Indosat's New CEO Appointment Triggers Question
PT Indosat Ooredo Tbk (IDX: ISAT), plans to raise as much as US$300 million by selling 3,000 towers - Photo by Indosat Ooredoo

JAKARTA (TheInsiderStories) –  Moody’s Investors Service (“Moody’s”) has revised the outlook on P.T. Indosat Tbk‘ (lndosat Ooredoo) ratings to negative from stable. At the same time, Moody’s has affirmed the company’s Baa3 issuer rating.

“The negative outlook reflects a weakening in Indosat’s financial metrics driven by the company’s plans for accelerated 4G capex amid an intensely competitive operating environment for the Indonesian mobile sector,” says Nidhi Dhruv, a Moody’s Vice President and Senior Analyst.

Indosat Ooredoo‘ operating and financial profile has weakened
significantly over past quarters, mainly due to the introduction of
registration for pre-paid SIM cards in Indonesia and a more rapid decline in traditional voice and SMS revenue in 2018.

Specifically, the company’s revenue declined by 23 percent to Rp23.1 trillion (US$1.64 billion) in 2018 from a year earlier, primarily driven by a 26% decline in the cellular business. Indosat Ooredoo’ subscriber base also fell 47 percent to 58 million at the end of 2018 from 110 million at the end of 2017, while average revenue per user (ARPU) declined 8 percent to Rp18,700 over the same
period.

“Although the Indonesian mobile sector remains intensely competitive, there has been some uptick in quarter-on-quarter ARPUs and revenue growth. A more consistent growth in revenue, leading to the company steadily recouping its market share and profitability margins, would be supportive of stabilizing the rating outlook,” says Dhruv, who is also the Lead Analyst for Indosat Ooredoo.

Indosat Ooredoo has suffered steeper declines in its subscriber and
revenue share due to its weak 4G networks, in turn a result of
under-investment by the company over 2016-2018. In Q4 2018, the company also saw significant leadership changes resulting in a management overhaul and potentially delaying responses to the rapidly changing competitive environment.

Under the new management team, Indosat Ooredoo has significantly
increased its capex plans to Rp30 trillion over 2019-2021 primarily to strengthen the company’s 4G networks and expand coverage
ex-Java.

“The accelerated capex investment is key to Indosat Ooredoo’s strategy to remain competitive, especially ex-Java against its closest competitor, XL Axiata Tbk (P.T.) (Baa3 stable). However, if Indosat Ooredoo heavily debt funds its aggressive capex plan, its leverage and cash flow metrics will remain above our tolerance for the rating,” adds Dhruv.

Absent any capital restructuring initiatives, Moody’s expects Indosat
Ooredoo’s adjusted gross leverage will remain at 3.5x-3.7x over the next 2 years. Its retained cash flow (RCF)/debt is expected to also weaken in the range of 25 percent to 30 percent.

“Indosat Ooredoo is exploring alternative funding options — including
the sale of its towers and monetization of its stakes in some
subsidiaries. However, although such tower sales would benefit the
company’s liquidity position, given the capitalization of leases, it
would be leverage neutral. Furthermore, these initiatives would be time consuming — driven by market dynamics, and subject to regulatory and shareholder approvals,” adds Dhruv.

The company has stated that at this time it does not foresee an imminent need to raise equity.

Indosat Ooredoo‘ liquidity position is strained. Its cash and cash
equivalents of Rp1.0 trillion as of Dec. 31, 2018 and available
revolver facilities of Rp3.7 billion, combined with its projected
operating cash flow of around Rp5.0 trillion over the next 12 months, will be insufficient to cover its debt maturities of IDR6.4 trillion and projected capital spending of IDR10.0 trillion.

Moody’s expects the company will refinance its maturing debt with
longer-dated rupiah bonds and bank loans. Given Indosat Ooredoo’
demonstrated strong access to the domestic bank and bond markets, we consider the refinancing risk to be manageable. Earlier this month, Indosat Ooredoo successfully completed the first tranche of a bond issuance in the amount of Rp2 trillion.

Moody’s remains cautious about Indosat Ooredoo‘ credit profile over the near-term. Nonetheless, the company’s Baa3 rating continues to combine its standalone credit strength of ba1, reflecting Indosat Ooredoo’s established market position, moderate financial profile and Moody’s expectation for moderate growth in the Indonesian cellular market following price increases by incumbents since Q3 2018.

Furthermore, the credit support Moody’s believes Ooredoo Q.P.S.C. (Ooredoo, A2 stable) is likely to provide to Indosat Ooredoo in a distress scenario, resulting in a one-notch uplift.

The negative outlook reflects Indosat Ooredoo‘ weak operating and
financial metrics for its Baa3 rating, with limited potential for
near-term improvement in the company’s underlying profitability. The negative outlook also reflects the uncertainties with regard to the timing and execution of its potential capital restructuring plan.

Moody’s will closely review the company’s progress over the next 12
months. The rating could be downgraded if there is a material deterioration in its underlying credit strength, arising from a reducing market share, diminishing profit margin, weaker operating cash flow or increased shareholder returns.

Metrics indicative of downward pressure include adjusted debt/EBITDA rising above 3.0x or retained cash flow/adjusted debt remaining below 25 percent to 30 percent on a sustained basis. In
addition, the one-notch uplift (based on expected support from the parent company, Ooredoo) could be removed if the parent company’s stake falls below 50 percent or if it indicates that Indosat Ooredoo is no longer a core asset.

Given the negative outlook, upward pressure on the rating is unlikely. However, Moody’s could change the outlook to stable if there is a  consistent improvement in Indosat Ooredoo’s credit profile and overall profitability through organic or inorganic measures.

Parameters that  Moody’s would consider for a change in outlook to stable include consistent revenue and earnings growth, a consistent improvement in its debt leverage and a clear plan and capacity for adjusted debt/EBITDA to remain below 3.0x, and retained cash flow/adjusted debt remaining above 25 percent to 30 percent on a sustained basis.

Indosat Tbk. (P.T.) is an integrated telecommunications network and
services provider in Indonesia. The company is the second-largest
cellular operator in the country in terms of revenue and active
subscribers. It also provides multi-media, data communications, and
internet services. The company is 65 percent owned by Ooredoo Q.P.S.C.

US$1: Rp14,100

by Linda Silaen, Email: linda.silaen@theinsiderstories.com