INDOSAT - ISAT

Investment sector is still promising

Despite there was a slowdown in economic growth in first quarter of 2015, the investment segment has still been growing gradually in the last 4 years. In 2014 the total investment was 463.1 trillion rupiah and it was higher than total investment in 2012 which was 313.2 trillion rupiah. It increased 48 % up than total investment in 2012 (source: kompas newspaper). In first quarter of 2015 the investment was 124.6 trillion rupiah and it is expected keep growing.

The investment is dominated by investor from oversea; the bottle neck in investment is the complicated procedure in administrative procedure of each investment. There are too many institutions which were involved in the process of investment.

Generally indonesia is still promising for investment because the country has good natural resource and a surplus in demographic side. Hence, the total investment has been growing as the previous explanation.

Consumption dropped in ramadhan

The consumption sector is falling down due to higher inflation rate. Wage rate did not meet to the cost of living. Export rate is not performing as expectation due to many factors such as low price of commodities. The gradual increase of inflation rate since the early of 2014 might be the key reason to the slowdown in consumption. The biggest part of GDP is contributed by consumption and that is why the dramatic change has already been happening when new government decided to focus in investment for infrastructure project.

According to economic data of central bank in May of 2015, the segment of trading, mining and manufacture are experienced decline in its growth. The weak demand in these segments may cause the rise of nonperforming loan rate despite the credit distribution in mining and quarrying has raised 7.12 percent up compared to May of 2014. 

 Industry Analysis

The telecommunication industry may not be affected by the slowdown of economic growth. In fact people still need to communicate despite the cost of living is more expensive. The subscriber is still using various social media such as facebook and twitter to communicate to each other.

According to GFK 2013, the penetration of smart phone user is still promising, there is a sharply increase in its number since 2009. Its number increased from 1870 thousand user in 2009 in to 20,981 thousand unit in 2012. It was almost 1025 % up. And its number seems continue to grow at the future.

Market leader in this segment is still expanding their business, building new IT infrastructure and establishing new subsidiary to capture new opportunity. Telkomsel as the market leader in cellular segment is building Telkom indigo, subsidiary which focus in investing fund for Startup Company. It has also been establishing fiber optic cable at under the sea in order to connect Indonesia to Silicon Valley at USA.

Company analysis

Case of IMM : company has been sued for about 1.3 trillion payoff

The case of IM2 may hamper the performance of the company during 2015. The government sued to indosat for illegal use of 3G frequency for IM2. IM2 is subsidiary which operates in internet broadband connection. The government has sued the company for 1.3 trillion payoffs due to illegal use of 3G frequency in its internet broadband service. Indosat put that amount as legal provision in its income statement. Hence, the provision cost reduced the net profit of 2014. The provision is 5.7 % of revenue in 2014.

Despite the company has been supported by communication and information ministry and such association, the case has not been resulting final verdict. There is no execution yet from the jurisdiction.

IM3 was the key driver 

The key driver of sales was still from cellular segment which had more than 63 million users in across Indonesia. The subscriber’s growth was 6.1 % in 2014 compared to the number of subscriber in 2013. The cellular’s contribution to sales was 80.9 percent of total. The second was MIDI segment. For cellular segment there is a negative trend in last three years, there is a slightly decrease. Meanwhile for MIDI, there is a positive trend in the same period.

Despite the sales growth in 2015 was dropped 0.9 % compared to sales growth in 2014 which was about 6.4 % the company is still maintaining its position as the second largest cellular company in Indonesia.  IM3 was the most famous brand for cellular segment; its contribution was more than 80 % of total cellular segment. 

In spite of a slowdown in sales growth, the company has still developed its EBITDA margin. The EBITDA margin in 2014 was higher than EBITDA margin in 2013.

The company has more than 40 thousand BTS and 29.000 data connectivity service user.  

I think the company should focus to IM3 user which was dominated in generating sales growth. IM3 was successful brand in serving GPRS technology in the past. The user was attracted to GPRS technology because of its faster internet broadband connection.

Indosat is owned by ooredo asia as the biggest shareholder which has 65 %, a part of world telecommunication company from Qatar. The second biggest owner is Indonesian government which owns more than 14 % of total shareholder.

INDOSAT (ISAT)

Predicted Economic Growth : 5.2 %

Based on The World Bank, economic growth of indonesia is predicted rise 5.2 % in 2015. Mean while the third quarter of economic growth in 2014 is 5.1 %. Slow down of economic growth in the last two years is happening due to recovery of US economic, as the Fed rises its benchmark rate which has pulled the investment to the country.

United state is the biggest partner of indonesia in international trade. Indonesia imports various goods from US for production and consumption. The currency exchange rate is very important to indonesia.  

