Laporan dan Pengumuman Informasi atau Fakta Material 14Des2016
CORPORATES
CREDIT OPINION
13 December 2016
Indosat Tbk. (P.T.)
Credit Opinion Update
Update
Summary Rating Rationale
Indosat Tbk. (P.T.)’s (Indosat Ooredoo) Ba1 corporate family rating combines:
RATINGS
Indosat Tbk. (P.T.)
Domicile
Indonesia
Long Term Rating
Ba1
Type
LT Corporate Family
Ratings - Dom Curr
Outlook
Positive
Please see the ratings section at the end of this report
for more information. The ratings and outlook shown
reflect information as of the publication date.
Contacts
Maisam Hasnain
852-3758-1420
Associate Analyst
maisam.hasnain@moodys.com
Annalisa Di Chiara
852-3758-1537
VP-Sr. Credit Officer
annalisa.dichiara@moodys.com
Laura Acres
MD-Corporate Finance
laura.acres@moodys.com
65-6398-8335
1. The company's standalone credit strength, which reflects its established market position,
our expectation of moderate growth in the cellular market, and an improving macroenvironment. However, competition, especially in mobile data space, will continue to
pressure EBITDA margins although we expect them to remain high for the rating level
around 50%
2. The credit support we believe Ooredoo Q.S.C. (A2 stable) is likely to provide in a distress
scenario.
That’s because we consider Indosat Ooredoo as a strategic investment for Ooredoo
reflecting (1) majority ownership by Ooredoo, (2) the company is Ooredoo's largest nondomestic business, representing around 24% of gross revenue and 27% of reported EBITDA
for the nine months ended September 2016, and (3) the existence of cross-default provisions
between Ooredoo's debt and Indosat Ooredoo's debt.
Indosat Ooredoo's final rating of Ba1 benefits from a one-notch uplift due to such expected
support from Ooredoo.
Rating Outlook
The positive outlook reflects our expectation that Indosat Ooredoo will continue to grow and
de-lever and that the competitive and regulatory environments remain benign.
Factors that Could Lead to an Upgrade
The rating could be upgraded within the next 6-12 months if the (1) company maintains
its market position and growth momentum, (2) competition remains relatively benign,
(3) the regulatory environment remains stable, and (4) dividends and shareholder returns
remain within expectations. Positive rating pressure could also arise if it sustains strong credit
metrics, such that adjusted gross debt/EBITDA remains below 2.5x and RCF/ adjusted debt
remains above 30-35%.
Factors that Could Lead to a Downgrade
The outlook could return to stable if there is a material deterioration in its underlying credit
strength, arising from diminishing operating margins, weaker operating cash flows, or rising
foreign-exchange risk; all of which may be reflected in (1) adjusted debt/EBITDA rising above
2.5x, or (2) retained cash flow/adjusted debt falling below 30% on a sustained basis. In
addition, the one-notch uplift -- based on expected support from parent company, Ooredoo
CORPORATES
MOODY'S INVESTORS SERVICE
-- could be removed if its stake falls below 50%, or if it indicates that Indosat Ooredoo is no longer a core asset.
Key Indicators
Exhibit 1
Source: Moody's Investors Service
Credit Strengths
»
Position as one of the leading mobile operators in Indonesia
»
Ongoing improvement in operating metrics
»
Declining leverage and FX exposure
»
Strong shareholder provides rating uplift
Credit Challenges
»
Exposure to Indonesia’s competitive, although stabilizing, operating environment
»
Capex stabilizing at relatively high levels
Corporate Profile
Headquartered in Jakarta, Indosat Tbk. (P.T.) (Indosat Ooredoo) is a fully-integrated telecommunications network and services provider.
It provides multimedia, data communications and internet services, and is also a leading provider of international call services. With
total revenue of IDR28.7 trillion (approximately US$2.1 billion) for the 12 months ended September 2016, the company is the country's
second largest cellular operator by revenue.
Detailed Rating Considerations
ESTABLISHED POSITION IN A GROWING MARKET AND INTEGRATED BUSINESS MODEL UNDERPIN RATING
Indosat Ooredoo provides a full range of services across fixed-line and cellular networks. However, as of September 2016, its cellular
business generated 83% of revenues, fixed data 14%, and fixed-voice services 3%. The cellular business continues to drive revenue
growth with 12% year-on-year (YoY) growth during the nine months ended September 2016.
