ISAT has released soft 3Q24 results, as expected, with headline profit of IDR1.1tn (-21% q-q / +30% y-y). Still, despite the soft 3Q24, the company reported YTD 9M24 profit of IDR3.9tn (+39% y-y). We attribute the declining profitability on a q-q basis to 1) weaker purchasing power, 2) a still intense competitive landscape, 3) seasonality (whereby 3Q is the slowest quarter typically), and 4) possibly the increasing presence of illegal ISPs that compete with cellular companies’ data services. Despite that, we maintain our Buy rating on ISAT, as we anticipate 4Q24F to be better than 3Q24, albeit against the backdrop of weak purchasing power, particularly in the mass-market segments, which typically are associated with low ARPUs.

3Q24 result summary

3Q24 revenue reached IDR13.9tn (-2% q-q, +8% y-y) bringing 9M24 revenue to IDR41.8tn (+12% y-y). Mobile was the main driver of growth, with 3Q24 revenue hitting IDR11.6tn (-+% q-q, +6% y-y), implying 9M24 revenue of IDR41.8tn. While headline ARPU declined to IDR36,400 (-3% q-q); +3% y-y), the overall 3Q24 subscriber base reached 98.7mn users (down 2.2mn in 3Q24, or -2% q-q). We argue that the lower ARPU can be largely attributed to soft purchasing power and still intense competition

3Q24 EBITDA was at IDR6.6tn (-5% q-q, +8% y-y); bringing 9M24 EBITDA to IDR20.0tn (+15% y-y). Implied EBITDA margin reached 47.8% in 9M24 (+120bp y-y). For mobile, given the soft top line, EBITDA for cellular units was IDR5.6tn (-6% q-q / flat y-y), bringing cellular-only YTD 9M24 EBITDA to IDR17.1tn (+15% y-y), which we deem in line with our FY24F EBITDA growth projection of +12% y-y.

3Q24 net profit was at IDR1.1tn (-20% q-q / +30% y-y). This translated into 9M24 net profit of IDR3.98tn (+39% y-y). Further out, the company aims to divest its fiber infrastructure, according to management, which could fetch an EV valuation of ~USD500-1,500mn. It is still early days, but we think the company would prefer cash and stake payments.

Valuation and risks 

We derive our TP of IDR3,450 using an unchanged DCF valuation. Key parameters: a risk-free rate of 6.2%, an equity risk premium of 7.4%, beta of 1.2x and a terminal growth rate of 2.5%. At our TP, the stock would trade at 7.0x FY24F EV/EBITDA (compared with the current price implied multiple of 5.0x). Key risks include adverse macroeconomic trends that could impact purchasing power, lower price increases or subscriber base, higher opex due to slower post-merger network integration, and/or irrational competition leading to price cuts.

Fig. 4: ISAT - Data ARPU IDR/month

Fig. 5: Data volume q-q (PB)

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Nicholas Santoso (nicholas.santoso@verdhana.id)

Erwin Wijaya (erwin.wijaya@verdhana.id)