PT Sarana Menara Nusantara

Transcription

1 Equity Research Initiation Monday,01 October 2018 BUY Initiation Last price (IDR) 478 Target Price (IDR) 750 Upside/Downside +56.9% Stock Statistics Sector Bloomberg Ticker Towers TOWR IJ No of Shrs (mn) 51,015 Mkt. Cap (IDR bn/usdmn) 24,385/1,634 Avg. daily T/O (IDR bn/usdmn) 2.6/0.2 Major shareholders (%) PT Sapta Adhikari Investama 50.1 T Rowe Price Group Inc 7.9 Estimated free float 49.9 EPS Consensus (IDR) 2018F 2019F 2020F Danareksa Consensus Danareksa/Cons (3.1) (0.7) (3.8) TOWR relative to JCI Index PT Sarana Menara Nusantara Tbk Hugely underpriced TOWR is the largest private tower company in Indonesia, generating stable revenues growth with future proceeds locked in, a bottom line of over Rp2 tn p.a. and around a 40% net margin. Demand for new orders is underpinned by strong data consumption catalyzed by telcos ongoing 4G deployment. Strong CF supports tower & fiber investments including acquisitions with low leverage & a low cost of funds. The stock is significantly undervalued as it trades at more than -2SD EV/EBITDA with an estimated dividend yield of around 5.7%. We initiate coverage on TOWR with a BUY call and TP of Rp750. Strong assets portfolio to seize data opportunities. TOWR has the largest portfolio of around 16,800 towers sourcing revenues from around 27,900 telco tenancies, or an average tenancy ratio of 1.66x with room for further improvement. TOWR is the go-to provider with growth in new orders of 2,460 in FY18 with EXCL accounting for the lion s share. This compares to 1,591 fulfilled new orders in FY17. The productivity of TOWR assets will rise incrementally from new orders as data penetration and adoption are still far from the potential peak. Aspimtel Tower s local association suggests 550,000 new data BTS are needed by 2022 a strong growth driver for towers. Best fundamentals offer room for more acquisitions. TOWR further increased its capacity and revenues by acquiring KIN, adding 1,369 towers and 1,972 tenancies. Slight cost pressures may arise but the EBITDA margin should still be at least mid-80s thanks to economies of scale. Post-acquisition, TOWR s ND/EBITDA is still under 2x. This secures TOWR with investment grade rating, meaning the company will be able to consolidate more assets in the future. Source : Bloomberg More infra orders due in 4G. Telcos have competed fiercely at the expense of their profitability. However, we think their recovery is now due. Going forward, this should create more infra demand as telcos get healthier. TOWR s leading tenants EXCL, Hutch 3 and Telkomsel will increase network capacity as data consumption grows and this will consequently lead to higher towers/infra demand. TOWR seems lenient and willing to discuss lease terms with telcos in return for greater business volumes. Historically, the company has also served as an outlet for telcos to sell tower assets. Notably, Indosat intends to sell towers to improve its liquidity with 8,600 left on its balance sheet. BUY on TOWR. The market valuation is below -2SD EV/EBITDA; thus TOWR is mispriced in our view. Given TOWR s large portfolio & significant CF and high div. yield, we initiate coverage with a BUY. Our DCF-based valuation offers TP of Rp750 implies EV/EBITDA 19 of 8.4x. Key Financials Year to 31 Dec 2016A 2017A 2018F 2019F 2020F Niko Margaronis Revenue (IDRbn) 5,053 5,338 5,736 6,192 6,436 EBITDA (IDRbn) 4,408 4,604 5,002 5,452 5,643 (62-21) Ext EBITDA Growth (%) (10.0) niko.margaronis@danareksa.co.id Net profit (IDRbn) 2,134 2,100 2,297 2,618 2,742 EPS (IDR) EPS growth (%) (27.9) (1.6) BVPS (IDR) DPS (IDR) 0.0 (19.7) (23.5) (27.0) (33.4) PER (x) PBV (x) Dividend yield (%) See important 0.0 disclosure 4.1 at the back 4.9 of this report EV/EBITDA (x)