Indosat Ooredoo is the second largest cellular operator in Indonesia in terms of revenue and subscribers, with a with around 82 million
subscribers (22% subscriber market share) as of September 2016. In comparison, its peer, Telekomunikasi Selular (P.T.) (Telkomsel, Baa1
stable), dominates the market with about 164 million subscribers, while XL Axiata Tbk (P.T.) (Ba1 positive) had 45 million subscribers.
Currently, Indosat Ooredoo has the largest allocation of 900MHz spectrum (which is better suited for increasing network coverage);
however, its allocation of 3G spectrum (2100 MHz) is lower than XL and Telkomsel, both of which have 15MHz in this bandwidth.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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Indosat Tbk. (P.T.): Credit Opinion Update
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CORPORATES
Exhibit 2
Spectrum Holdings of Mobile Operators
Sources: Companies’ filings and Moody’s Investors Service estimates
The telecom regulator may plan to auction additional spectrum -- two blocks (5MHz each) in the 2100MHz frequency band and
two blocks (15MHz each) in the 2300MHz band – within the next 12 months. In this scenario, we expect mobile operators, including
Indosat, to bid for both these bands.
While auction guidelines have yet to be published, we expect the regulator to maintain a prudent approach to the auction process
(including setting spectrum base prices), such that it will not result in an aggressive bidding war which could materially impair the
credit quality of the winning bidders.
ONGOING IMPROVEMENTS IN OPERATING PERFORMANCE
Indosat Ooredoo’s has shown strong growth in subscribers and revenue since 1Q 2015, after having significantly stepped up its
marketing initiatives, although these subscriber additions have come with lower ARPUs as compared with Telkomsel and XL. Still,
Indosat Ooredoo has maintained its adjusted EBITDA margins at around 50% for LTM September 2016, among some of the highest in
the telco rated universe.
Exhibit 3
Diverging Trends in Subscriber Growth and ARPUs Since 1Q 2015 Amongst Top 3
Sources: Companies' filings
The company’s positive outlook reflects the substantial improvement in its operating profile, which has benefitted from early
gains in subscribers and absolute EBITDA expansion from its growth strategy. Still we would like to see a continued track record of
strengthening operational metrics and ongoing stability in its financial profile over the next few quarters to support upwards ratings
action.
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CORPORATES
DECLINING LEVERAGE AND FX EXPOSURE
Indosat Ooredoo has maintained stable and moderate leverage level – as measure by adjusted debt to EBITDA - as increases in
absolute debt have been offset by incremental EBITDA.
As shown in Exhibit 4, Leverage declined to 2.0x for LTM September 2016 from 2.5x as of December 2015 – reflecting both lower debt
levels and higher EBITDA - a trend which we expect will continue over the next two years. To that end, the company has also stated its
broad financial policy to reduce reported net leverage to around 1.7x
Exhibit 4
Indosat Ooredoo’s Leverage Will Continue To Decline
Sources: Moody’s Financial Metrics and Moody’s Investor Service estimates
The company is also exploring a further reduction in leverage through the monetization of surplus plants, property and equipment, or
through the sale-and-leaseback on another tranche of towers. For the latter, given our standard adjustments to capitalize operating
leases, these transactions may not reduce adjusted leverage significantly, but would benefit absolute reported debt levels and liquidity.
In 2015, Indosat Ooredoo reduced its foreign exchange exposure through the early redemption of its $650 million bonds due 2020,
cash on hand and US dollar revolver credit facilities – totaling $500 million with maturities staggered over the next 2-3 years – and
which can be prepaid any time before maturity.
We expect the company’s exposure to US dollar debt to decline further over the next 12-18 months as it plans to refinance the noted
US dollar revolvers with rupiah bonds. Pro forma for this planned rupiah-denominated refinancing, its US dollar exposure will be around
12%-15% of total debt (down from 41% in December 2013).
STRONG SHAREHOLDER PROVIDES RATING UPLIFT
We consider Ooredoo's majority stake in Indosat Ooredoo as an important strategic investment that provides the company with
substantial financial resources, if needed, and industry expertise.
The strategic importance is also demonstrated by the unified brand identity, whereby Indosat Ooredoo adopted the Ooredoo brand
name in November 2015.
Ooredoo, a larger and more geographically diversified telecom operator, enjoys a relatively strong standalone operating and financial
profile and it also benefits from strong support from the Government of Qatar (Aa2 negative), its 55% shareholder. We believe
Ooredoo has the financial flexibility to accommodate any potential capital needs for Indosat Ooredoo.
