ISAT The One-Off Gain That Was the Only Thing Keeping 2018 Profitable

A Profit That Didn't Need a One-Off This Time

For the three months ended June 30, 2019 (derived from the six-month interim filing less the already-published Q1 2019 quarter - see the Key Financial Metrics section below for the exact subtraction), Indosat's consolidated revenue grew 19.0% year-over-year to Rp6,245.4 billion, and adjusted EBITDA^» grew 15.9% to Rp2,897.1 billion. On the surface that reads like solid, unremarkable growth. It isn't, once you look at what was actually inside last year's number.

Q2 2018's entire operating profit existed because of a single unallocated, non-operating item: a Rp924.9 billion "gain associated with the loss of control of a subsidiary" that landed entirely in this one quarter (none of it was in Q1 2018). Strip that gain out, and Indosat's Q2 2018 operating income of Rp480.0 billion becomes a Rp444.9 billion operating loss - the underlying business, without the one-off, wasn't profitable at all. This quarter carried no comparable one-off of that size, and operating income still came in positive (Rp559.5 billion) even before adding back the smaller, ongoing Telkomsel frequency-swap gain (see below). Ex-one-off adjusted EBITDA - the cleanest read of the two quarters - grew 70.0% year-over-year, from Rp1,574.2 billion to Rp2,675.4 billion.

The improvement wasn't limited to the income statement. Free cash flow^» swung from essentially breakeven a year earlier (Rp5.6 billion) to a real Rp567.4 billion this quarter, as operating cash flow more than doubled while property capex grew only 99.5%. Cash still fell during the quarter (Rp2,227.1 billion to Rp1,782.8 billion) - but that's a financing-activity story, not an operating one: Q1 2019 had raised a large amount of fresh long-term debt ahead of a bigger construction push, and Q2 was the quarter that debt started coming back down (see Key Financial Metrics).

The Prescription

MIDI needs attention before it stops being the segment that works. It's still the only one of Indosat's three segments running a positive segment result this quarter (Rp23.6 billion), but that result collapsed 83.9% year-over-year (from Rp146.8 billion) on essentially flat revenue (-0.5%) - margin compression from 15.2% to just 2.5%. A segment that was earning real money is now barely breaking even, and if that trend continues one more quarter, Indosat's income statement stops having a segment that actually makes money on its own, one-offs aside.

Selular's improvement is real and worth protecting, not just enjoying. The segment's loss narrowed from Rp683.9 billion to Rp27.9 billion - a swing large enough that it's most of this quarter's entire story - on the back of 24.4% revenue growth that outran cost growth for the first time. Whether that holds without an unusually strong quarter (Ramadan and Eid al-Fitr both fell within this period, in late May/early June 2019, a seasonally higher-usage window for Indonesian telecoms) is the thing to watch in the next quarter's numbers, not assume.

Key Financial Metrics

Q2 2019 (quarter ended Jun 30, 2019) vs. Q2 2018, both derived as (six-month cumulative − already-published Q1), consolidated

FX: Rp14,141 = US$1, Bank Indonesia's own middle rate as at June 30, 2019 (per Note 38 of the filing). Applied to both years' local-currency figures below for scale reference, same approach as the Q1 2019 post.

Both quarters below are derived, not directly filed: Indosat's interim statements only disclose six-month (H1) cumulative figures for H1 2019 and H1 2018, and standalone three-month figures for Q1 2019 and Q1 2018 (restated) were already published in the Q1 2019 post. Q2 = H1 − Q1 for every line below; every subtraction reconciled exactly against the filing's own subtotals before being used.

