Indosat Ooredoo Hutchison (ISAT IJ)
Set to rebound on growth opportunities in 4Q24 onwards with strong margin expansion
- While 3Q24 growth took a breather due to weak macro, IOH is poised to resume its growth trajectory, aiming to recoup lost revenue in 4Q24.
- IOH reaffirms its near 50% EBITDA margin for FY24, implying substantial margin expansion in 4Q24, enhancing its leverage advantage vs. peers.
- We roll forward our DCF and raise our TP to Rp3,800 (5.7x EV/EBITDA); maintain Buy on IOH’s topline growth and margin expansion prospect.
In line 9M24 earnings despite weak macro.
IOH reported a core profit of Rp3.8tr (+39.1% yoy) in 9M24, in line at 72.1%/74.1% of ours/cons FY24F. This is due to growth in revenue (Rp41.8tr, +11.6% yoy), with a stronger EBITDA margin (+160bps yoy), and lower interest cost. IOH’s 3Q24 core net profit came in at Rp1.13tr (-21.8% qoq, +19.6% yoy) amid soft revenue due to weak macro (Rp13.8tr, -2.2% qoq, +8.2% yoy) and a lower EBITDA margin at 47.6% (-120bps qoq).
Optimizing subs demographics for higher ARPU with stronger distribution
IOH reported 98.7mn subs (lower by -2.2mn qoq) and lower ARPU at Rp37.2k (-3.1% qoq) in 3Q24. Nonetheless, IOH rolled out 3,000 new sites in 9M24 while optimizing demographics, seeking more ARPU-productive subs. Expansion in distribution is underway through the rollout of 2,500 service points, aiming for 5,000. IOH’s own app MAU is at 41.2mn (+4.8mn yoy); app users empirically see ARPU grow 50% over current ARPU.
Non mobile revenue growth in 4Q; new contract for homepasses is planned
There was little change in fixed BB subs (355k as of 3Q24) but IOH guides for ~450k subs by YE-24, suggesting a faster pick-up in 4Q24. With majority stake sale of its 92,000km fiber, reports suggest that IOH will award the winner with a new 50,000km fiber contract to support FTTH/FTTT deployments.
Revenue growth and margin expansion based on strong fundamentals
We believe a sector recovery is due in 4Q24, in line with Telco operators’ testimonies. We also see stronger seasonality ahead, which should enable IOH to resume growth. Moreover, IOH reaffirmed its trajectory to near-50% EBITDA margin in FY24 (47.6% in 3Q24, 47.8% in 9M24); this implies a hefty 4Q24 margin expansion is in the cards, offering IOH significant leverage vs. peers ahead.
Maintain BUY: Premium valuation justified by strong ARPU upside
We roll forward our DCF, arriving at a higher TP of Rp3,800 (implying 5.7x FY25 EV/ EBITDA). We maintain our Buy rating, as IOH’s mobile, fixed, and B2B (cybersecurity & GPU-aaS) expansions along with better margin prospect, support our thesis. Risks stem from competition intensity.
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