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Wednesday, October 13, 2010

INDOSAT

Please read carefully the important disclosures at the end of this publication.
QUICK TAKES
13 October 2010
TRADING BUY Upgraded Indosat RP5,950 Target: Rp6,600
Selling its towers? Mkt.Cap: Rp32,332bn/US$3,617m
Telecommunications - Mobile
INDONESIA
ISAT IJ / ISAT.JK Kelvin Goh CFA +60(3) 2084 9699 – kelvin.goh@cimb.com
Lightening its balance sheet
Upgrade to Trading Buy from Underperform with higher target price. The media
recently reported that Indosat may be selling up to 14,000 towers for US$1.4bn in the
coming months, with Telkom Indonesia and Tower Bersama the likely bidders. Indosat
said it is evaluating its options. We view any such sale positively as it would help to
unlock the value of these passive assets and help Indosat de-gear its balance sheet,
possibly bringing down its net debt/EBITDA from 2.3x in 1H10 to 0.95x. The supply of
these towers into the market would be a small negative for XL Axiata’s tower-leasing
operations. We upgrade Indosat to TRADING BUY with a higher target price of
Rp6,600 (from Rp4,800, previously parity with DCF), now based on a 10% premium
to our rolled-over DCF valuation (13% WACC) to factor in value-unlocking from tower
sales. A likely re-rating catalyst is further news flow on tower sales. With our upgrade
of Indosat, we upgrade our sector weighting to Overweight from Neutral.
The news
Reuters has reported that Indosat may sell up to 14,000 towers worth about US$1.4bn
in the coming months, citing three sources with direct knowledge of the matter.
Telkom Indonesia and Tower Bersama have been named as the likely bidders.
Indosat has confirmed it is considering a sale. "We're still evaluating the options, we
could sell it or retain it. Nothing is definite yet on the sale plan. It may be decided this
year or next year," said Fadzri Sentosa, an Indosat director.
Comments
Positive for Indosat. This does not entirely surprise us as rumours have been
swirling for some time that Indosat is considering hiving off its towers. The media
reported in Mar 10 that Telkom was interested in buying 12,000 of Indosat’s towers.
We view any such sale positively, for two reasons: unlocking value for Indosat and degearing
its balance sheet. Assuming Indosat sells its towers for US$1.4bn or Rp12.5tr,
its proforma 1H10 net debt/EBITDA would fall from an estimated 2.3x to 0.95x.
Longer-term uncertainties. The longer-term repercussion of selling its towers is that
Indosat would be fully dependent on third-party tower operators and would be
exposed to uncertainties over future tower-lease rates.
Pricing consistent with past sales. The price per tower of US$100k is within the
range of previous tower transactions in Indonesia, of US$70k-150k per tower for BTel.
When XL was considering selling its (then) 7,000 towers, its CEO was quoted as
saying that the towers should be valued at Rp5.5tr-9tr or Rp790m-1,300m (US$85k-
150k) each. The large variance in tower pricing hinges on leaseback rates i.e. should
Indosat lease back these towers at lower rates, selling prices would be lower.
Small negative for XL Axiata. The supply of 14,000 independent towers from Indosat
into the market will mean competition for XL’s tower-rental business, which contributes
5% to its revenue. That said, the growth in XL’s rental revenue has slowed sharply
because demand has slowed. Large telcos have largely built out their coverage while
small operators are cash-strapped. Axis, for one, has opted to buy wholesale minutes
from XL, to minimise its capex. On the flipside, XL could benefit from having access to
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Indosat’s towers.
Valuation and recommendation
Upgrade Indosat to TRADING BUY. We upgrade Indosat to TRADING BUY from
Underperform, with our target price lifted from Rp4,800 to Rp6,600, now based on a
10% premium to our DCF valuation after rolling over to end-CY11. The 10% premium
is to factor in value-unlocking from any tower sales. In addition, competition in the
Indonesia telecom space has been rather benign. A likely re-rating catalyst is further
news flow on tower sales.