In addition, there are also cross-default provisions between Ooredoo's debt and Indosat Ooredoo's debt, which means it is in the
parent's interest to ensure covenant compliance at Indosat Ooredoo.
In addition, following covenant amendments in 2009, Ooredoo has a backdoor mechanism to provide Indosat Ooredoo with a
subordinated shareholder loan, whose principal value will be excluded from total debt in covenant calculations.
As a result, Indosat Ooredoo's final rating of Ba1 benefits from a one-notch uplift reflecting the support we believe Ooredoo is likely to
provide in a distress scenario.
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Indosat Tbk. (P.T.): Credit Opinion Update
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EXPOSURE TO INDONESIA’S COMPETITIVE, ALTHOUGH STABILIZING, OPERATING ENVIRONMENT
Although Indonesia’s mobile sector remains competitive, it has remained relatively rational over the last two years. The number of
operators has also fallen to 7 from 10 in 2012 - also helping to ease the level of competition - as major CDMA operators have stopped
operations, and Axis, previously the fifth-largest GSM operator, has merged with XL in 2014.
With effective penetration (i.e. excluding dual SIM cards) estimated to be in the 80-85% range, we believe the market remains
conducive for organic revenue growth and that the industry will remain competitive as operators vie for subscribers.
However, we expect large GSM operators -- such as Indosat Ooredoo, Telkomsel and XL -- to remain rational with pricing strategies
and limiting the subsidizing of starter-pack SIMs, which have been unprofitable in the past.
Indonesia's price war of 2007/2008 and the brief price war in 2010 showed that any gains in subscribers resulting from aggressive
price cuts did not provide accretive gains in earnings; rather, they required operators to accelerate capex at the expense of margins and
financial metrics.
We estimate the Indonesian mobile sector revenue is likely to grow a healthy 8%-9% over the next two years, on the back of
15%-20% growth in data revenue, reflecting the strong demand for 3G/4G LTE services and the proliferation of smartphones.
Exhibit 5
Indonesian Mobile Sector Revenue to Grow 8%-9% Over Next Two Years
Sources: Company filings and Moody’s Investors Service estimates
CAPEX STABILIZING AT RELATIVELY HIGH LEVELS
The company is tracking towards the higher-end of management’s capex guidance for 2016 or about IDR6.5-7.5 trillion as it continues
rolling out 4G LTE services across the major cities in Indonesia.
We expect capex to stabilize at relatively high levels over the next two years to support investments in LTE services which are
imperative for the company to remain competitive.
Exhibit 6
Capex-to-revenue Ratio to Stabilize at Current Level of 28%-30%
Sources: Company filings, Moody’s Financial Metrics and Moody’s Investors Service estimates
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CORPORATES
In January 2016, Indosat Ooredoo and XL also announced a collaborative network-sharing agreement to expand their 4G-LTE services
in certain cities. The agreement will enable them to efficiently launch LTE services in greenfield areas, allowing them to achieve their
breakeven and profitability goals relatively quickly.
In addition, in May, these companies announced a 50-50 joint venture to provide consultancy services for future network
collaboration. However, the Business Competition Supervisory Commission (KPPU) later announced an investigation into potential
cartel practices between them in relation to this joint venture.
As a result, we believe this development could slow the pace of collaboration and network sharing between them and thus limited any
near-term threat to Telkomsel's market dominance in these areas.
Liquidity Analysis
Indosat Ooredoo has maintained an adequate liquidity for its rating category. The company came close to breaching its maintenance
covenants in 2009, but since then, has demonstrated a track record of maintaining adequate headroom which we believe to be
sustainable.
We estimate Indosat Ooredoo's cash balance of IDR2.4 trillion, combined with projected operating cash flow of around IDR9.0 trillion
over the next 12 months, will be insufficient to cover its debt maturities, projected capex and dividend payments. However, we expect
debt maturities in the next 12 months will be refinanced with longer dated rupiah bonds, subject to market conditions.
Exhibit 7
Indosat Ooredoo’s Cash Sources And Uses Over Next 12 months
Source: Moody’s Investors Service estimates
Overall, we consider the refinancing risk over the next two years to be limited, given the company’s demonstrated strong access to
local bank and bond markets, as exhibited by Indosat Ooredoo issuing IDR4 trillion bonds in 2015, and a further IDR3.5 trillion for the
nine months ended September 2016.