2 Exhibit 1. REVENUES AND GROWTH Exhibit 2. NET PROFITS AND GROWTH Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates Exhibit 3. MARGINS Exhibit 4. GEARING LEVEL Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates See important disclosure at the back of this report 2

3 TOWR Good revenues visibility for towers and TOWR over the long-term Tower companies generate revenues by leasing tower space to telco operators, providing either new or existing towers over a long time period. The relationship between tower companies and telcos is stipulated in master lease agreements with a 10-year validity which enforces the long-term commitment of both parties. These agreements carry important provisions and telcos are obliged to honor them, essentially locking in revenues. As of the 1H18 financial disclosure, TOWR expects a minimum of Rp16.1 tn over the next 5 years as well as Rp6.9 tn beyond the 5 th year from its current tenants only. Towers in Indonesia can be very profitable EBITDA margins may surpass 85% The capex to build a new tower is around Rp1 bn. With fairly low costs, the EBITDA margin can exceed 85%. Electricity and fuel costs are borne by the telco operators for the most part, thus removing the variable element from the base costs for towers. A tower has space for multiple BTS and equipment There can usually be more than 1 BTS or more equipment on a tower which increases the potential revenues of an individual tower. This is done by: a) adding more than one tenant - essentially collocating on the same tower with other telcos (collocation) and / or b) a tenant can request more space to add more BTS or telco equipment. Thus, additional revenues generated on the same asset will boost profitability. TOWR s tenancy ratio currently stands at 1.66x with room for improvement in our view. Source: American Tower See important disclosure at the back of this report 3

4 3Q 4Q16 3Q 4Q17 3Q 4Q16 3Q 4Q17 3Q 4Q16 3Q 4Q17 Exhibit 5: TOWR Tenancies # FY16 FY17 YoY 1H Q16 4Q Q17 4Q Operating KPIs Total Towers 14,562 14,854 2% 16,790 12,255 14,515 14,529 14,562 14,587 14,614 14,739 14,854 15,001 16,790 Total tenancies 24,144 25,011 4% 27,918 20,951 24,178 24,209 24,144 24,070 24,396 24,728 25,011 25,278 27,918 Telekomunikasi Selular 4,978 5,105 3% 5,903 4,599 4,925 4,937 4,978 5,012 5,055 5,071 5,105 5,115 5,903 Indosat 1,098 1,160 6% 1,594 1,036 1,094 1,099 1,098 1,111 1,112 1,112 1,160 1,221 1,594 XL Axiata 6,638 7,869 19% 9,200 4,162 6,591 6,620 6,638 6,653 7,195 7,602 7,869 8,141 9,200 Hutchison 3 8,554 8,472-1% 8,606 7,738 8,571 8,567 8,554 8,560 8,538 8,513 8,472 8,409 8,606 Smartfren 1,547 1,032-33% 1,282 1,665 1,663 1,656 1,547 1,388 1,130 1,054 1,032 1,027 1,282 First Media 1,060 1,059 0% 1,064 1,028 1,069 1,066 1,060 1,058 1,064 1,064 1,059 1,058 1,064 Others % Tenancy Ratio (x) % Towers change (YoY) 2, , ,780 2,318 2,325 2, ,176 Tenancies change (YoY) 3, , ,810 3,253 3,106 3, ,208 3,522 Telekomunikasi Selular Indosat XL Axiata 2,475 1,231-2, ,596 2,448 2,475 2, ,231 1,488 2,005 Hutchison Smartfren First Media Others Source: TOWR and Danareksa Sekuritas Exhibit 6: Number of BTS of the big 3 operators BTS ' # BTS '000 2G 3G 4G TSEL EXCL ISAT Source: TLKM, EXCL, ISAT and Danareksa Sekuritas See important disclosure at the back of this report 4