Financial summary
Price chart
4180.0
4680.0
5180.0
5680.0
6180.0
Oct-09 Ma r-10 Aug -10
0.00
0.50
1.00
1.50
2.00
2.50
Volume 10m (R.H.S ca le ) Indos a t
FYE Dec 2008 2009 2010F 2011F 2012F
Revenue (Rp bn) 18,659 18,393 20,175 22,179 23,794
EBITDA (Rp bn) 9,289 8,774 9,886 11,023 11,802
EBITDA margins (%) 49.8% 47.7% 49.0% 49.7% 49.6%
Pretax profit (Rp bn) 2,325 2,232 1,354 2,243 3,122
Net profit (Rp bn) 1,879 1,498 948 1,570 2,185
EPS (Rp) 346 276 174 289 402
EPS growth (%) (8.0%) (20.2%) (36.8%) 65.7% 39.2%
P/E (x) 17.2 21.6 34.1 20.6 14.8
Core EPS (Rp) 387 204 185 289 402
Core EPS growth (%) (4.9%) (47.4%) (9.4%) 56.6% 39.2%
Core P/E (x) 15.4 29.2 32.2 20.6 14.8
Gross DPS (Rp) 155 82 73 116 161
Dividend yield (%) 2.6% 1.4% 1.2% 1.9% 2.7%
P/BV (x) 1.9 1.8 1.7 1.7 1.6
ROE (%) 11.1% 8.5% 5.2% 8.3% 10.9%
Net gearing (%) 90.5% 123.8% 126.9% 118.5% 104.8%
P/FCFE (x) (306.0) (12.2) (24.0) 44.5 137.5
EV/EBITDA (x) 5.2 6.3 5.7 5.1 4.7
% change in EPS estimates - - -
CIMB/Consensus (x) 0.71 0.92 0.9 6
Source: Bloomberg Source: Company, CIMB Research, Bloomberg
Figure 1: Sector comparisons
Target 3-yr EPS P/NTA ROE Div
B'berg Price price Mkt cap Core P/E (x) CAGR (x) (%) yield (%) EV/EBITDA (x)
ticker Recom. (local CCY) (local) (US$ m) CY11 CY12 (%) CY11 CY11 CY12 CY11 CY11 CY12
Mobile operators
ADVANC ADVANC TB TS 93.0 9 0.5 9,212 13.3 1 2.0 5 .7 6.2 2 3.2 5 9.3 1 2.3 5.4 5.0
Axiata Group AXIATA MK O 4.52 5 .30 12,276 12.5 1 1.5 3.6 1.7 7 .7 1 4.2 2 .4 5.4 4.7
Bakrie Telecom BTEL IJ TS 245 1 77 7 81 >100 3 0.6 2 09.5 1.4 1 .9 4 .5 - 5.4 4.3
China Mobile 941 HK N 81.25 7 8.56 210,125 11.1 1 0.5 6.5 2.1 2 4.3 1 9.0 3 .5 4.0 3.4
China Unicom 762 HK U 11.32 6 .59 34,379 29.9 2 7.1 29.0 1.1 4 .1 4 .0 1 .2 4.7 4.3
DiGi DIGI MK N 24.30 2 3.60 6,076 15.5 1 4.9 4 .6 16.6 5 9 1 11 6 .4 7.9 7.6
DTAC DTAC TB U 40.5 4 5.0 3,200 11.7 1 3.0 (4.4) 1.3 9 .5 1 0.2 7 .6 3.9 3.8
Indosat ISAT IJ TB 5,950 6 ,600 3,617 20.6 1 4.8 3 2.5 1.7 6 .3 1 0.9 1 .9 5.1 4.7
M1 M1 SP O 2.26 2 .60 1,556 10.9 1 0.1 1 1.3 8.0 6 0 7 2 7 .3 6.4 5.8
Maxis MAXIS MK U 5.35 4 .80 12,904 16.4 1 5.0 8 .2 4.9 3 5 3 4 7 .1 9.7 9.1
XL Axiata EXCL IJ O 5,500 5 ,600 5,235 12.8 1 0.6 1 9.9 3.4 1 2.2 2 9.1 3 .1 5.5 4.8
Simple average of mobile telcos 15.5 1 5.5 2 9.7 4.4 2 2.1 3 3.5 4 .8 5.8 5.2
Fixed line/integrated telcos
City Telecom 1137 HK O 5.15 8 .00 5 08 13.8 1 1.6 1 4.5 2.1 1 6.1 1 7.5 2 .7 6.0 5.2
China Telecom 728 HK U 4.23 2 .93 44,126 15.0 1 1.1 2 5.1 1.2 6 .9 1 0.4 2 .1 4.1 3.5
SingTel ST SP U 3.08 3 .09 37,597 12.2 1 1.4 3 .8 1.9 1 7.6 1 5.7 5 .0 1 0.8 1 0.3
StarHub STH SP U 2.53 2 .14 3,324 13.7 1 3.1 1 2.3 >100 >100 >100 7 .9 7.7 7.4
Telekom Msia T MK U 3.50 3 .20 4,027 28.5 2 1.6 2 2.9 2.0 7 .1 9 .7 7 .4 5.8 5.3
Telkom Indo TLKM IJ N 9,150 8 ,700 20,638 14.1 1 3.3 3 .4 3.7 3 0.9 2 6.8 4 .5 5.3 4.9
TRUE TRUE TB U 4.82 3 .10 1,138 1 7.4 2 4.3 ( 9.9) 2 .5 nm 9 .9 - 4 .8 4 .6
Simple average of fixed line telcos 16.4 1 5.2 1 0.3 2.2 1 5.7 1 5.0 4 .2 6.4 5.9
Simple average of telcos in our universe 15.8 1 5.4 2 2.1 3.6 2 0.1 2 7.0 4 .6 6.0 5.5
O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell
Source: Company, CIMB Research
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[ 4 ]
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RECOMMENDATION FRAMEWORK #1*
