Indonesia Company Guide Version 4 Bloomberg: TOWR IJ Reuters: TOWR.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 1 Jun 2017 BUY Last Traded Price ( 31 May 2017): Rp3,700 (JCI : 5,738.20) Price Target 12-mth: Rp4,900 (32% upside) Analyst Sachin MITTAL +65 6682 3699 sachinmittal@dbs.com What s New 1Q17 EBITDA of Rp 1,134 bn (+13.3% y-o-y, -1.7% q-o-q) was in line Non-renewal of tower lease by Smartfren hurt topline; 1247 lease orders from XL & Telkomsel are better than our expectations Maintain BUY with unchanged TP of Rp 4,900 Price Relative Rp 5,205.0 230 4,705.0 210 4,205.0 190 170 3,705.0 150 3,205.0 130 2,705.0 110 2,205.0 90 May-13 May-14 May-15 May-16 May-17 Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 5,053 5,547 6,185 6,847 EBITDA 4,408 4,602 5,131 5,680 Pre-tax Profit 4,082 3,494 4,048 4,614 Net Profit 3,040 2,620 3,036 3,460 Net Pft (Pre Ex.) 2,667 2,620 3,036 3,460 Net Pft Gth (Pre-ex) (%) (9.9) (1.7) 15.9 14.0 EPS (Rp) 298 257 298 339 EPS Pre Ex. (Rp) 261 257 298 339 EPS Gth Pre Ex (%) (10) (2) 16 14 Diluted EPS (Rp) 298 257 298 339 Net DPS (Rp) 0.0 154 89.3 102 BV Per Share (Rp) 1,050 1,153 1,361 1,598 PE (X) 12.4 14.4 12.4 10.9 PE Pre Ex. (X) 14.2 14.4 12.4 10.9 P/Cash Flow (X) 9.8 9.6 9.7 8.6 EV/EBITDA (X) 10.1 9.5 8.3 7.3 Net Div Yield (%) 0.0 4.2 2.4 2.8 P/Book Value (X) 3.5 3.2 2.7 2.3 Net Debt/Equity (X) 0.7 0.5 0.4 0.2 ROAE (%) 33.1 23.3 23.7 22.9 Earnings Rev (%): 32 30 28 Consensus EPS (Rp): 264 296 317 Other Broker Recs: B: 15 S: 0 H: 2 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Relative Index (LHS) Relative JCI (RHS) Growth to accelerate in 2H17 Tower additions and colocations are accelerating in 2017. After a muted FY16, TOWR is seeing a significant rise in co-location orders from XL at monthly lease rate of Rp13m (~US$1000) per tower (~15% discount to the last year market rate in our estimate). At this rate, TOWR enjoys 14-15% Return on Invested Capital (ROIC) on each new tower, which can be supplemented further by additional colocation revenues potentially. Where we differ: Potential inorganic growth in FY17 could lead to TOWR beating market expectations. TOWR has a net debt to EBITDA of only 1.5x, indicating significant headroom to expand inorganically. With 14.6K towers, TOWR controls 35% of the independent tower market (~17% of the total tower market) in Indonesia and its tower base could double up in the long term. This will also improve its bargaining power during lease renewals. Potential Catalyst: TOWR is already in talks with few smaller independent tower operators for M&A possibilities, which may materialize in 2H17F. TOWR is also exploring the potential for paying dividends to its shareholders. Smartfren non-renewal hurt 1Q17; however, orders secured were quite impressive. 