5 Data consumption still low no end in sight to data growth The lengthy contractual commitment for towers allows telcos to operate their network uninterrupted and focus on their core telco business. Data business has been at the forefront of the industry in recent years with very high traffic volumes expected on the horizon with the 4G LTE network deployment. This will impact the tower business as we expect similar growth in demand for towers passive infrastructure. The current usage is still relatively low compared to neighboring countries and Ovum (as well as other think tanks) project much higher individual consumption. Furthermore, considering the breakneck growth in data usage, experts from Aspimtel (Asosiasi Pengembang Infrastruktur Menara Telekomunikasi) predict that 550,000 BTS will be needed to meet the country s data demand by Based on a rough calculation we can expect the tower capacity in Indonesia (~90,000 towers) to double by Exhibit 7: Indonesian Data usage relatively low Data Usage (GB) per connection per month Jun' Philippines Indonesia China India Malaysia Thailand Exhibit 8: Think Tanks see no end in data traffic growth Source : WCIS Ovum, TOWR Demand for infrastructure fueled by 4G LTE We see data consumption based on 3G mobile technology coming full circle: Telkomsel stopped adding 3G BTS in the latest quarter and the 3G BTS additions of EXCL and ISAT have declined. We are in the period when 4G LTE BTS are being rolled out for coverage, before we enter investments to strengthen capacity of the network. Thus, we expect demand for tower tenancies to gain steam. See important disclosure at the back of this report 5

6 Exhibit 9: Technology implementation phases Source: American Tower Demand for new towers/tenancies will be fueled by telco network densification The new telco packages are heavy on data offerings which also include access to content supplied by the likes of iflix, catchplay and other regional players. Thus, there are growing expectations for telco networks to perform and deliver seamless data which requires much more capacity. Increasing radio transmission capacity in a given radius with more BTS installations would greatly improve network performance. Exhibit 10: 4G LTE necessitates network densification Source: American Tower See important disclosure at the back of this report 6

7 Revenues and investment return visibility ensures adequate capital funding Financial institutions find comfort in: a) stable revenues and profitability over the long term, b) good prospects for the telcos data business. As such, they have provided TOWR with financing to build infrastructure in the past. TOWR has been very prudent with its finances and maintained leverage below 2x based on its last quarter s (LQA) EBITDA. This has allowed the company to maintain an investment grade global debt rating by Fitch and Moody s. Exhibit 11: Key financials Rp bn FY16 FY17 YoY 1H Q16 4Q Q17 4Q Financials Total Revenues 5,053 5,338 6% 2,805 1,170 1,253 1,309 1,321 1,313 1,330 1,335 1,360 1,362 1,443 Hutchison 3 1,969 1,908-3% XL Axiata 1,067 1,334 25% Telkomsel 984 1,021 4% Other Tower % VSAT Rentals % MWIFO Rentals % EBITDA 4,408 4,604 4% 2,385 1,000 1,108 1,146 1,154 1,134 1,136 1,149 1,185 1,168 1,217 EBITDA margin 87.2% 86.2% % 85.5% 88.5% 87.5% 87.3% 86.3% 85.4% 86.1% 87.2% 85.7% 84.4% Cash Capex 4,811 1, , FCF ,150 n.a. 1, , , ,439 Net Debt 7,014 6,650-5% 9,075 6,724 8,948 7,573 7,014 6,533 5,244 6,384 6,650 6,999 9,075 LQA EBITDA 4,614 4,741 3% 4,868 4,002 4,433 4,583 4,614 4,535 4,543 4,595 4,741 4,671 4,868 Net debt/lqa EBITDA (x) Source: TOWR and Danareksa Sekuritas The economics of Indonesian tower companies allow for strong FCF generation. TOWR can generate significant free cash flow (FCF) with high EBITDA margins and manageable CAPEX. Both EBITDA and CAPEX expenditure improve based on tower collocation effects which leverage on existing infrastructure. Significant FCF generation gives room to reduce debt and/or distribute dividends and undertake share buybacks. Significant capital generation gives TOWR plenty of options. It can either invest more in the business or pay dividends. We estimate a divided yield of ~5.7% for FY18 s earnings and a share buyback of up to 5% of the paid up capital effective from 10 Aug TOWR has grown briskly with the acquisition of towers from the incumbents and smaller players. TOWR has grown its business by purchasing and leasing back to Hutch 3 a total of 5,060 towers from 2008 through to 2013 with management expertise originating from the US. The management of the business was gradually turned over to Djarum executives who had become fully seasoned in the business by The group and TOWR promptly moved into microcell and the fiber space with the potentially value accretive acquisition of iforte and the fiberization of towers. iforte now has over 6,000km of fiber optics laid and 2,000km more in the pipeline. It subsequently bought and leased back 2,500 towers to XL Axiata. Recently, it acquired KIN Towers which owns 1,369 towers with 1,972 tenancies or a tenancy ratio of 1.44x. See important disclosure at the back of this report 7

