tower sector industry guide 23112018 has ample room to expand 3g/4g coverage in regions outside java...

ed: CK/ sa: MA, CW, CS

Opportunity to buy business near the

replacement cost

Tower sector is likely to see 4-6% revenue CAGR over next couple of years

~26,000 towers could be up for sale in 2-3 years

TOWR is our top pick offering 50% upside potential and 5.5% yield

Tower sector is likely to see 4%-6% revenue CAGR over

next few years. We estimate the sector to record 6%-9% CAGR in tenancy addition over the next 5-8 years from addition of towers and rise in tenancy ratio. Indonesia has 3.4 towers per 10,000 people (vs 3.0 for India and 6.1 for the US) and an average tenancy ratio of 1.4x (vs 1.8x for India and 2.2x for the US) despite its archipelago nature requiring more towers. However, blended tower-leasing rate is likely to decline 2%-3% annually due to the lower rates for the new leases. Indosat kick-starting tower orders may lead to a positive

surprise. We project the tower sector to record ~6-7% net tenancy growth in 2019F versus 8% in 2018F due to possible slowdown in momentum from XL Axiata. Indosat, who has been absent from the scene so far, starting to award co-location orders, may lead to a positive surprise. PT Sarana Menara Nusantara (TOWR) and Tower Bersama (TBIG) are likely to record 1500/2000 tenant additions organically in FY19F with TBIG benefitting more from Telkomsel orders. TOWR to benefit from full-year consolidation of PT Komet Infra Nusantara (KIN) whose 40% of the business came from Telkomsel.

Ample scope for M&A within the industry. We estimate that ~14,000 towers owned by tower companies and ~4,000 towers owned by XL Axiata and ~8,600 towers owned by Indosat could come up for sale over the next 2-3 years. TOWR equipped with a 1.8x net-debt to-EBITDA (versus 5.3x for TBIG) has ample room to pursue an aggressive M&A strategy.

TOWR is trading near the replacement cost despite

healthy Return on Invested Capital (ROIC). TOWR is trading at a 12-month forward EV/EBITDA of 6.0x, 2SDs below its historical average of 11.0x with the stock pricing-in renewal of only 20% of ~7,000 Hutch leases over FY19-23 versus our expectations of 50-80%. Meanwhile, TBIG is trading at ~10.0x EV/EBITDA at a 60% premium to TOWR (vs 3-year historical average of 35%) which could narrow due to similar pressure on leasing price from its top-tier customers.

JCI : 5,948.10

Analyst Sachin MITTAL +65 66823699

[email protected]

TOWR’s EV/EBITDA is attractive for its EBITDA CAGR

Source: Reuters, Companies, DBS Bank

Replacement EV/EBITDA based on new tower rentals

TOWR TBIG*

Capex per tower in US$ (a) 70,000 73,500 Co-location capex per tower in US$ (b) 16,000 16,000

Tenancy ratio (c) 1.63 1.73

Total tower capex (a+b*c) in US$ 96,080 101,180

US$/IDR exchange rate 14,600 14,600

Capex per tower (Rp m) 1,403 1,477

Monthly lease per tenant (Rp m) (d) 13 14 Annual revenue per tower (d*c*12) 257 286 Assumed EBITDA margin 85% 85%

EBITDA per tower per year (Rp m) (e) 218 243

Replacement EV/EBITDA (Total tower capex/EBITDA)

6.4 6.1

*Assumed 5% lease premium & capex for TBIG Source: Companies, DBS Bank

5.8 10.0

TOWR TBIG

FY19F EV/EBITDA

DBS Group Research. Equity 23 Nov 2018

Indonesia Industry Focus

Tower Sector

Refer to important disclosures at the end of this report

STOCKS

12-mth

Price Mkt Cap Target Price Performance (%)

Rp US$m Rp 3 mth 12 mth Rating

PT Sarana Menara 496 1,729 750 (4.8) (37.0) BUY Tower Bersama 3,950 1,223 4,000 (28.8) (36.6) HOLD

