Jan 23, 2017 15:59:43

Sarana Menara Nusantara ($TOWR): Towering above
Telecommunications: Indonesia
-  Inorganic and organic growth to maintain biggest tower status: At this stage, we are of the view that Sarana Menara Nusantara ($TOWR) will maintain its status as Indonesia’s biggest tower operator through both organic and inorganic growth. Currently, TOWR has 24,209 tenants and 14,529 towers (collocation rate 1.67x), slightly higher than its closest peer TBIG with 21,562 tenants and 13,463 towers (collocation: 1.60x). In 9M16, TOWR’s number of towers jumped 19.0% y-y versus TBIG’s growth of 9.5% y-y, helped by the acquisition of 2,500 towers from $EXCL.

-  Strengthening debt structure: TOWR has managed to lower its exposure to foreign currency debt from 59% to 45% (3Q16) and added a greater proportion of IDR debt through its latest bond issuance of IDR800bn (with tenor of 3.5 and 7 years) on 9 November 2016. We believe this will make TOWR’s cost structure more prudent given lower FX risks, although average interest rates jumped from 4.88% in 3Q15 to 6.53% in 3Q16, due to EUR55m and USD190m in debt repayments.

-  Support from operators’ data growth: Data growth of the 3 big operators have continued to accelerate, up 124% y-y in 3Q16 (2Q16: +99% y-y, 1Q16 +84% y-y), providing higher demand for TOWR. On the back of higher data usage (exhibit 8), which requires increased Base Transceiver Stations (BTS), we expect TOWR’s number of tenants to rise from 25,548 in 2016F to 26,568 in 2017F.

Outlook: Bad news mostly in the price
TOWR has severely underperformed the market by more than 40% in the past 12 months (exhibit 4) on less favorable industry outlook as large players such as $ISAT and $EXCL decided to share their capex, causing slower growth outlook. Additionally, we believe $TLKM will focus on its own internal tower projects. That said, we believe most of the bad news has been priced in, although there is still no signs of the operators selling their towers this year.

Recommendation: Reiterate BUY with unchanged TP of IDR5,600
On valuation, we apply a WACC of 9.2% to obtain our DCF-based 12-month TP of IDR5,600, reflecting 60% upside potential. At our TP, TOWR would trade at 13.0x 2017F EV/EBITDA, still at a c.20% discount to the current global average of 16.8x (exhibit 5). Risks to our call would be greater-than-expected competition and slower organic as well as inorganic growth.