AI Cloud Partnerships With NVIDIA, Google, And Accenture Will Fuel Long-term Earnings Growth

Key Takeaways

• Merger synergies and efficiency drives enhance profitability and margin expansion, supporting improved net profit margins.
  
• AI cloud services and rural market expansion drive revenue growth through new contracts, partnerships, and increased subscriber base.
  
• Declining subscriber base, lower ARPU, and increased marketing expenses could strain revenue and margins amid broader economic challenges.

Catalysts

Provides telecommunication services in Indonesia.

• The merger synergies, delivering $450 million of recurring annualized synergies above what was initially promised, have led to notable operational efficiencies and cost savings, positioning the company for improved profitability and margin expansion. This is likely to positively impact net margins moving forward.
  
• Indosat's AI cloud services, with secured multiyear contracts and partnerships with NVIDIA, Google, and Accenture, are expected to become a significant growth engine. As these services ramp up, they are anticipated to enhance revenue streams and contribute to long-term earnings, given the increasing adoption of AI technologies.
  
• The expansion into rural areas with new sites and service points allows Indosat to tap into underpenetrated markets, adding new subscribers and increasing population coverage. This strategic move is expected to drive revenue growth by broadening the customer base and increasing service penetration.
  
• Investments in digital platforms (IM3 and bima+) have led to an increase of 5 million app users year-on-year. App users reportedly generate 50% higher ARPUs compared to the overall base, which suggests potential for sustained revenue growth and improved profitability as digital adoption increases.
  
• The implementation of efficiency drives and increased pricing in select channels are expected to support EBITDA margin expansion towards the target of around 50%, reflecting disciplined cost management and stronger pricing power in various segments. This is positioned to improve both EBITDA and net profit margins.

Indosat Ooredoo Hutchison Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Indosat Ooredoo Hutchison's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 11.1% in 3 years time.
• Analysts expect earnings to reach IDR 7835.7 billion (and earnings per share of IDR 264.54) by about December 2027, up from IDR 5597.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as IDR 4491.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2027 earnings, up from 14.0x today. This future PE is greater than the current PE for the ID Wireless Telecom industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 2.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.93%, as per the Simply Wall St company report.

Indosat Ooredoo Hutchison Future Earnings Per Share Growth

Risks

• The company's subscriber base has been continuously declining, which could impact its revenue and market share in the future.
  
• There is a noted decline in ARPU on a quarter-on-quarter basis due to seasonal factors and SIM consolidation, which may affect revenue growth.
  
• The company's broadband user growth and revenue momentum are trending lower, indicating challenges in expanding this line of business, potentially impacting future revenue streams.
  
• High marketing expenses, which increased by 40%, could pressure net margins if not controlled or offset by significant revenue growth.
  
• The broader macroeconomic challenges and softening consumer demand may continue to impact the company's financial performance, potentially affecting revenue and earnings.

Valuation

• The analysts have a consensus price target of IDR 3171.59 for Indosat Ooredoo Hutchison based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR 3800.0, and the most bearish reporting a price target of just IDR 2670.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be IDR 70658.8 billion, earnings will come to IDR 7835.7 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 11.9%.
• Given the current share price of IDR 2430.0, the analyst's price target of IDR 3171.59 is 23.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.