Indosat Ooredoo Hutchison (ISAT IJ)

Aggressive Distribution Fuels Future Growth While Ensuring Short-Term Resilience with Price Hikes

• IOH establishes another distribution layer with Indosat retailers to transition away from low ARPU to high ARPU potential users in ex-Java.
• IOH implements 5-9% price hikes to maintain revenue resilience in 2H24 while it anticipates the sector to recover by 1Q25.
• We maintain our BUY rating on IOH (TP: Rp13,300), implying premium valuation driven by growth from IOH's expanding distribution.

Focus on Gross Adds with ARPU potential

IOH identifies ~20-22mn gross subscriber additions in the sector that rotate between operators monthly, causing supply bottlenecks. While IOH contributes ~1/4 of these adds, it plans to phase them out and prioritize acquisitions in ex-Java areas with higher ARPU potential. This strategy supports IOH’s shift away from wholesalers to its new distribution model, which better aligns with IOH’s growth and subscriber optimization objectives. As a result, IOH does not expect spikes in 3Q24 subscriber growth (contrary to market speculation).

Aiming for long-term growth by expanding its own distribution network

IOH has rolled out ~2,000 distribution points in ex-Java, alongside the ~48 pre-merger distributors. It now aims to add another layer of Preferred Indosat Retailers in ex-Java. To support this, IOH has deployed personnel to train these new retailers. IOH asserts that the incurred OPEX will be offset by avoiding ~700,000 annual churn due to its expanded market presence. Thus, we believe IOH can optimize its subscriber mix and derive greater profit margins.

Implementing price hikes while awaiting market improvement by 1Q25

IOH acknowledges the sector's growth weakness, partly due to Telkomsel's introduction of its new brand, in our view. However, Indosat expects the outlook to improve by 1Q25. In the meantime, IOH raised prices by 5-9% in its online channels in September, with plans for further increases in offline channels by the end of the month. We believe these increases target sticky customers who have come to value IOH’s improved 4G network.

Maintain BUY: Premium valuation justified by strong ARPU upside

We maintain our BUY rating for ISAT with a TP of Rp13,300, which implies 5.2x EV/EBITDA. ISAT's new distribution model is well-positioned to unlock significant ARPU upside and expand profit margins, justifying its premium valuation (EV/EBITDA 4.6x vs. sector 4.2x). Main downside risk stems mainly from heightened competition intensity.

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