Metric	Q2 2019 (Rp)	Q2 2019 (US$)	Q2 2018 (Rp)	YoY
Revenue	Rp6,245.4B	~$441.7M	Rp5,246.4B	+19.0%
Adjusted EBITDA» (operating profit + D&A)	Rp2,897.1B	~$204.9M	Rp2,499.1B	+15.9% (+70.0% excl. one-offs both years)
Operating Income» (company-reported subtotal before finance items)	Rp559.5B	~$39.6M	Rp480.0B	+16.6% (a Rp444.9B loss excl. 2018's one-off gain)
Net Income (attributable to owners)	-Rp39.4B	~-$2.8M	-Rp288.5B	loss narrowed 86.3%
Free Cash Flow» (operating cash flow − capex)	Rp567.4B	~$40.1M	Rp5.6B	swung to real positive FCF
Total Cash (vs. Mar 31, 2019)	Rp1,782.8B	~$126.1M	n/a	-20.0% QoQ (debt paydown, not an operating issue - see below)

Revenue and EBITDA both grew at a healthy clip, but what matters is what last year's comparable quarter actually looked like underneath its own one-off gain: without it, Q2 2018 was loss-making at the operating level. This quarter needed no such gain to turn a real, if still modest, operating profit.

Operating cash flow grew two-and-a-half-fold (Rp2,602.9 billion vs Rp1,026.6 billion, +153.6%), while capital expenditure (property and equipment only) grew 99.5% (Rp2,035.6 billion vs Rp1,020.9 billion) as Indosat kept building out network capacity - both grew, but operating cash flow grew faster, which is why free cash flow turned solidly positive rather than repeating Q1's cash burn. The cash balance actually fell versus Q1 2019's quarter-end specifically because financing activities swung from a Rp1,467.2 billion net inflow in Q1 (new long-term loans and bonds raised ahead of the capex push) to a Rp1,065.5 billion net outflow in Q2 (debt principal repayments, with no comparable new borrowing this quarter).

Total debt (short-term loans, current and non-current bonds/sukuk/loans, excluding lease liabilities) fell 2.2% quarter-over-quarter, from Rp23,147.5 billion at March 31, 2019 to Rp22,636.3 billion at June 30, 2019 - the first quarter-over-quarter decline, consistent with the financing-activity swing above. Net debt (total debt less cash) rose slightly (Rp20,920.4 billion to Rp20,853.6 billion is roughly flat, -0.3%) since the cash decline nearly offset the debt paydown.

Key Operational Metrics

No investor presentation was located for this quarter among the sourced documents either - only the filed interim financial statements, same gap as the Q1 2019 post - so subscriber count, ARPU^», and minutes-of-usage data remain not available for this specific post.

What the filing does disclose:

• Employee headcount: approximately 3,704 (including non-permanent employees) as of June 30, 2019, essentially flat versus 3,700 at December 31, 2018 and versus Q1 2019's count
• Capital-expenditure commitments: US$7.2 million plus Rp3,655.0 billion in signed-but-not-fully-delivered purchase orders as of June 30, 2019, down from Q1's Rp4,066.0 billion Rupiah-denominated commitment (in US Dollar terms the commitment grew, from $4.8 million to $7.2 million) - the same vendor relationships as Q1 (Huawei, Nokia Siemens Networks, Ericsson, NEC, and others), with the largest tranches still Huawei (Rp1,701.0 billion total PO, Rp1,310.1 billion not yet received) and Nokia Siemens Networks (Rp1,499.2 billion total, Rp780.4 billion not yet received)

Segment Comparison

Indosat reports three segments: Selular (cellular), MIDI (data/internet/corporate connectivity), and Telekomunikasi Tetap (fixed-line). The segment "result" below - each segment's external revenue less its own depreciation/amortization and other allocated operating expenses - is how the company itself evaluates segment performance; it excludes corporate-level items (financing, taxes, the one-off items discussed above, tower-gain amortization) that aren't allocated to any segment, so it doesn't reconcile directly to the consolidated operating-profit line above. Both quarters are derived the same way as the consolidated figures (H1 − Q1).

