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RHB Indonesia - Tower Bersama Infrastructure - Not Our Preferred Exposure In The Sector (Tower Bersama Infrastructure, Coal Mining) Unknown Jumat, 29 September 2017




Good morning,

Tower Bersama Infrastructure – Not Our Preferred Exposure In The Sector

Tower Bersama symbolises the sector's conundrum: it has stable cash flows but limited organic growth. The limited growth is due to its large size, and pressure on long term margins. Tower companies are generally chasing inorganic growth to compensate and deliver more value. That said, it might lose out on the M&A opportunities in the telco tower sector at this juncture, due to its stretched balance sheet. We reiterate our NEUTRAL recommendation on its rich valuation, moderate growth, and concern on lease rate compression. Our DCF-derived TP results in IDR6,250 (from IDR5,700, 5% downside return) which implies a 14.5x FY18F EV/EBITDA.

¨ The company has limited organic growth. Currently trading at FY17F EV/EBITDA of 14.7x, Tower Bersama increased its FY17F tenancy adds guidance from 2400 to 2700 due to higher than expected co-location orders. That said, we believe order books from Telco operators would still be relatively flat going forward as the 5G adoption is farfetched. With the exception of Indosat (ISAT IJ, Neutral, TP: IDR6,600), the current capacity growth rate of the sector is sufficient to cope with the mobile data traffic growth. As operators are looking to lower the lease rates on contract renewals, concerns on long term lease rates remain and might negate some EBITDA growth. However, these impacts are not evidenced so far. In the company’s latest financial results, EBITDA margin was stable as of 1H17.
¨ Stretched balance sheet limits M&A potential, risk on cash call. With total debt of IDR17.7trn as of 2Q17, net debt/EBITDA stood at 5.1x, close to its 6.5x debt covenant. Management has denied the recent news of Tower Bersama buying a stake in Centratama Telekomunikasi (CENT IJ, NR).
Meanwhile, 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. Based on the price of a previous transaction between Protelindo (TOWR IJ, BUY, TP: IDR5,200) and XL Axiata (EXCL IJ, BUY, TP: IDR3,700) of approximately USD110K/tower, Tower Bersama appears to have insufficient debt head room to acquire these assets without a sizeable equity injection.
¨ Maintain NEUTRAL with a higher DCF-derived TP of IDR6,250 (from IDR5,700), which assumes an 8.9% WACC and 3% TG. Our TP implies 14.5x/13.5x EV/EBITDAs for FY17F- 18F respectively.
¨ Risks. Upside risk to our call is the higher than expected telco capex, as this could lead to better than expected tenancy growth and tower additions. A downside risk is on margins erosion and on potential rights issue to fund assets acquisition as mentioned above. (Norman Choong, CFA)

Link to daily report: Indonesia Morning Cuppa 290917

Sector Update:

Coal Mining – Energy Minister Does Not Agree With Cost-Plus Margin
We think the statement by the Energy Minister, Mr Jonan that he does not agree with PLN’s request to implement the cost-plus margin formula for domestic coal selling price to domestic power plants should reverse selling pressure on the shares of Indonesian coal producers. We maintain our OVERWEIGHT stance on the coal sector as we believe coal companies should book robust earnings, while consensus is still using coal price assumptions that are below the actual levels. Adaro Energy and United Tractors are our sector Top Picks.

¨ The Energy Minister does not agree with PLN’s request to use the cost-plus margin formula. According to the Detik news portal, Energy Minster, Mr Ignasius Jonan at the Ministry of Energy and Mineral Resources, said at a press conference at his office that he does not agree with Perusahaan Listrik Negara’s (PLN) request to implement the cost-plus margin formula for domestic coal selling prices used for domestic power plants. He also indicated that he is still studying the fair prices for domestic coal. We think the statement from the minister should reverse selling pressure on the shares of listed domestic coal producers.
¨ The Energy Minister asks PLN to improve efficiency. Mr Jonan had instead asked PLN to improve cost efficiency by lowering the maintenance cost of PLN’s electricity transmission networks, and using less diesel in its energy mix. Diesel oil accounts for only c.7% of PLN’s total electricity production but contributes c.17% of PLN’s total fuel expenses.
¨ Coal expenses contribute only 14% of PLN’s total operating expenses. Although coal-fired power plants contribute the biggest portion or around 56% of PLN’s total electricity production, coal expenses account for only c.32% of PLN’s total fuel expenses (Figure 1) or only c.14% of PLN’s total operating expenses (Figure 2), which is still lower than gas expenses, and cheaper than diesel oil.
¨ Adaro Energy and United Tractors are our Top Picks. We maintain our OVERWEIGHT call on the coal sector as we think coal companies should book robust earnings, while consensus is still using coal assumptions that are below actual coal prices. We like Adaro Energy as we think it is a good proxy for the coal sector, with good trading liquidity.
We also like United Tractors as we believe it is the biggest coal mining contractor with good corporate governance, while consensus has yet to factor in its higher mining heavy equipment sales in 2018F-2019F. The weak IDR against USD should also benefit United Tractors as the profit margin at its mining contracting business should expand when IDR weakens. (Hariyanto Wijaya, CFA, CPA, CMT)
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Best regards,

Andrey Wijaya
Senior Vice President
Research Analyst – Auto, Consumer, Cement
PT RHB Sekuritas Indonesia
 ​

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