RHB Indonesia Morning Cuppa - 2 September 2016- (Inflation, Sarana Menara Nusantara)

Good morning,

Inflation Continues To Ease In August

¨ The headline inflation decreased to 2.8% y-o-y in August, down from +3.2%in July. The slower increase in prices of raw and processed food products and a larger deflation in transport contributed to the decrease but were offset partially by an acceleration in the costs of the rest of categories.

¨ M-o-m inflation held unchanged, from an inflation of 0.7% each in the previous two months.

¨ Overall, we expect the headline inflation to moderate to an average of 4.0% in 2016, from +6.4% in 2015, on account of low crude oil prices and relatively soft economic growth.

¨ As the inflation will likely continue to be benign after the festive season and school holidays and given that Bank Indonesia mentioned there is still a need for additional policy easing to stimulate growth, we expect another 25 bps cut to 7-Day (Reverse) Repo rate for the rest of the year. (Rizki Fajar)

Link to report: Inflation Continues To Ease In August

Link to Daily report: Indonesia Morning Cuppa 020916

Results Review:

Sarana Menara Nusantara (TOWR IJ, BUY, TP: IDR4,700), Steady Performance

We maintain BUY on Sarana Menara , premised on the following :

i) Superior balance sheet versus its closest peer (net debt/EBITDA of 1.6x vs Tower Bersama (TBIG IJ, NEUTRAL, TP: IDR6,450)’s 5x

ii) The new growth catalyst from its micro poles12 venture

We expect a good 2H16 numbers from additional lease revenues from acquisition of XL towers. The de-rated of the share price in the past few months was due to soften organic growth, in our view. We think that Sarana Menara has a better positioned from inorganic growth that are still on the table. Remains as our top pick with an attractive 10x EV/EBITDA.

♦ Acquisition of XL’s towers to drive 2H16 growth. The completion of XL tower acquisition will boost their revenue in the 2H16. As Sarana Menara is able to add another 2,500 new towers and would translate into a higher tower tenancy adds in 2H16 from XL. As of 2Q16, the tenancy ratio was dropped to 1.67x (vs. 1.71x in 1Q16) – we view that the tenancy ratio will improve in 2H16 and maintain our tenancy ratio assumptions of 1.7x in FY16. But, we also expect the lease rates from XL to decline; as based on the last conference call with the management, the company is planning to reduce the cost of tower rentals. Thus, we maintain our topline growth of 15%/12%/9% in FY16/FY17/FY18 respectively.

♦ Higher net debt/EBITDA from tower acquisitions. Sarana Menara’s net debt/EBITDA increased to 1.6x in 2Q16 (1Q16: 0.9x) which is still manegeable compare to Tower Bersama of 5x. In our view, the better balance sheet would give Sarana Menara a competitive advantage to capture the inorganic growth compare to peers. As there are potential for more tower sales as telcos look to hive off non core assets.

♦ Maintain BUY based on unchanged TP of IDR4,700 (+18% upside). We like Sarana Menara for i) its healthy balance sheet which presents opportunities for inorganic expansion, ii) stronger 2H16 showing on the back of additional lease revenues from the acquisition of XL’s towers, and iii) valuation remains attractive at 10x EV/EBITDA FY17 vs. peers of 14x EV/EBITDA FY17.

♦ 2Q16 results inline with our/consensus numbers. Sarana Menara reported 1HFY16 EBITDA of IDR1.1trn (+11% QoQ; +23% YoY), which formed 49%/50% of our/consensus estimates. 2Q16 EBITDA margin widened by 3%-points QoQ to 88.5% in 2Q16 on higher revenue growth and lower G&A expenses (-24% YoY). 2Q16 revenue expanded by 17% YoY to IDR1.25trn (+7% QoQ), driven by stronger revenue contribution from Hutchinson Indonesia (+19.5% YoY; +14.6% QoQ) and Telkomsel (+15.3% YoY; +12.5% QoQ) - (see Fig. 1)

♦ Tenancy ratio eased slightly QoQ. Tower tenancy adds of 3,775 in 2Q16 is higher compare to the 1Q16 of -87 tower tenancy adds. Meanwhile, Sarana Menara’s towers addition increased 2,500 from the acquisition of XL Axiata’s (EXCL IJ, BUY, TP: IDR4,000) towers to 14,775 towers in 2Q16 (vs. 12,255 in 1Q16). Its tenancy ratio however eased to 1.67x in 2Q16 (1Q16: 1.71x).

♦ Net debt/EBITDA rose to 1.6x in 2Q16.Overall debt stood at IDR10.8trn at end-2Q16, above 1Q16’s IDR6.4trn. This contributed to higher net debt/EBITDA (1H16 annualised EBITDA) of 1.6x at end 2Q16 (vs. 0.9x in 1Q16). We believe SMN’s balance sheet remains manegeable and below its net debt covenant of 5x. The higher debt was due to IDR3trn to finance the purchase of XL’s towers. (David Hartono)

Link to report: to be sent out later

Media Highlights:

Economics

Indonesia’s manufacturing index grew in August

Government submitted IDR7.2trn capital injection for 2017

Corporates

Bank Mandiri aims funds of IDR9trn from tax amnesty program until end of FY16

Intiland start to finalise Regatta project phase II

Wika Gedung to purchase IDR1trn land in East Java

Kimia Farma to lower raw material import

Indika obtained EPC contract from Berau

PP Properti to build 2 towers apartment in Semarang