1Q17 EBITDA of Rp1,134bn (+13.3% y- o-y, -1.7% q-o-q) was in line with our expectations. The sequential decline was due to non-renewal of about 150 tower leases by Smartfren who migrated to its own towers.smartfren accounts for 4.5-5% of TOWR s business. Year-to-date TOWR has secured 1247 lease orders 900 co-locations and 347 buildto-suit (BTS) towers, which seems impressive versus forecast of 2500 new tenants in FY17F including acquisitions. Valuation: TOWR is trading at 9.5x FY17F EV/EBITDA, at 25-30% discount to its peer Tower Bersama (TOWR) despite TOWR s strong balance sheet and willingness to pursue inorganic growth. Our DCF-based TP of Rp4,900 (9.2% WACC, 4% terminal growth rate) implies 32% potential upside. Maintain BUY Key Risks to Our View: Tenancy risk and rental rate pressure. If TOWR fails to find tenants for newly acquired/built towers, its tenancy ratio and profitability could drop. Lower-than-expected rental rates could also squeeze profitability. At A Glance Issued Capital (m shrs) 10,203 Mkt. Cap (Rpbn/US$m) 37,751 / 2,838 Major Shareholders (%) PT. Sapta Adhikari Investama (%) 32.7 T Rowe Price Group Inc (%) 7.6 Free Float (%) 68.3 3m Avg. Daily Val (US$m) 0.30 ICB Industry : Telecommunications / Mobile Telecommunications ed: JS/ sa:ma, PY
WHAT S NEW Impressive order wins Smartfren non-renewal hurt 1Q17 results: 1Q17 EBITDA of Rp 1,134 bn (+13.3% y-o-y, -1.7% q-o-q) was in line with our expectations. The sequential decline was due to nonrenewal of about 150 tower leases by Smartfren, after it rationalised its network, which had hurt top line performance. Smartfren accounts for 4.5-5% of TOWR s business and according to management, this is likely to be maintained. XL and Telkomsel order wins coming onstream in 2Q17 and 3Q17: TOWR has won ~900 colocation orders and ~350 tower orders from XL and Telkomsel year-t-o-date which are likely come online in 2Q17-3Q17. This is expected to reverse the q-o-q revenue contraction. In addition, further growth is likely to be seen through inorganic growth as TOWR pursues M&A opportunities in the market. Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq Revenue 1,170 1,321 1,313 12.2 (0.6) Cost of Goods Sold (155) (178) (188) 20.9 5.3 Gross Profit 1,015 1,143 1,126 10.9 (1.5) Other Oper. (Exp)/Inc (123) (110) (113) (8.2) 2.8 Operating Profit 892 1,033 1,012 13.5 (2.0) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc 0.0 0.0 0.0 - - Net Interest (Exp)/Inc (128) (175) (172) (34.3) 1.6 Exceptional Gain/(Loss) (66.4) 125 25.6 nm (79.4) Pre-tax Profit 697 982 866 24.2 (11.9) Tax (178) (238) (216) 21.8 (9.3) Minority Interest (1.5) (6.6) 0.0 nm nm Net Profit 518 737 650 25.4 (11.9) Net profit bef Except. 584 613 624 6.8 1.8 EBITDA 1,001 1,154 1,134 13.3 (1.7) Margins (%) Gross Margins 86.7 86.5 85.7 Opg Profit Margins 76.2 78.2 77.1 Net Profit Margins 44.3 55.8 49.5 Source of all data: Company, DBS Bank Page 2
CRITICAL DATA POINTS TO WATCH Critical Factors Tower additions positive with favorable ROIC. YTD TOWR has secured ~350 new tower lease contracts, about ~170 of which are macro sites, from Telkomsel, which are likely to come online in 2H17. The new towers are likely to be a healthy addition to EBITDA and improve TOWR s value due to the high ROICs of new towers in Indonesia. Average lease rate of US$900-1100 with a EBITDA margin of 80-85% from an investment of US$60,000-70,000 per tower translates to a ROIC of ~15% for tower additions. Colocations to drive tenancy ratio. XL has already contracted TOWR for ~900 new colocations in 1H17 with part of it going online in 2Q17. Increase in colocations leads to