Telecommunications
Infrastructure: Scaling a New Normal
We reinitiate coverage on the towerco sector,
which currently exhibits the following features:
1. Alonger-term structural/operationalsector
headwinds;
2. Protracted concerns over the erosion in lease
rates;
3. Potential for opportunistic M&As; and,
4. The sector’s valuation discount when stacked
against global peersfollowing the sell-down over the past 12-18 months.
Our preferred pick is SMN, as its balance
sheet strength portends scope for more inorganic growth.
¨ Pressure on lease
rates... XL
Axiata’s (XL) (EXCL IJ, BUY, TP: IDR4,550)and Sarana Menara Nusantara’s (SMN)
(TOWR IJ, BUY, TP: IDR4,700) Protelindo subsidiary’s recent sale and leaseback
deal for 2,500 towers suggests that industry lease rentals remain under
pressure. We think XL’s IDR10m per month/site rental has become the new
industry benchmark for future lease rental negotiations upon contract renewals;
it was IDR15m-18m/month in the past (typically by the bigger towercos). This
was given the greater competition within the industry in recent years as well
as the telcos’ strong desire to minimise opex.
¨ ….could crimp EBITDA in the long run. The telecommunications
tower infrastructure companies’ (towercos) currently attractive EBITDA margins
are still – to a large extent – protected by higher lease rates under 10-15
year master leasing agreements with the telcos. Nonetheless, we see downside risk
to industry EBITDA margins going forward,driven by increasing contract
renewals, with lower rates also applied to new build-to-suit sites. However,
the impact should be mitigated by legacy provisions within contracts that
prohibit significant variations to lease charges and the timing of contract
renewals.
¨ Microcell poles (MCPs) look set to be the new
growth catalyst. We
see strong potential for MCPs (or base transceiver station (BTS) hotels) and
fibre infrastructure. This is given the site acquisition challenges in the
bigger cities and rising demand for backhaul connectivity. Mobile operators are
utilising MCPs as additional layers of capacity in dense locations. SMN is
well-positioned to tap on the rising demand via wholly-owned Iforte Solusi Infotek
(iForte), which it acquired in 2014. iForte owns 500 MCPs in Jakarta and
>750km of fibre laid across dedicated bus line network.
¨ Potential tower M&As could drive
earnings. Aside
from XL, Indosat (ISAT IJ, NEUTRAL, TP: IDR5,650) plans to dispose of more
towers to pare down debt. We believe this could be a short- to medium-term
M&A catalyst for the sector. Indosat sold 2,500 towers to Tower Bersama
Infrastructure (Tower Bersama) (TBIG IJ, NEUTRAL, TP: IDR6,450)in 2012 and, at
its recent 1Q16 results briefing, reaffirmed its intent to monetise items
listed under non-core assets like towers in subsequent quarters to pare down
debt. Of the two leading towercos, we think SMN stands a good chance of
procuring these towers, given its more manageable debt headroom.
¨ Reinitiate coverage on the sector with a
NEUTRAL weighting. At
11x FY17F EV/EBITDA, sector valuations are at the low end of the 15x historical
mean. This is post the sell-down of the last 12-18 months, which we deem as
fair. We think the strong earnings growth of the past is behind this sector.
Our Top Pick for exposure is SMN as:
i. We
think the market has not fully baked-in the potential from its recent
acquisition of XL’s towers and its earlier diversification into MCPsvia iForte;
ii. Its
10x FY17 EV/EBITDA is at a discount to Tower Bersama’s14.7x.
¨ The upside risks to
our view are inorganic expansion and stronger-than-expected capex of the
telcos. Downside risks are stronger-than-expected in lease rental erosions and
weaker-than-expected site and tenancy additions.
Sarana Menara
Nusantara (TOWR IJ, BUY, TP: IDR4,700), Better Positioned To Capture
Inorganic Growth
We re-initiate
coverage on Sarana Menara with a BUY given:
1. Its
balance sheet is stronger compared to peers (net debt/EBITDA ratio at 0.9x vs
peers’ at 5.1x);
2. Micro
cell poles are its growth catalyst.
Putting aside the
softening organic growth in tower industry, we think that inorganic growth is
still on the table. Our DCF-based TP (WACC : 8.5%, TG: 3%) of IDR4,700 (11%
upside) implies 10x EV/EBITDA FY17F. We think that the current valuation is
already attractive vs Tower Bersama’s and global peers’ of 14.7x and 15.9x
EV/EBITDA FY17F respectively.
