Newly appointed Indosat president director Chris Kanter, right, speaking with Indosat president commissioner Waleed Mohamed Ebrahim Alsayed, center, and outgoing president director Joy Wahjudi after an extraordinary general shareholders' meeting in Jakarta on Oct. 17. (Antara Photo/Muhammad Adimaja)

Is Indosat Realistic in Its Quest to Massively Hike Capex?


OCTOBER 22, 2018

Jakarta. Chris Kanter, the newly appointed chief of Indosat, said he plans a massive transformation of the telecommunications service provider's business, while also proposing an ambitious hike in capital expenditure to improve the company's networks and services in Indonesia.

Chris, who has served as a commissioner at Indosat since 2010, replaced Joy Wahjudi, who stepped down at the end of September. Speaking to journalists at a gathering in Jakarta on Thursday, Chris said Indosat is looking at setting aside capex of Rp 30 trillion ($1.98 billion) over the next two years.

This figure is considered somewhat unrealistic, prompting at least one stock analyst to question whether the company would be able to secure funding for such a massive increase. Indosat, Indonesia's second-largest mobile phone operator by subscriber numbers, budgeted just Rp 8 trillion for capex this year.

Indosat reported a loss of Rp 693.7 billion in the first six months, compared with Rp 784.2 billion in profit in the same period last year.

The company has been outperformed over the past few quarters by its closest rival, XL Axiata, the country's third-largest mobile phone operator.

Analysts have blamed slow and insufficient spending on network expansion as one of the main reasons for Indosat's sliding fortunes in an already saturated industry, while a government regulation requiring registration of SIM cards also saw the company losing a significant number of subscribers.

Chris, whose family controls Sigma Sembada, a conglomerate with diversified interests, including turnkey contractors, transportation and logistics, said the entire capex amount would be used to build at least 4,000 base transceiver stations.

He said the company would still need more funding to improve its human resources capacity, hire consultants and fund other business operations.

"We will make a massive transformation in the company," said Chris, who also plays an active role in the Indonesian Chamber of Commerce and Industry (Kadin).

"I requested this amount in capex from the company's shareholders before I agreed to take up this position [as president director]," he added.

Ooredoo Asia, an affiliate of Doha-based telecommunications giant Ooredoo, controls 65 percent of Indosat, while the Indonesian government has a 20.7 percent stake.

However, Chris said the size of the capex was not yet final and that Indosat may only finalize the amount by the end of this year.

Mission Impossible?

Victoria Venny, an equity analyst at MNC Sekuritas, said a mobile phone operator should ideally set aside between 20 percent and 25 percent of its annual revenue for capex.

"If they can book Rp 30 trillion [in annual] revenue, then the ideal capex is at about Rp 6 trillion to Rp 7.5 trillion. If they plan to go for Rp 30 trillion [in capex], it would likely be difficult to achieve," she said, adding that Indosat may have limited options to secure such massive funding.

Indosat booked Rp 11.06 trillion in sales between January and June this year – 26.7 percent lower than in the corresponding period last year. Room to secure additional funding is also limited, with its net debt-to-equity ratio (used to measure a company's financial leverage) already at between 1.4 and 1.5 – far higher than its rivals, XL Axiata and Telekomunikasi Indonesia, which have net DERs of between 0.5 and 0.6.

Meanwhile, Indosat's total DER is already at 2.6, with most analysts considering 3 as the maximum level for a telecommunications company. With total debt at slightly more than Rp 36 trillion and equity at Rp 13 trillion as of June this year, the maximum amount of debt the company can take on is Rp 39 trillion if it does not want to exceed a DER of 3.

"If Indosat is looking for capex funding through more debt, that will be very difficult. At the maximum, it can only secure Rp 3 trillion," Venny said, adding that the company's current cash flow also does not support such a plan.

"Furthermore, selling bonds nowadays is very difficult," she said, referring to weak investor appetite for assets in high-risk, high-yield emerging markets.

What About a Rights Issuance?

Venny suggested that Indosat restructure its financial situation, with one of the most realistic options being a rights issuance to boost equity. But this is not an easy option, as it requires government approval.

"The government, as one of the major shareholders in Indosat, may not want to spend more money on Indosat, or may not want to have its portion diluted," she said.

Venny added that shareholders may also look for a consolidation, including the acquisition of another player.

Indosat's share price rose 1.13 percent to Rp 2,680 at Friday's closing, while the broader index declined 0.14 percent.