higher tenancy ratios, and improves revenue generation from tower assets with relatively low capex outlay, thus improving ROICs further. TOWR has reported ROICs of 20-21% over the past 24 months with tenancy rations of 1.65-1.75. This is likely improve further during FY17-F19F from XL s tower colocation additions as it densifies its network. Potential inorganic growth in FY17. TOWR has a net debt to EBITDA of 1.5x indicating significant headroom to expand its footprint inorganically. TOWR is already in talks with few smaller independent tower operators for M&A possibilities, which may happen in FY17. TOWR already controls 35% of the fragmented independent tower market in Indonesia and potential additions could increase its market share by 4-5% according to the company. Tower lease rates seeing 10-15% correction at the time of renewal. XL is expected to renew ~500 of its tower leases in 2018 at ~Rp 13m per lease (~US$1,000), lower than the current average lease of ~Rp 15m. However, lower lease rates should be more than offset by higher number of lease orders. In addition, a bulk of Hutch s tower leases are expected to come up for renewal in 2020-2022, indicating a significant lead time before renewal. Management is confident that it will be able to secure additional business from Hutch at 10-20% discount to the existing rate during the renewal negotiations. Hutch is likely to increase its network investments over the next 4-5 years if it is able secure additional spectrum in the 2017 auction. 16763.1 14368.3 11973.6 9578.9 7184.2 4789.4 2394.7 0.0 29726.9 23781.5 17836.1 11890.8 5945.4 0.0 1.81 1.45 1.09 0.72 0.36 0.00 4.0 3.2 2.4 1.6 0.8 0.0 88.1 Towers 16597 15408 14562 12237 11346 Total tenants 29144 26644 24144 20138 21038 Tenancy ratio 1.77 1.72 1.66 1.73 1.76 Capex (Rp tn) 3.93 1.9 1.93 1.44 1.22 EBITDA margin (%) 83.3 84.5 87.2 83 83 70.5 52.9 35.2 17.6 0.0 Source: Company, DBS Bank Page 3
Balance Sheet: Unlevered balance sheet. TOWR had a net debt-to-ebitda of around 1.5x as of end-1q17 vs. TBIG's 5.1x indicating room for further inorganic expansion in the near term compared to its competitors. 2.00 1.50 1.00 Leverage & Asset Turnover (x) 0.3 0.3 0.3 0.2 Share Price Drivers: Trading at 9.5x FY17F EV/EBITDA. TOWR is trading at 9.5x EV/EBITDA, which is at a 25-30% discount to TBIG s 13.1x. Given TOWR s balance sheet strength and willingness to pursue inorganic growth opportunities, we believe the counter is attractive at current levels. Our DCF-based TP of Rp4,900 (9.2% WACC, 4% terminal growth rate) implies 32% upside. Depreciation assumption revised. We have revised down our depreciation expectations for FY17-19F to reflect the current annual runrate of ~Rp 450-550bn. However, this does on not impact our cashflow assumptions, hence there is no change to our DCF based valuation. Key Risks: Tenancy risk. If a TOWR fails to find additional tenants for newly acquired/built towers, its high ROICs may take a hit. Rental rate pressure. Tower rental rates could drop if the competition among tower-cos intensifies. The resulting shift in bargaining power towards operators also means that towercos will not be able to pass on higher costs, and hence margins will contract. Operators rein in network expansion, weak rupiah vs USD. A slower network expansion would entail a slower BTS rollout, which could slow TOWR s overall growth. 