Source: DBS Bank, Bloomberg Finance L.P. Closing price as of 21 Nov 2018

5.5% 6.6%FY18F‐20F EBITDA CAGR

Industry Focus

Indonesia Tower Sector

Tower industry may see 6-9% CAGR in tenancy additions

over the next 5-8 years. We believe the Indonesian tower sector is poised for strong growth, supported by growing demand for data on accelerating smartphone adoption and expanding coverage in regions outside Java. Indonesia has ~90,000 telecom towers, translating into 3.4 towers per every 10,000 people. While this is in line with peers such as India, Indonesia’s archipelago nature naturally requires more tower infrastructure to connect mobile users. Besides, the tower count per head is much higher in more developed markets such as China, Germany and the US, where 3G/4G coverage is more ubiquitous and is of better quality. Furthermore, market leader Telkomsel, has ample room to expand 3G/4G coverage in regions outside Java as seen from the network charts compiled by nPerf, an aggregator of network statistics. Telkomsel has nearly 55k 3G/4G BTS stations more than, XL Axiata (EXCL), which has the widest network coverage outside Java after Telkomsel. The Indonesian tower sector also experiences relatively lower tenancy ratios in comparison to peers such as India and developed markets such as the US and Germany. While bigger players such as TBIG, TOWR and STP (~43% of total towers) experience higher tenancy ratios of ~1.7x, ~50% of towers in the industry is still controlled by mobile network operators (MNOs) and MNO-operated towercos such as Mitratel, which

have much lower tenancy ratios of ~1.1-1.2x. With growing interest in ex-Java regions among operators, where it is more difficult and costly to build and operate tower infrastructure, we believe operators are more likely to opt for co-locations than build-to-suit infrastructure going forward, especially in regions outside Java. Hence, we believe the industry should witness an improvement in tenancy ratios to the levels seen by peers such as India over the next 5-8 years. Assuming, Indonesia needs ~4.5 towers per every 10,000 residents for ubiquitous 4G network coverage, we estimate that the Indonesian tower sector would have room to add at least ~30,000 more towers over the next 5-8 years. This translates to around ~4,000-6,000 tower additions per year, higher than the ~3,000-5,000 tower additions the industry has witnessed in the past, as the proportion of micro-cell infrastructure, which currently accounts for ~10% of orders, is likely to expand as mobile network operators (MNOs) focus on improving capacity from providing blanket coverage. Assuming tenancy ratios edge up to similar levels of India of ~1.7x with the development of the tower sector and coupled with 30,000 increases in towers, this translates to potential tenancy additions of ~73,000, translating to potential 5-8 year CAGR of ~6-9%.

Indonesia has ample headroom to grow its tower count,

US* - Towercos own ~65-75% of towers in US. Estimated no of towers owned by towercos is 154k Source: China Tower, Telecom Regulatory Authority of India, Deloitte, Sarana Menara Nusantara, Tower Xchange, World Bank, Analysys Mason, DBS Bank

1,879

400200

90 70

13.6

3.0

6.1 3.4

8.5

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

‐

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

China India US* Indonesia Germany

Towers per 10,000 people

No. of Towers in 000's Global Telecom Tower Market

1.4 1.5

1.8

2.2 2.3

Indonesia China India US* Germany

Global Tower Markets ‐ Tenancy Ratios

Industry Focus


Telkomsel has ample room to grow 4G coverage outside Java (2G coverage is denoted in blue, 3G in Green, 4G in

orange, and 4G+ is denoted in red)

