Sarana Menara Nusantara (TOWR): Biggest in class
- Raising 2015-17F revenue Cagr to 13% on newly acquired towers: Following the acquisition of 2.5k towers from EXCL back in 1H15, TOWR will strengthen its claim as the biggest Indonesian independent tower provider with 14.7k towers, above the second biggest TBIG with around 12k towers. At a valuation of IDR1.4bn/tower, the tower transaction is cheaper than EXCL’s previous transaction of IDR1.6bn/tower with SUPR despite having a 20% inflation adjustment of its IDR10mn/month leasing rate. Due to the new tower addition, we increase our 2016-17F revenue CAGR for TOWR from 9% y-y to 13% y-y.
- Well positioned to win tenders: We believe that companies in the telco sector will continue to pursue an asset-light business model and to sell non-core assets such as towers to other companies. Thus, we believe ISAT and EXCL will continue to sell their towers in the near future. For the tenders in the near future, we believe TOWR is best positioned to win the tenders due to its huge tower base and its relatively low 2016 net gearing level of 91% (TBIG: 481%). Furthermore, S&P just upgraded TOWR’s rating to investment-grade, making TOWR one of three Indonesian firms apart from Telkomsel and ASII in this category. This will likely lower TOWR’s interest rate, which currently stands at around 8.5%.
- Change in accounting policy: Following the push by the Financial Services Authority (OJK) to change its tower accounting policies to be similar to its peers, TOWR is currently not depreciating its towers but rather is valuing them annually. This move should not only improve net profit levels and making TOWR’s net profit comparable to its peers’, but also raise the company’s leverage capability given higher equity levels.
Outlook: Entering a high-growth phase
Due to the telco operators’ asset-light strategies, we expect TOWR to continue to experience solid EBITDA growth, reaching a 2016-17 EBITDA CAGR of 22%. Benefitting from huge operating leverage, we expect TOWR’s EBITDA margin to hover around 84% in 2016-17. With additional towers from EXCL, TOWR has improved its exposure to the big three telco incumbents from 40% to 42%. We expect TOWR’s 2016 tenants to reach 21k, up 5% y-y, before continuing to improve to 22k tenants, up 5% y-y in 2017. Furthermore, we believe there is upside from our 2017 projection as TOWR could benefit from acquisition opportunities.
Recommendation: Reaffirm BUY and raise TP to IDR5,600
On sustainable revenue from telco operators due to solid data growth, coupled with lower interest rate expectations, we expect sentiment on TOWR to improve, allowing for a turnaround in its market underperformance of 9 ytd (exhibit 4). In line with our 26-30% earnings upgrades (exhibit 8) on new tower acquisition, we maintain our BUY recommendation on the stock and raise our DCF based 12-month target price from IDR5,000 to IDR5,600, reflecting a 2016F EV/EBITDA of 15.7x, a 7% discount to regional peers. Risks include greater-than-expected competition and operating costs as well as a stronger-than-expected USD.$TOWR $TBIG