Segment	Revenue Q2 2019	Revenue Q2 2018	YoY	Segment Result Q2 2019	Margin 2019	Margin 2018
Selular (cellular)	Rp5,103.4B	Rp4,101.2B	+24.4%	-Rp27.9B	-0.5%	-16.7%
MIDI (data/internet/corporate)	Rp961.8B	Rp966.9B	-0.5%	Rp23.6B	2.5%	15.2%
Telekomunikasi Tetap (fixed-line)	Rp180.2B	Rp178.3B	+1.1%	-Rp57.1B	-31.7%	-27.3%
Total segment	Rp6,245.4B	Rp5,246.4B	+19.0%	-Rp61.4B

All three segments still ran a segment-level operating loss or a near-zero result this quarter - Selular's loss narrowed dramatically, but MIDI's positive result nearly disappeared, and Telekomunikasi Tetap's loss margin widened further even as its multi-quarter revenue decline finally broke (+1.1% YoY, the first growth for the segment).

Selular

Cellular's revenue growth accelerated sharply from Q1's +6.9% YoY to +24.4% this quarter, and unlike Q1, the growth finally outran cost growth: segment result improved from -Rp683.9 billion to -Rp27.9 billion, a loss narrowing of 95.9%. Ramadan and Eid al-Fitr both fell within this quarter (late May to early June 2019), a period Indonesian telecoms typically see elevated data and voice usage around - a plausible tailwind, though the filing itself doesn't isolate how much of the growth traces to it versus the underlying data-over-voice shift already documented in Q1's post.

MIDI

MIDI remains Indosat's only segment with a positive operating result, but that result nearly evaporated: Rp146.8 billion to Rp23.6 billion, an 83.9% decline, on revenue that barely moved (-0.5%). This is a sharper deterioration than Q1's own margin compression (21.2% to 14.2%) and is the single biggest concern in this quarter's segment picture - the segment carrying multi-year IT-services and connectivity contracts (see the Q1 2019 post's Beyond the Usual) is no longer generating much profit from them.

Telekomunikasi Tetap

Fixed-line's revenue finally grew (+1.1% YoY, versus Q1's -30.4%), but the segment's loss margin still widened (-27.3% to -31.7%) - a smaller, still-shrinking-in-relevance segment (2.9% of total segment revenue this quarter) that hasn't found a way to turn a modest revenue recovery into a better bottom line.

Beyond the Usual

A Rp203.6 billion payment to employees for revoking a retirement health benefit, disclosed only as a subsequent event

Indosat's own interim filing discloses that the Company revoked its post-retirement healthcare benefit plan effective July 1, 2019 - one day into the following quarter - and on July 24, 2019 paid Rp203,641 million (roughly $14.4 million at the period's own exchange rate) in financial assistance to its permanent employees as a result. Neither the size, timing, nor rationale of this change is explained anywhere in the filing beyond that single sentence in the subsequent-events note. A payment of this size to compensate for revoking a standing employee benefit is a real capital-allocation choice - it's worth watching whether Indosat's next filing explains what prompted the change or whether it recurs in any form.

An entirely new Board of Directors and Board of Commissioners took over one month after this quarter ended

Indosat's subsequent-events note discloses that an Extraordinary General Meeting of Shareholders on August 1, 2019 - the day before this filing was signed - installed a new Board of Directors, with Ahmad Abdulaziz A A Al-Neama named President Director and Chief Executive Officer. This is a full leadership change disclosed at the very end of the filing, with no further detail in this document about the outgoing board or the reason for the change; it's the kind of governance shift worth carrying forward into whichever quarter's post covers Q3 2019, to see whether strategy or capital allocation shifts alongside it.

