Declining Legacy Revenues And Heavy CapEx Will Impair Outlook

Key Takeaways

• Structural revenue and margin pressures from shrinking legacy businesses and intense regional competition threaten sustainable growth and profitability.
  
• Heavy capital spending amid limited new revenue traction and rising regulatory demands heightens financial risk, especially with mounting debt and volatile market dynamics.
  
• Strategic price adjustments, strong AI-cloud growth, network investment, healthier industry competition, and expanding broadband are driving long-term revenue and margin improvement opportunities.

Catalysts

Provides digital telecommunication services in Indonesia.

• The rapid adoption of over-the-top communication platforms such as WhatsApp and Skype is accelerating the decline in traditional voice and SMS revenues, further eroding Indosat Ooredoo Hutchison's high-margin legacy business and placing structural pressure on topline growth and net margins over time.
  
• Heightened regulatory scrutiny in Indonesia, coupled with potential price controls or universal service requirements tied to digital inclusion policies, increases the risk of margin compression and forces the company into heavy, recurring capital expenditures at a time when organic revenue growth is already under pressure.
  
• Despite ambitious guidance around AI-driven new revenue streams and B2B contracts, actual contribution from these initiatives remains very limited in the near term, with less than one fifth of the forecasted annual AI revenue realized by mid-year; this creates execution risk and potential disappointment on both topline and EBITDA, especially if ramp-up lags optimistic projections.
  
• The 85% quarter-on-quarter growth in capital expenditures-more than half of full-year guidance by mid-year-is raising net debt levels and future finance costs, putting further strain on free cash flow and increasing vulnerability to interest rate hikes or currency volatility given the heavy post-merger debt load.
  
• Persistent ARPU compression across the broader Southeast Asian market, combined with continued aggressive pricing from competitors like Telkomsel and XL Axiata, undermines efforts at sustainable ARPU growth and risks margin erosion, particularly as the price-sensitive lower-middle-class segment continues to struggle and may not absorb recent price hikes, further challenging revenue sustainability.

Indosat Ooredoo Hutchison Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Indosat Ooredoo Hutchison compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Indosat Ooredoo Hutchison's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.2% today to 8.6% in 3 years time.
• The bearish analysts expect earnings to reach IDR 5313.6 billion (and earnings per share of IDR 171.69) by about August 2028, up from IDR 4511.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, down from 16.2x today. This future PE is lower than the current PE for the ID Wireless Telecom industry at 22.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.46%, as per the Simply Wall St company report.

Indosat Ooredoo Hutchison Future Earnings Per Share Growth

Risks

• Indosat Ooredoo Hutchison is successfully implementing price increases and removing freebies on entry-level packs, with early signals indicating customers are absorbing these changes and moving to higher plans, which could drive higher average revenue per user and potentially improve revenue growth.
  
• Strong momentum in the AI-cloud business, with annual long-term contracts ramping up and management expecting at least IDR 70–75 million in incremental AI-cloud revenue next year at approximately 60 percent EBITDA margin, sets a foundation for high-margin revenue growth and enhanced overall earnings.
  
• The company is executing significant investment in network expansion and digital infrastructure, including CapEx on new base stations and AI infrastructure, which is recognized by third parties for quality, positioning them well for long-term subscriber growth and market leadership that can boost future revenue and profitability.
  
• Market repair initiatives and increased industry rationality are taking hold across the sector, with management observing improved behavior from competitors and positive ARPU and revenue trends, thus reducing the risk of destructive price wars and supporting better net margins.
  
• Expansion in fiber broadband with ambitions for significant customer additions and increasing market share, together with improving postpaid ARPU and robust growth in value-added services, indicate multiple long-term revenue growth engines that can drive improvement in both top-line and bottom-line financials.

Valuation

• The assumed bearish price target for Indosat Ooredoo Hutchison is IDR1836.71, which represents two standard deviations below the consensus price target of IDR2601.43. This valuation is based on what can be assumed as the expectations of Indosat Ooredoo Hutchison's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR3300.0, and the most bearish reporting a price target of just IDR1600.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be IDR61504.2 billion, earnings will come to IDR5313.6 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of IDR2270.0, the bearish analyst price target of IDR1836.71 is 23.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.