Other Considerations
Litigation: In January 2013, Indonesia's Attorney General's Office pressed a corruption case against Indosat Ooredoo and its wholly
owned subsidiary, PT Indosat Mega Media (IM2, unrated), in connection with the use of a 3G operating license.
Given the network operator and service provider relationship between Indosat Ooredoo and IM2, the latter leases the cellular network
owned by Indosat Ooredoo. The alleged offences are against IM2 not paying upfront fees and frequency right fees for such network
utilization.
As per representations by Indosat Ooredoo, these views differ from that of the telecommunications regulator, the Minister of
Communications and Informatics, which has confirmed that IM2 has not utilized the frequency and is not required to pay the
frequency right fees.
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Indosat Tbk. (P.T.): Credit Opinion Update
CORPORATES
MOODY'S INVESTORS SERVICE
In January 2014, the Appellate Court annulled the High Court’s decision in July 2013 to fine the company IDR1.36 trillion and pressed
charges against the concerned individual only. However, Indosat Ooredoo remains exposed to some uncertainty and regulatory
overhang as the Attorney General’s Office has the right to file a fresh case against IM2 reinstating the fine.
As of September 2016, Indosat Ooredoo has fully provided for IM2’s disputed fine amount of IDR1.36 trillion, calculated on a
retrospective basis.
Rating Methodology and Scorecard Factors
In accordance with Moody's global rating methodology for telecommunications companies (refer to Rating Methodology Global
Telecommunications Industry, December 2010), Indosat Ooredoo's overall performance measurements and underlying fundamentals
(as of September 2016) -- relative to the rating methodology -- indicate a Baa3 rating category.
Indosat Ooredoo's final rating of Ba1 reflects the competitive operating environment for mobile operators. But the rating also benefits
from a one-notch uplift due to expected support from Ooredoo.
Exhibit 8
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporates. [2] This represents Moody's forward view; not the
view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestures
Source: Moody's Financial Metrics and Moody's Investors Service estimates
Ratings
Exhibit 9
Category
INDOSAT TBK. (P.T.)
Outlook
Corporate Family Rating -Dom Curr
Issuer Rating -Dom Curr
Moody's Rating
Positive
Ba1
Ba1
Source: Moody's Investors Service
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REPORT NUMBER
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13 December 2016
1053381
Indosat Tbk. (P.T.): Credit Opinion Update
CREDIT OPINION
13 December 2016
Indosat Tbk. (P.T.)
Credit Opinion Update
Update
Summary Rating Rationale
Indosat Tbk. (P.T.)’s (Indosat Ooredoo) Ba1 corporate family rating combines:
RATINGS
Indosat Tbk. (P.T.)
Domicile
Indonesia
Long Term Rating
Ba1
Type
LT Corporate Family
Ratings - Dom Curr
Outlook
Positive
Please see the ratings section at the end of this report
for more information. The ratings and outlook shown
reflect information as of the publication date.
Contacts
Maisam Hasnain
852-3758-1420
Associate Analyst
maisam.hasnain@moodys.com
Annalisa Di Chiara
852-3758-1537
VP-Sr. Credit Officer
annalisa.dichiara@moodys.com
Laura Acres
MD-Corporate Finance
laura.acres@moodys.com
65-6398-8335
1. The company's standalone credit strength, which reflects its established market position,
our expectation of moderate growth in the cellular market, and an improving macroenvironment. However, competition, especially in mobile data space, will continue to
pressure EBITDA margins although we expect them to remain high for the rating level
around 50%
2. The credit support we believe Ooredoo Q.S.C. (A2 stable) is likely to provide in a distress
scenario.
That’s because we consider Indosat Ooredoo as a strategic investment for Ooredoo
reflecting (1) majority ownership by Ooredoo, (2) the company is Ooredoo's largest nondomestic business, representing around 24% of gross revenue and 27% of reported EBITDA
for the nine months ended September 2016, and (3) the existence of cross-default provisions
between Ooredoo's debt and Indosat Ooredoo's debt.
Indosat Ooredoo's final rating of Ba1 benefits from a one-notch uplift due to such expected
support from Ooredoo.
Rating Outlook
The positive outlook reflects our expectation that Indosat Ooredoo will continue to grow and
de-lever and that the competitive and regulatory environments remain benign.