Source: nPref EXCL and ISAT have a lot of catching up to do with Telkomsel

Source: Companies, DBS Bank

54,895

78,689

110,381

132,968

27,091 32,441

37,358 41,946

21,373

46,935

63,292

78,504

‐

20,000

40,000

60,000

80,000

100,000

120,000

140,000

FY15 FY16 FY17 9M18

3G/4G BTS Stations

Telkomsel Indosat XL Axiata

1H18 for ISAT

Industry Focus


Lease rentals under pressure. Tightening competitive pressures among towercos with TOWR expanding aggressively outside Java and declining margin profiles of telecom operators are likely to put downward pressure on the lease renewal rates over the next 2-3 years. Our industry checks indicate that the renegotiated tower lease rates are 25-30% lower at ~Rp13K per month vs Rp17K-18K 10-years ago. TOWR, for example, has renewed its leasing rate agreement with EXCL at Rp13m per month last year vs Rp15.5m earlier in return for more orders from EXCL. A large chunk of leases of Telkomsel, Hutchison and ISAT would come up for renewal over FY21-23 which coupled with the margin squeeze experienced by these operators would lead to them negotiating hard on the renewal rates, creating downward pressure on industry yields. We have conservatively assumed lease renewal rates of Rp11m for TOWR and Rp12.5m for TBIG to reflect this. Industry revenue growth of 4%-6% over the next 5-8 years. Indonesia tower sector is likely to record ~4-6% topline growth annually over the next 5-8 years as lease rental pressures partially offset the 6-9% growth in tenancy additions. The sector will confront major lease renewals over the next 4-5 years, bulk of which are likely to be renewed at 30-40% discounts to their on-going rates, weighing down the blended per tenant lease rentals of the industry. Besides the growing proportion of tenancy additions on micro-cell infrastructure, which carry lower lease rentals of ~Rp7m per month vs. Rp 13m per month for macro towers, could further weigh on the blended lease rentals. Accordingly, we believe the blended per tenant lease rental of the industry could decline at an annual rate of ~2-3% over the next 5-8 years, bringing down the topline CAGR of the industry to 4-6% over the next 5-8 years despite, 6-9% growth in tenancy additions. 2019 to be driven by ex-Java interests. We believe the key focal point of the major operators would turn to ex-Java in FY19. EXCL continues to expand coverage in the region aggressively and expects to attain ~80% population coverage on its 4G network by the end of FY18. EXCL plans to continue spending ~50% of its Rp7tr annual capex for improving coverage and capacity in the region going forward. Telkomsel is aggressively expanding 4G coverage in the region, leveraging the 2.3GHz spectrum acquired in 2017. While the order flows from ISAT for ex-Java expansions over FY18 has been slow, we expect to see more action going forward as the new management of ISAT has announced plans to aggressively expand coverage and plug its network deficits with EXCL and Telkomsel. We believe order flows from ISAT will start towards 2H19 as the telco is currently upgrading the equipment in its existing coverage regions, after which it will start expanding coverage.

Tower sector to expand ~6-7% over FY19 under our base case. We expect the tower sector to record ~6-7% growth in organic net tenancies over FY19, marginally below the 8% growth projected for FY18 and in line with our macro forecasts of 6-9% CAGR in tenancy additions over 5-8 years. The bulk of the growth in FY19 should stem from new build-to-suit orders of ~2,100, accounting for 53% of gross tenancy additions. With TOWR and TBIG expected to maintain a stable tenancy ratio of 1.7x, we expect the duo to add ~1,900 co-location tenancies over FY19. This coupled with the absence of major lease renewals over FY19 should allow TOWR/TBIG to record 1,500/2,000 net tenancy additions organically over FY19. Net organic tenancy additions of 3,500 over FY19 would be slightly lower than the projected 3,700 net tenancy additions for FY18, as EXCL may start to slow down towards the latter part of the year with focus shifting to improving capacity from providing blanket coverage. the impact of which would be partially offset by orders from ISAT. Under our bear case, we project for consolidation within the mobile sector and intensifying competitive dynamics in the mobile sector to drive down expansions by major operators. This would result in TOWR/TBIG recording net tenancy additions of only 750/1200 over FY19, translating into ~3-4% growth over the year. Under our bull case, we project for a stronger-than- expected comeback in orders from Telkomsel and ISAT, and EXCL to keep expanding its coverage regions without slowing down. TOWR and TBIG would add 1800/2600 net tenancies over FY19, under our bull case, registering ~8-9% growth over FY19. Net tenancy additions have accelerated over FY17/18


867

1500 1465

2,603

2,200 2,000

FY17 FY18F FY19F

Base Case Net Organic Tenancy Additions

TOWR TBIG

Industry Focus


Major renewals for TOWR starting in FY20, TBIG in FY22. ~7,000 leases TOWR acquired from Hutchison over 2008-2010 will come up for renewal over FY20-23, with ~2,000 leases expected to come up for renewal over FY20 with ~1,600 each over the next years. The Hutchison leases, denoted in US$ carry high lease rentals and are likely to be renewed at much lower lease rentals. However, our checks with the TOWR management indicate that the new management of Hutchison has re-instated 80 leases recently on the same terms out of 370 leases which were cancelled by the previous Hutch management. To factor in the possibility of any telco-consolidation in the future, we project ~50% of expiries from Hutchison to be renewed at Rp11m lease rental versus market price of Rp13m currently. TBIG will start seeing major lease renewals from FY22 with ~2,500 leases acquired from ISAT, carrying a lease rental of US$1,300 monthly (~Rp18m) coming up for renewal in FY22, along with ~3,500 leases of Telkomsel and other operators. We expect bulk of the leases from Telkomsel and ISAT to be renewed albeit at much lower lease rentals of ~Rp12.5m-13m.