Tower Bersama
Infrastructure (TBIG IJ, Neutral, Tp: IDR6,450), Little Headroom For Debt
We reinitiate
coverage on Tower Bersamawith a NEUTRAL rating and DCF-derived TP of IDR6,450
(3% downside). We think the following factors could crimp tenancy growth and
lease rates going forward:
1. The
pressure on lease rentals amidst intensifying competition;
2. The
consolidation of the telcosector;
3. Falling
capex intensity;
4. The
company’s over-leveraged balance sheet may also be a stumbling blockin
potential M&As.
The stock tradesata
14.7x EV/EBITDA multiple in FY17Fwhich we deem as fair given its FY16-FY18 EPS
CAGR of 11% vs. Sarana Menara of 15% FY16-FY18 EPS CAGR. (David Hartono,
Jeffrey Tan)
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Media Highlights:
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Economics
Ministry of Industry
seeks to double 2017 budget
Minister of Energy
expects unchanged diesel price despite subsidy cut
Indonesia Trade
Balance predicted to be surplus in May 2016
Corporates
Astra Agro Lestari
to build palm oil refinery with estimated cost of IDR500bn
Astra Agro Lestari
(AALI IJ; BUY; TP: IDR17,800) allocates FY16F capex of IDR2.5tn, which around
IDR500bn would be used for building new palm kernel oil refinery in Sulawesi
and around IDR2tn for funding immature plantation. Astra Agro expect the palm
kernel oil refinery to commence operation in 2017.(Kontan)
Comments: As the company
complies with Indonesian Palm Oil Pledge (IPOP) regulation specifically on
the deforestation issue, Astra Agro would not do new planting in 2016.
Therefore, it would mainly focus to expand into palm oil-related downstream
business in order to increase shareholders value. Nonetheless, we fully aware
that the profit margin generation of palm-oil downstream business is inferior
when compared to palm-oil upstream business. (Hariyanto Wijaya, CFA, CPA)
Astra International
aims to operate 330km toll-road in 2020
Astra International
(ASII IJ, BUY, TP: IDR7,400) continue its expansion in infrastructure sector,
particularly on toll-road business. In the next four years, the company
targets to acquire 103.3km of new toll-road. Currently, Astra International
through its subsidiary Astratel Nusantara has five toll-road sections along
226.7km. This includes Tanggerang-Merak toll-road along 72.4km,
Kunciran-Serpong toll-road along 11.2km, Mojokerto-Jombang section along
40.5km, Semarang-Solo section along 72.6km and Serpong-Balaraja along 30km.
According to its Investor Relation Tira Ardianti, the company targets to
operate 330km of toll-road until 2020. (Kontan)
Comments: Infrastructure
business contributds less than 3% of Astra 1Q16 consolidated earnings, relatively
insignificant since majority its toll roads – Kertosono-Mojokerto and
Kunciran-Serpong – are still under construction. However, we see that its
earnings contribution to increase in next five years and higher toll road
earnings will strengthen Astra income structure and will provide more
diversified earnings. (Andrey Wijaya)
Unilever to allocate
IDR2trn for capital expenditure
Unilever Indonesia
(UNVR IJ, Neutral, TP: IDR42,500) will allocate IDR2trn for its capital
expenditure this year. The company will use IDR1.4trn from its capex for
capacity expansion, while the remaining IDR600bn will be used to finish its
office construction in Bumi Serpong Damai (BSDE, BUY, TP: IDR2,540). Unilever
will fund most of its capex allocation with its internal cash, while the
remaining 15-20% will be funded through short term loan. (Bisnis
Indonesia)
Comments: Unilever net cash
from operating activities is c.IDR7trn per annum, while the company’s debts
are very low with interest coverage ratio around 53x. Hence, we see that the
company will be able to comfortably finance its capex requirement internally.
Unilever just commenced its new manufacturing facility, plant-9. At current
soft demand growth situation, we are of the view that the company may delay
its major capacity expansion this year. Hence, realised capex is likely to be
lower than its budget. (Andrey Wijaya)
Bukit Asam is aiming
for 5,000 MW power plant project
Cikarang Listrindo
to work with GE for USD800m gas power plant
Indopora achieved
IDR350bn new contracts
Best regards,
Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
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