0.50 0.2 0.00 0.2 Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure Rpm 4,000.0 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 0.0 Capital Expenditure (-) ROE (%) 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Forward PE Band (x) (x) Company Background Tbk, through a subsidiary, builds telecommunication towers. The company constructs, operates and rents the towers to mobile telecommunications service providers. 28.0 23.0 18.0 13.0 +2sd: 26.5x +1sd: 22.1x Avg: 17.7x -1sd: 13.4x -2sd: 9x 8.0 May-13 May-14 May-15 May-16 May-17 (x) 12.0 10.0 8.0 6.0 4.0 PB Band (x) +2sd: 11.31x +1sd: 9.05x Avg: 6.8x -1sd: 4.54x 2.0-2sd: 2.28x May-13 May-14 May-15 May-16 May-17 Source: Company, DBS Bank Page 4
Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Towers 12,237 14,562 15,409 16,597 17,786 Total tenants 21,038 24,144 26,644 29,144 31,644 Tenancy ratio 1.70 1.70 1.70 1.80 1.80 Capex (Rp tn) 3.90 1.40 1.90 1.90 2.00 EBITDA margin (%) 84.5 87.2 83.0 83.0 83.0 Colocation to improve tenancy ratio Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 4,470 5,053 5,547 6,185 6,847 Cost of Goods Sold (572) (669) (822) (911) (1,001) Gross Profit 3,898 4,384 4,725 5,275 5,846 Other Opng (Exp)/Inc 610 (62.2) (586) (653) (723) Operating Profit 4,508 4,322 4,139 4,622 5,123 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (550) (613) (645) (574) (509) Exceptional Gain/(Loss) 0.0 373 0.0 0.0 0.0 Pre-tax Profit 3,958 4,082 3,494 4,048 4,614 Tax (993) (1,039) (873) (1,012) (1,153) Minority Interest (6.3) (3.3) 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,958 3,040 2,620 3,036 3,460 Net Profit before Except. 2,958 2,667 2,620 3,036 3,460 EBITDA 3,776 4,408 4,602 5,131 5,680 Growth Revenue Gth (%) 8.9 13.1 9.8 11.5 10.7 EBITDA Gth (%) 10.5 16.7 4.4 11.5 10.7 Opg Profit Gth (%) 87.4 (4.1) (4.2) 11.7 10.8 Net Profit Gth (Pre-ex) (%) 169.0 (9.9) (1.7) 15.9 14.0 Margins & Ratio Gross Margins (%) 87.2 86.8 85.2 85.3 85.4 Opg Profit Margin (%) 100.9 85.5 74.6 74.7 74.8 Net Profit Margin (%) 66.2 60.2 47.2 49.1 50.5 ROAE (%) 47.8 33.1 23.3 23.7 22.9 ROA (%) 15.3 13.1 10.1 10.6 10.7 ROCE (%) 19.1 14.9 13.0 13.3 13.0 Div Payout Ratio (%) 0.0 0.0 60.0 30.0 30.0 Net Interest Cover (x) 8.2 7.1 6.4 8.1 10.1 Source: Company, DBS Bank Page 5
Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 1,170 1,253 1,309 1,321 1,313 Cost of Goods Sold (155) (162) (173) (178) (188) Gross Profit 1,015 1,091 1,135 1,143 1,126 Other Oper. (Exp)/Inc (123) (93.0) (109) (110) (113) Operating Profit 892 998 1,026 1,033 1,012 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (128) (125) (184) (175) (172) Exceptional Gain/(Loss) (66.4) 216 99.3 125 25.6 Pre-tax Profit 697 1,089 941 982 866 Tax (178) (281) (343) (238) (216) Minority Interest (1.5) (1.8) 6.50 (6.6) 0.0 Net Profit 518 807 605 737 650 Net profit bef Except. 