’s distribution channels are expected to play significant roles in sustaining growth and enhancing competitive positioning.

Investment Thesis and Risks

The upgrade to a ‘BUY’ recommendation is underpinned by the market’s reaction to recent concerns and the company’s alignment with revenue and EBITDA forecasts. Key risks include potential slow revenue growth, lower margins, and higher-than-expected churn rates. Despite these risks, the strategic shift to a partnership model and focus on revenue growth positions Indosat as a viable investment opportunity.

Strategic Initiatives and Competitive Landscape

Indosat’s strategic initiatives focus on improving network quality and expanding its fiber-optic infrastructure. The company holds a significant spectrum position post-merger, suitable for 5G deployment. With over 193,665 4G+ BTS and a commitment to network expansion, Indosat is poised to enhance its market competitiveness, particularly against major players like Telkomsel.

Environmental and Social Commitment

Indosat is committed to environmental sustainability, achieving ISO 14001:2015 certification and implementing strategies to reduce environmental impact. Socially, the company supports initiatives like SheHacks and IDCamp, empowering women and providing training to thousands of individuals. These efforts align with the United Nations’ Sustainable Development Goals, reinforcing Indosat’s commitment to societal development.

Conclusion

Indosat Ooredoo Hutchison’s strategic maneuvers, financial resilience, and commitment to sustainability present a robust investment case. The company’s proactive approach to addressing market challenges and leveraging strategic partnerships positions it for sustained growth and value creation for shareholders.