RHB Indonesia - Sarana Menara Nusantara - M&A Galore (Sarana Menara Nusantara, BI Policy Rate, Strategy) Unknown Rabu, 23 Agustus 2017




Good morning,

Sarana Menara Nusantara – M&A Galore

SMN remains our Preferred Indonesian telco tower exposure for its undemanding valuation and strong balance sheet. Management concurred that the company is keen on its inorganic expansion. Concurrently, several smaller telco tower companies are now up for sale. Its 1H17 EBITDA growth was soft but we expect a modest pickup in 2H17F on the contribution of new contracts signed in 1H17. Maintain BUY as we rollover our valuation base to FY18F with a higher DCF-based TP of IDR5,200 (from IDR4,700, 16% upside), implying a 11x FY18F EV/EBITDA.


¨ Open to more M&A activities to support growth. The main highlight of Sarana Menara Nusantara’s (SMN) 2Q17 results call was management’s emphasis on potential M&As, citing its net debt/EBITDA of 1.2x ass the lowest amongst Indonesian tower companies (industry average of 4x).
During its presentation, management disclosed that two smaller Indonesian telco companies, Solusi Tunas Pratama (STP) (SUPR IJ, NR) and PT Komet Infra Nusantara (KIN), have both appointed their respective advisors for a possible stake sale. STP is Indonesia’s third largest independent tower company, with about 7,000 towers, while KIN has about 1,300 towers. SMN indicated it could maintain its current credit ratings with a net debt/EBITDA of up to 3x. The company is likely to bid for these assets. As at 2Q17, it owned 14,614 towers. Both deals would work out to be an additional 50% and 10% of SMN’s tower portfolio respectively.
¨ 2Q17’s results were in line but EBITDA growth was soft due to non-renewal of tower leases by Smartfren (FREN IJ, NR). 2Q17’s revenue and EBITDA saw a 6.2% and 2.5% YoY growth and only 1.3% and 0.2% QoQ growth. YoY, new lease revenue grew IDR165.6bn but was partially offset by the loss of lease revenue of IDR58.4bn from Smartfren and another IDR30bn from the sale of its tower assets in the Netherlands. SMN has contracted some 300 new built towers and 1,000 co-locations as at 1H17 and expects revenue to kick in as soon as 2H17F. EBITDA margin was down slightly to 85.4% (1Q17: 86.3%) due to higher marketing expenses. We believe the company is on track to deliver a high single-digit EBITDA growth, excluding any inorganic expansion.
¨ New accounting policy by end-FY17 that would change the recognition of tower assets from investment properties into fixed assets. The new policy would translate to higher depreciation charges and a lower net profit after the restatement but it would have no impact on its EBITDA, cash flow, and debt/EBITDA ratios. SMN also guided a higher dividend payout ratio in the event of a lower NP base, aiming to maintain or give a slightly higher absolute dividend on a YoY basis.
¨ Inorganic growth in sight, maintain BUY with a higher DCF based TP of IDR5,200. YTD, the stock’s FY17F EV/EBITDA has increased to 11x from 9x but it is still a tad lower than Tower Bersama’s (TBIG IJ, NEUTRAL, TP: IDR5,700) 14x. A key downside risk is the margin squeeze caused by an accelerated lease rate erosion, which is more likely to occur in a gradual manner over the longer term, in our opinion. (Norman Choong, CFA)

Link to daily report: Indonesia Morning Cuppa 230817

Economics Update:

BI Cuts Key Policy Rate, Maintains Neutral Stance
Bank Indonesia’s (BI) board of governors unexpectedly cut the 7-day (reverse) repo rate – the benchmark policy rate – by 25bps to 4.5% on 22 Aug. As risks of financial volatility linger, we believe the Central Bank would maintain its key policy rate for the rest of 2017.
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¨ Deposit facility and lending rates were also cut to 3.75% and 5.25% respectively. BI believes that there was room for further monetary policy easing, as evidenced by relatively low inflationary pressure in 2017 while 2018 inflation is projected to be within the target range. Also, the country’s current account deficit appears to be well under controlled. Moreover, the rate cut could largely be due to the slower than expected economic growth registered in 2Q17. The policy rate easing is expected to reinforce intermediation in the banking sector, to strengthen financial stability while supporting higher economic growth. External risks, relating to the Fed hiking its Fed Funds Rate (FFR) and unwinding its balance sheet, have decreased, resulting in the still-attractive domestic interest rate in Indonesia, compared to the external interest rate.
¨ BI sees the economic growth to improve on the back of increased investment and consumption. This is in line with more expansive government spending and additional stimulus from the easing monetary policy. Currently, BI is reviewing its macroproduential policies in Loan to Value (LTV) and Loan To Financing (LFR) but still maintaining its neutral monetary policy stance. Moving forward, BI maintains its forecast GDP growth of 5%-5.4% range for 2017 and 5.1%-5.5% for 2018. In 2Q 2017, the growth was supported by investment gains but offset by a contraction in government consumption after spending was delayed along with a slower growth in exports after a strong pick-up in 1Q. This was reflected in a decline in manufacturing export volume. Geographically, slower exports were mainly reported in the islands of Java, Sulawesi and Kalimantan, resulting in slower economic growth in the areas.
¨ Meanwhile, we believe inflation would likely trend up to 4.2% in 2017 (2016: +3.5%), but would remain manageable and within the Central Bank’s target range. This would be due to higher fuel prices, particularly in 1H17, and stronger domestic demand. In addition, the current account deficit in the balance of payments would likely be contained. Nonetheless, the Indonesian Rupiah (IDR) may continue to face external headwinds following the interest rate cut. This is on the back of expectations of further US interest rate hikes this year and next as well as a reduction in the Fed’s balance sheet.
Overall, we are of the view that moderate inflationary pressure, the recent deregulation of Government policies, successful implementation of the tax amnesty bill, and BI’s monetary easing would likely boost consumption and private investment, moving forward.
¨ Elsewhere, BI expects the global economy to keep improving, supported by gains in Europe, China and other emerging markets, while commodity prices are set to remain high. As global economic growth improved, world trade volume also showed increases.
Still, several global risk factors continue to demand vigilance, according to the BI. These include the US Federal Reserve’s (US Fed) plan to reduce its overall balance sheet and the impact on global financial markets as well as the US Fed’s rate hike plans.
¨ The Rupiah is expected to remain stable, supported by maintained trade balance and deeper domestic forex market. Rupiah stability would continue to get support by the influx of foreign capital along with the prospect of positive returns, followed by the abundant supply of corporate foreign exchange on the domestic forex market. (Rizki Fajar)

Link to report to be sent out later
Strategy:

Strategy – LTV and LFR to be relaxed
In addition to lowering benchmark rate by 25bps (to 4.5%), Bank Indonesia is reviewing spatial Loan to Value (LTV) and Loan to Financing Ratio (LFR) policies, by referring to economic condition in each area. This should be positive to interest-sensitive sectors, such as banks, property, and auto. Our top picks on these sectors are Bank Rakyat Indonesia (BBRI IJ, BUY, TP: IDR16,500), Bank Tabungan Negara (BBTN IJ, BUY, TP: IDR2,950), Bumi Serpong Damai (BSDE IJ, BUY TP: IDR2,650), and Astra International (ASII IJ, BUY, TP: IDR9,850). (Andrey Wijaya)
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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT RHB Sekuritas Indonesia

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