584 591 506 613 624 EBITDA 1,001 1,108 1,146 1,154 1,134 Revenue hit by Smartfren s non-renewal of contracts Growth Revenue Gth (%) (2.1) 7.1 4.5 1.0 (0.6) EBITDA Gth (%) 20.8 10.8 3.4 0.7 (1.7) Opg Profit Gth (%) 20.0 11.9 2.8 0.7 (2.0) Net Profit Gth (Pre-ex) (%) (355.6) 1.1 (14.4) 21.3 1.8 Margins Gross Margins (%) 86.7 87.1 86.8 86.5 85.7 Opg Profit Margins (%) 76.2 79.7 78.4 78.2 77.1 Net Profit Margins (%) 44.3 64.4 46.2 55.8 49.5 Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 14,683 18,269 19,250 20,639 22,014 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,200 3,162 3,162 3,162 3,162 Cash & ST Invts 2,987 2,905 3,758 5,859 8,272 Inventory 11.1 0.0 0.90 1.00 1.10 Debtors 471 352 386 431 477 Other Current Assets 64.2 338 338 338 338 Total Assets 21,417 25,025 26,894 30,428 34,263 ST Debt 446 1,515 446 446 446 Creditor 217 189 302 334 366 Other Current Liab 1,315 1,598 2,136 2,275 2,416 LT Debt 9,684 8,359 9,359 10,359 11,359 Other LT Liabilities 2,076 2,655 2,894 3,133 3,372 Shareholder s Equity 7,680 10,708 11,756 13,882 16,304 Minority Interests (1.6) 0.10 0.10 0.10 0.10 Total Cap. & Liab. 21,417 25,025 26,894 30,428 34,263 Non-Cash Wkg. Capital (985) (1,098) (1,714) (1,840) (1,967) Net Cash/(Debt) (7,144) (6,970) (6,048) (4,947) (3,534) Debtors Turn (avg days) 42.7 29.7 24.3 24.1 24.2 Creditors Turn (avg days) 96.4 127.1 249.5 289.5 288.0 Inventory Turn (avg days) 1.6 3.5 0.4 0.8 0.9 Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2 Current Ratio (x) 1.8 1.1 1.6 2.2 2.8 Quick Ratio (x) 1.7 1.0 1.4 2.1 2.7 Net Debt/Equity (X) 0.9 0.7 0.5 0.4 0.2 Net Debt/Equity ex MI (X) 0.9 0.7 0.5 0.4 0.2 Capex to Debt (%) 17.4 38.1 14.7 17.6 16.4 Z-Score (X) 3.0 2.8 2.7 2.7 2.7 Low gearing Source: Company, DBS Bank Page 6
Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 3,958 4,082 3,494 4,048 4,614 Dep. & Amort. (732) 459 463 510 557 Tax Paid (335) (874) (335) (873) (1,012) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (876) (160) 77.5 (12.8) (13.7) Other Operating CF (51.5) 325 239 239 239 Net Operating CF 1,962 3,833 3,938 3,910 4,384 Capital Exp.(net) (1,760) (3,767) (1,444) (1,899) (1,933) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 42.1 0.0 0.0 0.0 Net Investing CF (1,760) (3,725) (1,444) (1,899) (1,933) Div Paid 0.0 0.0 (1,572) (911) (1,038) Chg in Gross Debt 777 (256) (69.3) 1,000 1,000 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (1.9) 130 0.0 0.0 0.0 Net Financing CF 775 (126) (1,642) 89.2 (38.0) Currency Adjustments 0.0 (63.5) 0.0 0.0 0.0 Chg in Cash 977 (81.5) 853 2,101 2,414 Opg CFPS (Rp) 278 391 378 385 431 Free CFPS (Rp) 19.9 6.43 245 197 240 Source: Company, DBS Bank Target Price & Ratings History 4440 4240 4040 3840 3640 3440 1 Rp 2 3 4 5 S.No. Date of Report Clos ing Price 12-m th Target Price Rating 1: 30 May 16 4050 4900 BUY 2: 02 S ep 16 3970 4900 BUY 3: 14 Nov 16 3750 4900 BUY 4: 13 Feb 17 3450 4900 BUY 5: 28 Feb 17 3540 4900 BUY 3240 3040 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Note : Share price and Target price are adjusted for corporate actions. Source: DBS Bank Analyst: Sachin MITTAL Page 7
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 1 Jun 2017 11:49:35 (WIB) Dissemination Date: 1 Jun 2017 12:25:30 (WIB) Sources for all charts and tables are DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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