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS
OUTPERFORM: The stock's total return is expected to exceed a relevant
benchmark's total return by 5% or more over the next 12 months.
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is
expected to outperform the relevant primary market index over the next 12
months.
NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant
benchmark's total return.
NEUTRAL: The industry, as defined by the analyst's coverage universe, is
expected to perform in line with the relevant primary market index over the next
12 months.
UNDERPERFORM: The stock's total return is expected to be below a relevant
benchmark's total return by 5% or more over the next 12 months.
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe,
is expected to underperform the relevant primary market index over the next 12
months.
TRADING BUY: The stock's total return is expected to exceed a relevant
benchmark's total return by 5% or more over the next 3 months.
TRADING BUY: The industry, as defined by the analyst's coverage universe, is
expected to outperform the relevant primary market index over the next 3
months.
TRADING SELL: The stock's total return is expected to be below a relevant
benchmark's total return by 5% or more over the next 3 months.
TRADING SELL: The industry, as defined by the analyst's coverage universe,
is expected to underperform the relevant primary market index over the next 3
months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be
temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
[ 5 ]
RECOMMENDATION FRAMEWORK #2 **
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS
OUTPERFORM: Expected positive total returns of 15% or more over the next
12 months.
OVERWEIGHT: The industry, as defined by the analyst's coverage universe,
has a high number of stocks that are expected to have total returns of +15% or
better over the next 12 months.
NEUTRAL: Expected total returns of between -15% and +15% over the next
12 months.
NEUTRAL: The industry, as defined by the analyst's coverage universe, has
either (i) an equal number of stocks that are expected to have total returns of
+15% (or better) or -15% (or worse), or (ii) stocks that are predominantly
expected to have total returns that will range from +15% to -15%; both over the
next 12 months.
UNDERPERFORM: Expected negative total returns of 15% or more over the
next 12 months.
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe,
has a high number of stocks that are expected to have total returns of -15% or
worse over the next 12 months.
TRADING BUY: Expected positive total returns of 15% or more over the next 3
months.
TRADING BUY: The industry, as defined by the analyst's coverage universe,
has a high number of stocks that are expected to have total returns of +15% or
better over the next 3 months.
TRADING SELL: Expected negative total returns of 15% or more over the next
3 months.
TRADING SELL: The industry, as defined by the analyst's coverage universe,
has a high number of stocks that are expected to have total returns of -15% or
worse over the next 3 months.
** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the
prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

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