Tower leases added over 2009-2013: Bulk of these will be

up for renewal over FY20-23

Ample headroom for tower acquisitions: TOWR is the likely candidate. We estimate that ~14,000 towers owned by independent towercos such as STP and MNO operated towercos such as IBS and ~4,000 towers owned by EXCL and ~8,600 towers owned by ISAT could be up for grabs over the next 2-3 years. With ongoing pressure on lease rentals and steep depreciation of the Indonesian rupiah, smaller towercos may look to merge with bigger players, in a bid to secure 10-15% pricing premiums and accelerate expansions. EXCL and ISAT may also look to exit some of their non-strategic tower infrastructure and funnel the savings in to new businesses such as fibre broadband and ongoing investments in their networks. We believe TOWR is the most likely candidate to pursue an aggressive M&A strategy within the sector. TOWR, equipped with a 1.8x net-debt to last-quarter annualized EBITDA vs the sector average of ~4-5x, has ample headroom to raise funding for inorganic expansions. TBIG is unlikely to be active in the M&A space, with a high leverage of 5.3x net debt to last-quarter annualised EBITDA, limiting TBIG’s ability raise funding to pursue its M&A ambitions.

~26,000 towers could come up for sale over the next 2-3 years

* Figures are as of December 2017 for IBS and Telkomsel. IBS is owned by the Sinar Mas Group, the controlling shareholder of Smartfren. Mitratel is controlled by Telkom Indonesia, the controlling shareholder of Telkomsel. Source: Companies, Tower Xchange, DBS Bank

Industry Focus


TOWR diversifying beyond the telecom tower business. TOWR is deepening its offerings in the telecom sector in a bid to diversify beyond the provisioning of telecom tower services. Non-tower revenues already account for ~9% of TOWR’s topline and the bulk of the revenues stem from the provisioning of satellite solutions to banks with the rest derived from fiberising cell sites and the provisioning of small-cell solutions. The business is seeing high double-digit growth in revenue, with non-tower revenues over 9M18 expanding at 56% y-o-y. TOWR’s management hopes to further expand this segment and expects non-tower revenues to account for ~20% of TOWR’s topline in another five years.

Stock Picks TOWR is our top pick in the sector. TOWR is attractive at a 12-month forward EV/EBITDA of 6.0x or ~2SDs below its historical average of 11.0x, while offering 6.6% FY17-20F EBITDA CAGR and ~5.5% yield. With TOWR’s current 12 month forward EV/EBITDA valuation below 7x, the stock is now trading near the replacement cost of towers. We expect TOWR to benefit from 4G capacity expansions in Java and coverage expansions outside Java.

TOWR is trading near the replacement cost of the business

TOWR TBIG Capex per tower in US$ (a) 70,000 73,500 Assumed Colocation capex per tower in US$ (b) 16,000 16,000 Tenancy ratio (c) 1.63 1.73 Total tower capex (a+(b*c) 96,080 101,180 US$/IDR 14,600 14,600 Capex per tower (Rp m) 1,403 1,477 New lease rental per tenant per month (Rp m) 13 14 Revenue per tower 257 286 Assumed EBITDA margin 85% 85% EBITDA per tower per year (Rp m) 218 243 Replacement cost (Per tower capex/EBITDA) 6.4 6.1

Based on a 5% lease rental premium and capex for TBIG* to reflect TBIG’s extensive ex-Java portfolio. Source: Companies, DBS Bank ROIC for the new towers > WACC warrants higher valuation than the replacement cost TOWR TBIG