Factors that Could Lead to an Upgrade
The rating could be upgraded within the next 6-12 months if the (1) company maintains
its market position and growth momentum, (2) competition remains relatively benign,
(3) the regulatory environment remains stable, and (4) dividends and shareholder returns
remain within expectations. Positive rating pressure could also arise if it sustains strong credit
metrics, such that adjusted gross debt/EBITDA remains below 2.5x and RCF/ adjusted debt
remains above 30-35%.
Factors that Could Lead to a Downgrade
The outlook could return to stable if there is a material deterioration in its underlying credit
strength, arising from diminishing operating margins, weaker operating cash flows, or rising
foreign-exchange risk; all of which may be reflected in (1) adjusted debt/EBITDA rising above
2.5x, or (2) retained cash flow/adjusted debt falling below 30% on a sustained basis. In
addition, the one-notch uplift -- based on expected support from parent company, Ooredoo
CORPORATES
MOODY'S INVESTORS SERVICE
-- could be removed if its stake falls below 50%, or if it indicates that Indosat Ooredoo is no longer a core asset.
Key Indicators
Exhibit 1
Source: Moody's Investors Service
Credit Strengths
»
Position as one of the leading mobile operators in Indonesia
»
Ongoing improvement in operating metrics
»
Declining leverage and FX exposure
»
Strong shareholder provides rating uplift
Credit Challenges
»
Exposure to Indonesia’s competitive, although stabilizing, operating environment
»
Capex stabilizing at relatively high levels
Corporate Profile
Headquartered in Jakarta, Indosat Tbk. (P.T.) (Indosat Ooredoo) is a fully-integrated telecommunications network and services provider.
It provides multimedia, data communications and internet services, and is also a leading provider of international call services. With
total revenue of IDR28.7 trillion (approximately US$2.1 billion) for the 12 months ended September 2016, the company is the country's
second largest cellular operator by revenue.
Detailed Rating Considerations
ESTABLISHED POSITION IN A GROWING MARKET AND INTEGRATED BUSINESS MODEL UNDERPIN RATING
Indosat Ooredoo provides a full range of services across fixed-line and cellular networks. However, as of September 2016, its cellular
business generated 83% of revenues, fixed data 14%, and fixed-voice services 3%. The cellular business continues to drive revenue
growth with 12% year-on-year (YoY) growth during the nine months ended September 2016.
Indosat Ooredoo is the second largest cellular operator in Indonesia in terms of revenue and subscribers, with a with around 82 million
subscribers (22% subscriber market share) as of September 2016. In comparison, its peer, Telekomunikasi Selular (P.T.) (Telkomsel, Baa1
stable), dominates the market with about 164 million subscribers, while XL Axiata Tbk (P.T.) (Ba1 positive) had 45 million subscribers.
Currently, Indosat Ooredoo has the largest allocation of 900MHz spectrum (which is better suited for increasing network coverage);
however, its allocation of 3G spectrum (2100 MHz) is lower than XL and Telkomsel, both of which have 15MHz in this bandwidth.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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Indosat Tbk. (P.T.): Credit Opinion Update
MOODY'S INVESTORS SERVICE
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Exhibit 2
Spectrum Holdings of Mobile Operators
Sources: Companies’ filings and Moody’s Investors Service estimates
The telecom regulator may plan to auction additional spectrum -- two blocks (5MHz each) in the 2100MHz frequency band and
two blocks (15MHz each) in the 2300MHz band – within the next 12 months. In this scenario, we expect mobile operators, including
Indosat, to bid for both these bands.
While auction guidelines have yet to be published, we expect the regulator to maintain a prudent approach to the auction process
(including setting spectrum base prices), such that it will not result in an aggressive bidding war which could materially impair the
credit quality of the winning bidders.
ONGOING IMPROVEMENTS IN OPERATING PERFORMANCE
Indosat Ooredoo’s has shown strong growth in subscribers and revenue since 1Q 2015, after having significantly stepped up its
marketing initiatives, although these subscriber additions have come with lower ARPUs as compared with Telkomsel and XL. Still,
Indosat Ooredoo has maintained its adjusted EBITDA margins at around 50% for LTM September 2016, among some of the highest in
the telco rated universe.
Exhibit 3
Diverging Trends in Subscriber Growth and ARPUs Since 1Q 2015 Amongst Top 3
Sources: Companies' filings
The company’s positive outlook reflects the substantial improvement in its operating profile, which has benefitted from early
gains in subscribers and absolute EBITDA expansion from its growth strategy. Still we would like to see a continued track record of
strengthening operational metrics and ongoing stability in its financial profile over the next few quarters to support upwards ratings
action.
