Indosat Ooredoo Hutchison (ISAT IJ)

Solid 1H24 earnings (inline); further upsides in ARPU and EBITDA margins are still in the cards

 

  • IOH’s solid 1H24 net profit of Rp2.73tr (+43% yoy) was in line, driven by 2Q24 margin expansion due to revenue growth and leverages realization.
  • We expect rural area expansion and core network adjustments to unlock EBITDA margin expansion by <200bps in the next two quarters.  
  • We keep our forecast and TP of Rp13,300 unchanged and reaffirm our Buy rating on intact robust earnings growth.

 

Solid 2Q24 earnings driven by margin expansion; more upside in 2H24 

IOH delivered in line 1H24 net profit of Rp2.73tr (43.3% yoy) accounting for 50.9%/52.2% of our/cons est., driven by 2Q24 EBITDA expansion to 48.8%.  Mgmt reconfirmed its guidance of near 50% FY24 EBITDA margin (1H24: 47.9%). We see two pathways to realize this upside: a) IOH reiterated that key growth will come from subscriber acquisition, placing 2,000 unique selling points in the rural area to sell/change SIM cards and unlock significant scale. b) improved customer experience via improvements in own apps IM3/Tri.  

 

Higher Rp40k ARPU within reach, with further upside

IOH ARPU grew to Rp38.4k, (+2.4%qoq, +7.3%yoy), broadly in line with our 2Q24 preview. We concur with mgmt’s view that reaching the higher Rp40k ARPU will be part of bigger monetization journey, with further upside to Rp45-50k as IOH aims to modernize its app to become a one-stop shop super app. Our observations with peers show that app enhancements in customization and utility correlate with organic increase in ARPU.

 

More network improvements to ensure business sustainability and margins.

Mgmt and we also expect EBITDA margin to improve via efficiencies in the Core network concluded in 1H for Java. (see exh. 4). These efficiencies are also due in ex-Java to help reduce IOH’s cost structure. Hence, we believe the targeted margin expansion of <200bps in FY24 is achievable despite the weak consumer purchasing power experienced in 2Q24. Additionally, further capex rollout (38% budget absorption in 1H) will ensure sustainability and upside in fixed BB growth. 

 

Reaffirming our BUY rating as robust earnings growth outlook is intact. 

We keep our forecast largely unchanged post in line 1H24 earnings and reiterate our Buy rating on ISAT with an unchanged TP of Rp13,300 on its superior earnings growth vs peers. ISAT trades at EV/EBITDA 5.3x, +1SD above its mean, but is below ASEAN players’ (excl. SG) multiple at 7.3x.  The Key downside risk is prolonged consumer weakness beyond FY24.

 

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