Based on data of statistic bureau the current account is still deficit because many company in indonesia needs raw material from over sea. They should conduct importing goods for production. Based on particular research center the current account deficit is predicted at range of 2.4 %  

If the price hike the demand will decline, and the people will decrease their consumption. The domestic consumption as the biggest part of GDP will decline and the total GDP will decrease.  

The Fed ends its quantitative easing; Russia raised its interest rate at 17 %

The Fed has finished its monetary policy, quantitative easing, which is likely a liquidity trap to the market. They sold Treasury bond with almost zero interest rate to generate their economy. Once situation start to recover, Aggregate demand move to its potential GDP, they advance the interest rate.  It is strengthening the US dollar to almost all global currency.

The Inflation rate of indonesia will rise at range of 6.5% - 7.5 % as the rupiah is weaken to US dollar and The government allocated its fuel subsidy to productive posts. The price is encouraged to shift price of goods as the transportation cost, energy cost and wages cost are increase.

While Russia increase its rate in order to rise its currency to US dollar. Russia suffered high inflation rate after US have given sanction of economic related to war in Ukraine.

Telecommunication Industry: Tariff war, merger and Technology competition

Indonesia is 4^th biggest country with almost 250 million citizens; the country is a potential market for telecommunication industry. 50 % of citizen in indonesia is under 30 years old and they are at productive age which has strong consumption in cellular service and data service.

The market is still potential; the industry grew more than 1.5 times between 2007 -2012. For data service, indonesia has relatively low internet penetration compared to other country. In 2013 indonesia only has 22 % internet penetration.  Malaysia has internet penetration 61 % and Vietnam has 34 %.

In indonesia there are commonly two kind of telecommunication operator, the CDMA and the GSM operator. The esia and smartfren, as the CDMA operators seem at its down turn as the technology of CDMA is not as fastest as the technology improvement of GSM cellular. In 2010, smart telecom did the same thing, they did merger with mobile-8 and they establish new company, Smart Fren. The two companies plan to do merger to strengthen their market share and positioning. Both of the companies impose loss of their profit. They loss its competition with GSM technology as the 3G GSM offers cheaper tariff in its service.

XL axiata, a Malaysian investment company has done acquisition of Axis Telekom Indonesia. The XL axiata gets wider spectrum of frequency, the company expand its spectrum in to bandwith of 1800 Mhz.

Indonesia is still acknowledged as potential market for Telecommunication industry, mostly cellular. Strong growth of Smartphone sales is also good signal for this industry.

The average cellular revenue per BTS of Top 3 operator in first quarter 2013 was at IDR 185 million, it is higher than first quarter of 2014. The decline is caused by higher inflation rate which force consumer to reduce their spending and price war between the operators, cheaper price is preferred.

 ISAT

Low operating profit Margin, high cash to sales ratio

Despite in 2013 revenue increase slightly at 6.4 % compared to the last year. The company still loss IDR -2,666 trillion rupiah. Loss in foreign exchange rate is amounting about IDR 3 trillion in 2013. In 2012 the company could get profit after they had sold particular asset and it was a gain amounting to IDR 1,2 trillion. In 2012 the company sold thousands of its telecommunication towers to Tower Bersama.  

The low operating profit margin causes the company hard to get positive profit margin. The biggest part of revenue contribution is in cellular segment. In 2013 it was 83 % of total sales.

Despite the net income of 2013 was negative, the EBITDA is at IDR 7,8 trillion, the high depreciation and amortization cost reduce the net profit margin of the company. The ratio of cash to sales is also high; in 2013 it was 9.4 %.

In the future the company will take position as the leader in data and smart device in its market and they also plan to reduce cost of operation. As the industry of telecommunication is still growing, The Company should be able to increase revenue. Based on merill lynch the industry grew from 6.5 in 2007 in to 10.5 in 2012, it was growing about 1.5 times. The smart phone sales in indonesia also increase sharply in 2013, based on gfk it advanced from 14,302 units in to 20,981 units. The average revenue per user in 2013 decreased compared to ARPU at 2012. The decline is happening because of hard competition with competitor, especially in its price and the usage of free internet service in several store or café. Consumer allocated their money for buying a cup of coffee for getting free internet service.

The company could expand their business in restaurant and café to capture this segment. For example, the company sells their coffee only with its e-money product as its payment.

  

Forecast

The assumption is taken with 7-10 % growth of the next 3 years. The assumption might not suit with the company’s business plan, but the assumption could be one of medium scenario. The consumption in cellular segment will drop as the inflation rate increase. The consumer may reduce their spending include buying pulse.

The growth of about 7-10 % is contributed with huge capital expenditure, 45-50 % of total revenue. The assumption used the same ration of 2013 such as activity ratio, profitability ratio and etc.