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DECLINING LEVERAGE AND FX EXPOSURE
Indosat Ooredoo has maintained stable and moderate leverage level – as measure by adjusted debt to EBITDA - as increases in
absolute debt have been offset by incremental EBITDA.
As shown in Exhibit 4, Leverage declined to 2.0x for LTM September 2016 from 2.5x as of December 2015 – reflecting both lower debt
levels and higher EBITDA - a trend which we expect will continue over the next two years. To that end, the company has also stated its
broad financial policy to reduce reported net leverage to around 1.7x
Exhibit 4
Indosat Ooredoo’s Leverage Will Continue To Decline
Sources: Moody’s Financial Metrics and Moody’s Investor Service estimates
The company is also exploring a further reduction in leverage through the monetization of surplus plants, property and equipment, or
through the sale-and-leaseback on another tranche of towers. For the latter, given our standard adjustments to capitalize operating
leases, these transactions may not reduce adjusted leverage significantly, but would benefit absolute reported debt levels and liquidity.
In 2015, Indosat Ooredoo reduced its foreign exchange exposure through the early redemption of its $650 million bonds due 2020,
cash on hand and US dollar revolver credit facilities – totaling $500 million with maturities staggered over the next 2-3 years – and
which can be prepaid any time before maturity.
We expect the company’s exposure to US dollar debt to decline further over the next 12-18 months as it plans to refinance the noted
US dollar revolvers with rupiah bonds. Pro forma for this planned rupiah-denominated refinancing, its US dollar exposure will be around
12%-15% of total debt (down from 41% in December 2013).
STRONG SHAREHOLDER PROVIDES RATING UPLIFT
We consider Ooredoo's majority stake in Indosat Ooredoo as an important strategic investment that provides the company with
substantial financial resources, if needed, and industry expertise.
The strategic importance is also demonstrated by the unified brand identity, whereby Indosat Ooredoo adopted the Ooredoo brand
name in November 2015.
Ooredoo, a larger and more geographically diversified telecom operator, enjoys a relatively strong standalone operating and financial
profile and it also benefits from strong support from the Government of Qatar (Aa2 negative), its 55% shareholder. We believe
Ooredoo has the financial flexibility to accommodate any potential capital needs for Indosat Ooredoo.
In addition, there are also cross-default provisions between Ooredoo's debt and Indosat Ooredoo's debt, which means it is in the
parent's interest to ensure covenant compliance at Indosat Ooredoo.
In addition, following covenant amendments in 2009, Ooredoo has a backdoor mechanism to provide Indosat Ooredoo with a
subordinated shareholder loan, whose principal value will be excluded from total debt in covenant calculations.
As a result, Indosat Ooredoo's final rating of Ba1 benefits from a one-notch uplift reflecting the support we believe Ooredoo is likely to
provide in a distress scenario.
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EXPOSURE TO INDONESIA’S COMPETITIVE, ALTHOUGH STABILIZING, OPERATING ENVIRONMENT
Although Indonesia’s mobile sector remains competitive, it has remained relatively rational over the last two years. The number of
operators has also fallen to 7 from 10 in 2012 - also helping to ease the level of competition - as major CDMA operators have stopped
operations, and Axis, previously the fifth-largest GSM operator, has merged with XL in 2014.
With effective penetration (i.e. excluding dual SIM cards) estimated to be in the 80-85% range, we believe the market remains
conducive for organic revenue growth and that the industry will remain competitive as operators vie for subscribers.
However, we expect large GSM operators -- such as Indosat Ooredoo, Telkomsel and XL -- to remain rational with pricing strategies
and limiting the subsidizing of starter-pack SIMs, which have been unprofitable in the past.
Indonesia's price war of 2007/2008 and the brief price war in 2010 showed that any gains in subscribers resulting from aggressive
price cuts did not provide accretive gains in earnings; rather, they required operators to accelerate capex at the expense of margins and
financial metrics.
We estimate the Indonesian mobile sector revenue is likely to grow a healthy 8%-9% over the next two years, on the back of
15%-20% growth in data revenue, reflecting the strong demand for 3G/4G LTE services and the proliferation of smartphones.
