A Government That's Both Shareholder and Creditor
Indosat's full-year 2018 results, covered separately, show a subscriber base cut nearly in half by a regulatory SIM re-registration rule. Underneath that operating story sits a second one this post covers on its own: a leverage cushion that nearly disappeared, a network build increasingly financed off the cash flow statement, and a decade-old legal liability that puts the Indonesian government - already Indosat's second-largest shareholder at 14.29%, with a golden veto share - in the unusual position of also being the company's creditor.
The Prescription
Indosat should stop treating vendor-financed capex as a free lunch. Cash capital expenditure actually fell slightly this year (Rp5,458.3 billion, down from Rp5,831.2 billion), but the amount of property and equipment acquired through payables and finance leases - not cash - jumped to Rp6,972.2 billion combined, nearly double 2017's Rp3,752.6 billion. That's a company financing its network build increasingly off the cash flow statement and onto future obligations, in the same year its debt-to-EBITDA covenant cushion nearly evaporated. A telecom operator whose interest coverage ratio just fell from 7.8x to 3.9x in twelve months has no business leaning harder on vendor financing to keep its reported capex number down.
Beyond the Usual
The covenant cushion that mattered didn't breach, but it nearly disappeared
Indosat's own debt agreements require it to keep gross debt under 3.5x EBITDA and EBITDA at least 3x interest expense. Both ratios stayed within covenant this year, but only just: gross debt to EBITDA jumped from 1.5x in 2017 to 3.3x in 2018 - within half a turn of the 3.5x ceiling - as EBITDA nearly halved while gross debt kept rising (Rp19,501.0 billion to Rp21,429.6 billion, before finance leases). EBITDA-to-interest coverage fell from 7.8x to 3.9x, barely above the 3x floor. None of this is a breach, and management separately disclosed amending its debt-to-equity covenants in prior periods specifically to manage rupiah volatility - Indosat has a track record of proactively renegotiating terms rather than getting surprised by them. But a cushion this thin, in a year the company's own numbers show can evaporate that fast, is worth watching closely if 2019 brings any further regulatory or competitive shock.
A decade-old corruption case is still sitting on the balance sheet, now booked as a debt to the state
Indosat carries a Rp1,358.6 billion "provision for legal case," unchanged in amount since it was first recognized in 2014, tied to a Supreme Court decision that Indosat's former subsidiary IM2 owed the state compensation for allegedly using Indosat's 3G license without paying the associated frequency and concession fees. The saga runs from a 2012 Attorney General investigation through a corruption-court conviction, an appeal that annulled the payment order against IM2 specifically (while upholding the prison sentence for IM2's former president director), a separate administrative-court ruling that the government's own loss-calculation report was itself illegal, and a 2015 Supreme Court judicial review that went against the company - and, as of this filing, the company still hadn't received the official copy of that final decision. Indosat's related-party note now classifies the entire Rp1,358.6 billion provision as a liability to the Government of Indonesia - the same government that holds 14.29% of Indosat's own shares and a golden veto share.
Capex is increasingly showing up on the balance sheet before it shows up on the cash flow statement
Cash capital expenditure actually fell slightly this year (Rp5,458.3 billion, down from Rp5,831.2 billion), but property and equipment acquired through payables jumped from Rp3,200.4 billion to Rp5,895.1 billion, and equipment acquired under finance leases nearly doubled (Rp552.2 billion to Rp1,077.0 billion) - together, Rp6,972.2 billion of network build in 2018 that never touched the cash flow statement's investing section, against Rp3,752.6 billion the year before. The accrual-basis capital expenditure figure disclosed in the segment footnote (Rp9,288.6 billion, +48.9% year-over-year) makes this visible in a way the cash flow statement alone wouldn't.
PT Indosat Tbk's audited consolidated financial statements for the years ended December 31, 2018 and 2017, as included in the company's 2018 Annual Report, together with the Independent Auditors' Report of KAP Tanudiredja, Wibisana, Rintis & Rekan (a member firm of the PwC network in Indonesia). Operating results for the same period are covered separately in this publication's fiscal 2018 earnings post.