8 More opportunities to acquire assets More opportunities for acquisitions of tower portfolios may be available in the near future as telcos will seek further financing to invest in their core networks by divesting towers. We believe TOWR will seize on such an opportunity given its financial superiority with Net Debt / (LQA) EBITDA of below 2.0x. Exhibit 12: Market landscape The independent and telco tower owners TowerCo # Towers % Telco # Towers % Sarana Menara Nusantara 16,790 29% Telkomsel* 18,000 57% Tower Bersama 13,765 24% XL Axiata 4,000 13% Solusi Tunas Pratama 6,818 12% Indosat Ooredoo 8,600 27% Dayamitra - Mitratel* 11,061 19% Other MNOs** 1,000 3% Inti Bangun Sejahtera* 4,077 7% Other ITCs** 4,800 8% 57,311 31,600 *as per 2017 **approximation Source: Telcos disclosures, TOWR Telcos EBITDA margins are under pressure; thus more impetus to ask for lease discounts from tower companies As telcos develop their data businesses, their business becomes more capital intensive. This makes cost savings imperative for telcos, and they are seeking ways to reduce costs through reducing tower lease rates. When the renewal of lease contracts is due, the lease rates are up for negotiation. In this regard, TOWR seems willing to see the bigger picture. In our discussion with the management, the company said that it was willing to trade better lease terms for towers for more business volume in the future in line with the underlying data trends. Towers and TOWR have an edge in negotiating leases Since the early days, Hutch 3 has provided a core revenues stream having sold and leased back to TOWR a total of 5,060 towers. XL Axiata, meanwhile, sold and leased back ~2,500 towers to TOWR in Telkomsel is the 3 rd largest revenues contributor for TOWR mainly due to its nationwide coverage and dominant position in the telcos industry. Going forward, the management is cautiously optimistic that tower revenues from Hutch 3 can be sustained with contract renewals falling due in the near term. XL Axiata has accounted for the majority of the recent infrastructure orders. Smartfren, meanwhile, has been churning recently by not renewing its leases. Nonetheless, TOWR s management has concluded that Smartfren will soon renew at least part of its churned tenancies. See important disclosure at the back of this report 8

9 Exhibit 14: TOWR breakdown of tenancies Exhibit 13: Tenancy contribution / telco operator 18 Other 1% Internux 4% Indosat 6% Smartfren 4% Hutch 3 31% Telkomsel 21% XL Axiata 33% Source: TOWR Exhibit 14: TOWR s footprint TOWR is fairly balanced geographically with 52% of its 16,790 towers located in Java and the rest outside Java. TOWR is the go-to provider serving the network densification needs for all the players in Java. Another positive is that XL Axiata and Indosat are expanding further in the other islands of Indonesia. Additionally, the government is overseeing the Palapa Ring plan to set up nationwide fiber optic cable infrastructure circling Indonesian islands. We expect Palapa Ring to give a boost to the data traffic generated outside Java. Source: TOWR Valuation and Rating We initiate coverage on Sarana Menara Nusantara (TOWR) with a BUY call, using the DCF valuation method which gives a target price of Rp750, or implying 2019 EV/EBITDA of 8.4x. The current undemanding valuation of 6.5x is more than -2SD below its 3-year average. TOWR trades at a discount to its closest competitor TBIG (2019 EV/EBITDA of 11.5x) which exhibits similar profitability but has higher leverage. While TBIG may deserve a premium over TOWR given its higher exposure to leader Telkomsel, we think the gap is too wide. See important disclosure at the back of this report 9