Useful life of tower assets (years) 30

30

Tower depreciation (Rp m) 47

48

EBIT per tower (Rp m) 172

199

Tax rate on revenue (GR-34) 10% 10%

Tax on lease income 26

29

NOPAT per tower 146

170

ROIC per tower 10.4% 11.9%

Assumed WACC 9.6% 9.4%


Industry Focus


Market is overly concerned about Hutch lease expiries. The market is concerned about the impact of non-renewal of the ~7,000 Hutch leases expiring over FY19-23. TOWR’s current stock price implies renewal of only 20% of Hutch leases vs our base-case expectations of 50% renewal at lower lease rentals. Under its new CEO, Hutch has reinstated 80 out of the 370 leases cancelled by the previous management under the same conditions, supporting our views. With a net debt-to-EBITDA of 1.8x, TOWR has ample room to raise debt to expand inorganically to offset any tenancy losses in our view. TBIG’s premiums over TOWR may not expand further. TBIG is trading at a 12-month forward EV/EBITDA of ~10.0x, at a 60%

premium to TOWR vs its 3-year historical average premium of 35%. We think that the premium may not expand further as TBIG is also likely to face similar pressure on tower leasing price from its top-3 telco customers. Some 2,500 leases acquired from ISAT in FY12, carrying a lease rate of Rp18m, and ~3,500 leases from Telkomsel and others, are expected to be renewed at a much lower price of ~Rp12-13m in FY22F, adding pressure on the topline and EBITDA growth of TBIG. TBIG’s 5.3x net debt to EBITDA also limits the potential for aggressive inorganic expansions to grow its topline, in our view.

ed: CK/ sa: MA, CW, CS

BUY

Last Traded Price ( 22 Nov 2018): Rp500 (JCI : 5,990.80) Price Target 12-mth: Rp750 (50% upside) Analyst Sachin MITTAL +65 66823699 [email protected]

What’s New ROIC above WACC warrants a premium valuation over

replacement cost of the business

The market has priced in renewal of only 20% of Hutch leases vs our expectations of 50-80%

Maintain BUY and TP of Rp750

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2017A 2018F 2019F 2020F Revenue 5,338 5,733 6,261 6,643 EBITDA 4,604 4,904 5,300 5,570 Pre-tax Profit 2,803 3,304 3,426 3,618 Net Profit 2,100 2,478 2,569 2,714 Net Pft (Pre Ex.) 2,387 2,478 2,569 2,714 Net Pft Gth (Pre-ex) (%) 27.4 3.8 3.7 5.6 EPS (Rp) 41.2 48.6 50.4 53.2 EPS Pre Ex. (Rp) 46.8 48.6 50.4 53.2 EPS Gth Pre Ex (%) 27 4 4 6 Diluted EPS (Rp) 41.2 48.6 50.4 53.2 Net DPS (Rp) 23.5 26.7 27.7 29.3 BV Per Share (Rp) 139 161 184 208 PE (X) 12.1 10.3 9.9 9.4 PE Pre Ex. (X) 10.7 10.3 9.9 9.4 P/Cash Flow (X) 7.4 5.3 6.3 6.2 EV/EBITDA (X) 7.0 6.6 5.8 5.7 Net Div Yield (%) 4.7 5.3 5.5 5.9 P/Book Value (X) 3.6 3.1 2.7 2.4 Net Debt/Equity (X) 0.9 0.8 0.6 0.6 ROAE (%) 32.2 32.4 29.2 27.2 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 47.5 52.4 56.1 Other Broker Recs: B: 16 S: 0 H: 1

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

ROIC > WACC warrants a premium over replacement cost Trading near replacement cost despite solid return on invested capital (ROIC). Sarana Menara Nusantara (TOWR) is trading at an attractive 12-month forward EV/EBITDA of 6.0x, ~2SDs below its historical mean of 11.0x while offering 6.7% FY18F-20F EBITDA CAGR and ~5.5% yield. It is now trading near the replacement cost of towers despite generating an ROIC over its average cost of capital. Being the largest operator in the Indonesian tower sector, TOWR will benefit from 4G capacity growth in Java and coverage expansion outside Java (ex-Java). Where we differ: The market is concerned about the impact of non-renewal of ~7,000 Hutch leases expiring over FY19-23. The stock price implies renewal of only 20% of Hutch leases vs our base-case expectation of 50% renewal at lower lease rentals. Under its new CEO, Hutch has reinstated 80 out of the 370 leases cancelled by the previous management under the same conditions, thus supporting our view. With a net debt-to-EBITDA of 1.8x, TOWR has ample room to raise debt to expand inorganically to offset any tenancy losses in our view.