Exhibit 5
Indonesian Mobile Sector Revenue to Grow 8%-9% Over Next Two Years
Sources: Company filings and Moody’s Investors Service estimates
CAPEX STABILIZING AT RELATIVELY HIGH LEVELS
The company is tracking towards the higher-end of management’s capex guidance for 2016 or about IDR6.5-7.5 trillion as it continues
rolling out 4G LTE services across the major cities in Indonesia.
We expect capex to stabilize at relatively high levels over the next two years to support investments in LTE services which are
imperative for the company to remain competitive.
Exhibit 6
Capex-to-revenue Ratio to Stabilize at Current Level of 28%-30%
Sources: Company filings, Moody’s Financial Metrics and Moody’s Investors Service estimates
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In January 2016, Indosat Ooredoo and XL also announced a collaborative network-sharing agreement to expand their 4G-LTE services
in certain cities. The agreement will enable them to efficiently launch LTE services in greenfield areas, allowing them to achieve their
breakeven and profitability goals relatively quickly.
In addition, in May, these companies announced a 50-50 joint venture to provide consultancy services for future network
collaboration. However, the Business Competition Supervisory Commission (KPPU) later announced an investigation into potential
cartel practices between them in relation to this joint venture.
As a result, we believe this development could slow the pace of collaboration and network sharing between them and thus limited any
near-term threat to Telkomsel's market dominance in these areas.
Liquidity Analysis
Indosat Ooredoo has maintained an adequate liquidity for its rating category. The company came close to breaching its maintenance
covenants in 2009, but since then, has demonstrated a track record of maintaining adequate headroom which we believe to be
sustainable.
We estimate Indosat Ooredoo's cash balance of IDR2.4 trillion, combined with projected operating cash flow of around IDR9.0 trillion
over the next 12 months, will be insufficient to cover its debt maturities, projected capex and dividend payments. However, we expect
debt maturities in the next 12 months will be refinanced with longer dated rupiah bonds, subject to market conditions.
Exhibit 7
Indosat Ooredoo’s Cash Sources And Uses Over Next 12 months
Source: Moody’s Investors Service estimates
Overall, we consider the refinancing risk over the next two years to be limited, given the company’s demonstrated strong access to
local bank and bond markets, as exhibited by Indosat Ooredoo issuing IDR4 trillion bonds in 2015, and a further IDR3.5 trillion for the
nine months ended September 2016.
Other Considerations
Litigation: In January 2013, Indonesia's Attorney General's Office pressed a corruption case against Indosat Ooredoo and its wholly
owned subsidiary, PT Indosat Mega Media (IM2, unrated), in connection with the use of a 3G operating license.
Given the network operator and service provider relationship between Indosat Ooredoo and IM2, the latter leases the cellular network
owned by Indosat Ooredoo. The alleged offences are against IM2 not paying upfront fees and frequency right fees for such network
utilization.
As per representations by Indosat Ooredoo, these views differ from that of the telecommunications regulator, the Minister of
Communications and Informatics, which has confirmed that IM2 has not utilized the frequency and is not required to pay the
frequency right fees.
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In January 2014, the Appellate Court annulled the High Court’s decision in July 2013 to fine the company IDR1.36 trillion and pressed
charges against the concerned individual only. However, Indosat Ooredoo remains exposed to some uncertainty and regulatory
overhang as the Attorney General’s Office has the right to file a fresh case against IM2 reinstating the fine.
As of September 2016, Indosat Ooredoo has fully provided for IM2’s disputed fine amount of IDR1.36 trillion, calculated on a
retrospective basis.
Rating Methodology and Scorecard Factors
In accordance with Moody's global rating methodology for telecommunications companies (refer to Rating Methodology Global
Telecommunications Industry, December 2010), Indosat Ooredoo's overall performance measurements and underlying fundamentals
(as of September 2016) -- relative to the rating methodology -- indicate a Baa3 rating category.
Indosat Ooredoo's final rating of Ba1 reflects the competitive operating environment for mobile operators. But the rating also benefits
from a one-notch uplift due to expected support from Ooredoo.
Exhibit 8
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporates. [2] This represents Moody's forward view; not the
view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestures
Source: Moody's Financial Metrics and Moody's Investors Service estimates
Ratings
Exhibit 9
Category
INDOSAT TBK. (P.T.)
Outlook
Corporate Family Rating -Dom Curr
Issuer Rating -Dom Curr
Moody's Rating
Positive
Ba1
Ba1
Source: Moody's Investors Service
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