10 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17 09/17 11/17 01/18 03/18 05/18 07/18 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17 09/17 11/17 01/18 03/18 05/18 07/18 Exhibit 7: TOWR 3yr EV/EBITDA valuation Exhibit 8: TBIG 3yr EV/EBITDA valuation 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 17.0x 16.0x 15.0x 14.0x 13.0x 12.0x 11.0x 10.0x 9.0x 8.0x -2stdev Average EV/EBITDA +2stdev -1stdev +1stdev EV/EBITDA -2stdev Average EV/EBITDA +2stdev -1stdev +1stdev EV/EBITDA Source : Bloomberg, Dabareksa Business and Financial Risks Pricing pressure on leases during contract renewals with telcos becoming too aggressive Possible telcos consolidation which may destabilize revenues and create the risk of trade receivables write-offs. Slowdown of collocation and tenancy ratio improvement See important disclosure at the back of this report 10

11 Exhibit X. Income Statement Year to 31 Dec (IDRbn) 2016A 2017A 2018F 2019F 2020F Revenue 5,053 5,338 5,736 6,192 6,436 COGS (1,394) (1,172) (1,184) (1,065) (1,003) Gross profit 3,659 4,166 4,551 5,126 5,433 EBITDA 4,408 4,604 5,002 5,452 5,643 Oper. profit 3,110 3,422 3,854 4,282 4,483 Interest income Interest expense (669) (687) (818) (819) (855) Forex Gain/(Loss) Income From Assoc. Co s Other Income (Expenses) Pre-tax profit 2,870 2,803 3,066 3,494 3,660 Income tax (733) (703) (769) (876) (918) Minority interest (3) Net profit 2,134 2,100 2,297 2,618 2,742 Core Net Profit 2,134 2,100 2,297 2,618 2,742 Exhibit X. Balance Sheet Year to 31 Dec (IDRbn) 2016A 2017A 2018F 2019F 2020F Cash & cash equivalent 2,905 2,348 3,466 2,031 4,316 Receivables Inventory Other Curr. Asset Fixed assets - Net 12,269 12,601 14,855 15,566 16,282 Other non-curr.asset 2,923 3,113 2,990 2,951 2,881 Total asset 18,787 18,763 22,045 21,340 24,303 ST Debt 1, , Payables Other Curr. Liabilities 1,598 1,320 1,403 1,373 1,339 Long Term Debt 8,403 8,365 9,533 8,253 10,090 Other LT. Liabilities 1,121 1,066 1,173 1,290 1,419 Total Liabilities 12,827 11,662 13,846 11,902 13,823 Shareholder'sFunds 5,960 7,102 8,199 9,438 10,479 Minority interests Total Equity & Liabilities 18,787 18,763 22,045 21,340 24,303 See important disclosure at the back of this report 11

12 Exhibit X.Cash Flow Year to 31 Dec (IDRbn) 2016A 2017A 2018F 2019F 2020F Net income 2,134 2,100 2,297 2,618 2,742 Depreciation and Amort. 1, Change in Working Capital 113 (203) 23 (113) (78) OtherOper. Cash Flow Operating Cash Flow 3,546 2,927 3,639 3,793 3,964 Capex (3,182) (871) (2,727) (1,150) (1,116) Others Inv. Cash Flow Investing Cash Flow (2,965) (864) (2,632) (1,142) (1,092) Net change in debt 16 (920) 2,022 (2,007) 1,840 New Capital (10) (6) Dividend payment 0 (1,006) (1,200) (1,378) (1,701) Other Fin. Cash Flow (669) (687) (818) (819) (855) Financing Cash Flow (663) (2,620) 110 (4,087) (587) Net Change in Cash (82) (557) 1,118 (1,435) 2,285 Cash - begin of the year 2,987 2,905 2,348 3,466 2,031 Cash - end of the year 2,905 2,348 3,466 2,031 4,316 Exhibit X. Key Ratios Year to 31 Dec 2016A 2017A 2018F 2019F 2020F Growth (%) Sales EBITDA (10.0) Operating profit (31.0) Net profit (27.9) (1.6) Profitability (%) Gross margin EBITDA margin Operating margin Net margin ROAA ROAE Leverage Net Gearing (x) Interest Coverage (x) Source : TOWR, Danareksa Estimates See important disclosure at the back of this report 12

13 See important disclosure at the back of this report 13