The Telkomsel frequency-swap gain reached formal completion this quarter

The Telkomsel frequency-swap transaction first disclosed in the Q1 2019 post reached formal completion this quarter: a MOCIT letter dated April 4, 2019 confirmed the 800MHz/900MHz band re-arrangement was finished, and the cumulative gain recognized through June 30, 2019 grew to Rp519.2 billion net (Rp615.9 billion gross gain less a Rp96.8 billion impairment on dismantled equipment), up from Rp297.5 billion disclosed as of Q1's quarter-end - meaning roughly Rp221.7 billion of this one-off gain landed specifically in Q2, already reflected in the operating-income figures above.

Target Valuation Range

Bottom line: undervalued, on the same reasoning as the Q1 2019 post - a peer-multiple sanity check implies a fair-value range of roughly Rp4,040-7,980 nominal per share, with a Rp6,010 base case, well above the Rp2,630 it actually closed at, and the underlying operating improvement this quarter is more genuine (less one-off-dependent) than Q1's was.

Indosat's shares closed at a split-adjusted Rp657.50 on June 28, 2019 (the last trading day of the month; June 30 fell on a Sunday) - accounting for the company's 1-for-4 forward stock split in October 2024, the actual nominal price quoted on the Indonesia Stock Exchange at the time was Rp2,630, up 4.8% from Q1 2019's Rp2,510 close.

Market cap → enterprise value	Q2 2019 (period-end)
Share price (period-end, nominal)	Rp2,630
Shares outstanding (Series A + B)	5,433,933,500
Market capitalization	~Rp14,291.2 billion (~$1,010.9 million)
Plus: total debt (short-term + current and non-current long-term borrowings)	Rp22,636.3 billion
Less: cash and cash equivalents	Rp1,782.8 billion
Enterprise value	~Rp35,144.8 billion (~$2,485.7 million)

Peer-multiple sanity check	Q2 2019
Book value attributable to owners per share	~Rp1,995.2
P/B	~1.32x
Adjusted EBITDA, annualized (×4, ex-one-off)	~Rp10,701.6B
EV/EBITDA (ex-one-off, annualized)	~3.28x
Adjusted EBITDA, annualized (×4, as-reported incl. one-off)	~Rp11,588.3B
EV/EBITDA (as-reported, annualized)	~3.03x
P/E	not meaningful - net loss this quarter

Only three quarters of Indosat data are on hand (Q1 2009, Q1 2019, and this one), and that still doesn't give enough of a continuous trailing history for a full multi-quarter DCF - EV/EBITDA remains the more trustworthy read for now. At ~3.0-3.3x, Indosat trades meaningfully below where established telecom operators have historically traded globally (commonly 4-6x EV/EBITDA), essentially unchanged from Q1's ~3.3-3.7x range despite the real operating improvement documented above - the market didn't reward this quarter's cleaner profit any more than it rewarded Q1's one-off-assisted one.

Scenario	Key assumption	Implied EV	Implied per-share value
Bear	4x ex-one-off annualized EBITDA	~Rp42,806.2B	~Rp4,040
Base	5x ex-one-off annualized EBITDA	~Rp53,507.8B	~Rp6,010
Bull	6x ex-one-off annualized EBITDA	~Rp64,209.3B	~Rp7,980
Current (period-end close)	Actual Jun 28, 2019 nominal close	~Rp35,144.8B	Rp2,630

Each scenario applies its multiple to the ex-one-off annualized EBITDA figure (~Rp10,701.6 billion), then backs out the same Rp22,636.3 billion of debt and adds back Rp1,782.8 billion of cash to reach an implied per-share value - a single-multiple sanity check, not a discounted cash flow. Even the bear case sits well above the actual quarter-end price, the same conclusion Q1's post reached and, if anything, a stronger one now that this quarter's operating profit didn't need a large one-off to exist at all.

The stock's slow partial recovery off its December 2018 trough continued this quarter (Rp1,685 to Rp2,510 to Rp2,630 across the three quarter-ends), but it remains far below where it traded two years earlier (Rp6,500 nominal at end-June 2017) - a decline of roughly 60% over that window that this quarter's genuinely improving fundamentals haven't come close to reversing.

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