Potential catalyst: Share buyback plan, higher dividends and acquisitions. TOWR announced a share buyback plan of up to 2.5b shares (5% of paid-up capital) over the next 18 months. Possible upward adjustment in dividends as indicated by management could also lead to a re-rating, in our view. Valuation:

Reiterate BUY with TP of Rp750. We maintain our DCF-based TP at Rp750 (9.6% WACC, 3% terminal growth rate) despite upward revision to our tenancy additions being offset by lower EBITDA margins on the growing non-tower businesses. Key Risks to Our View:

Bear-case TP of Rp500. This scenario projects net additions of only 400 tenants over FY17-23 vs. 7,700 under our base case, assuming non-renewal of 80% of 7,000 Hutch leases and slower tenancy additions. We also assume a lower renewal rate of Rp7m vs. Rp11m and a terminal growth rate of 2% vs. 3% under our base case. At A Glance Issued Capital (m shrs) 51,015 Mkt. Cap (Rpbn/US$m) 25,507 / 1,751 Major Shareholders (%) PT Sapta Adhikari Investama 50.1 T Rowe Price Group Inc (%) 7.6

Free Float (%) 42.3 3m Avg. Daily Val (US$m) 0.32 ICB Industry : Telecommunications / Fixed Line Telecommunications

DBS Group Research . Equity 23 Nov 2018

Indonesia Company Guide

PT Sarana Menara Nusantara Version 8 | Bloomberg: TOWR IJ | Reuters: TOWR.JK Refer to important disclosures at the end of this report

43

63

83

103

123

143

163

183

203

412.2

512.2

612.2

712.2

812.2

912.2

1,012.2

Nov-14 Nov-15 Nov-16 Nov-17 Nov-18

Relative IndexRp

PT Sarana Menara Nusantara (LHS) Relative JCI (RHS)

Company Guide

PT Sarana Menara Nusantara

WHAT’S NEW

ROIC generation over and above WACC

Why shouldn’t TOWR trade near replacement cost? Typically, businesses tend trade near their replacement cost when current and new projects fail to generate positive economic value, i.e. ROIC is similar to the weighted average cost of capital (WACC). In the past, ROIC has been well above WACC. Even for new leases at lower price, TOWR is generating ROICs over and above its WACC of 9.6%, thus

adding economic value on new build-out, further maximising the value-add of its existing operations which generate ROICs in low-mid double digits. Hence, we believe TOWR has ample potential to generate positive economic value going forward, justifying a valuation over and above the replacement cost of the business of 6.4x EV/EBITDA.

ROIC > WACC warrants a premium over the replacement cost

Based on a 5% lease rental premium and capex for TBIG*. Tax computation is based on the GR-34 tax ruling, requiring tower companies to pay final taxes of 10% on income for leases initiated after the 2 January 2018.

Company Guide


CRITICAL DATA POINTS TO WATCH

Critical Factors

6-9% tenancy growth in the sector should benefit TOWR. We believe the Indonesian tower sector would have the potential to add over 70,000 new tenants over the next 5-8 years, as tenancy ratios improve with the ongoing ex-Java expansions of telcos and the tower count, which is well below averages seen in developed markets, edge up. TOWR, being the largest operator in the Indonesian tower sector, is poised well to capitalise on this growth. TOWR has an edge over smaller tower players in the ex-Java region due to its much larger scale and better execution capabilities. This is reflected in TOWR’s rental pricing as well, which carries 10-15% pricing premiums over the leasing rates of smaller operators. The acquisition of KIN, which is predominantly present in regions outside Java, should also provide a much-needed boost to TOWR’s ex-Java portfolio which presently accounts for ~46% of its tower portfolio. KIN, generates ~40% of its topline from Telkomsel. TOWR has historically lacked exposure to Telkomsel, which contributes to ~19% of TOWR revenue vs. 45% for Tower Bersama Infrastructure (TBIG). As per management guidance, ~1,100 orders are in the pipeline as of September 2018. As such, we expect TOWR to add ~400 net tenancies in 4Q18. Based on our revised outlook on the sector and potential growth in business from Telkomsel, we have revised up our net tenancy additions to 1500/1950 for FY19F/20F from 1200/1500 before. Acquisitions to partially offset potential loss of Hutch leases. With a net debt to EBITDA of ~1.8x, TOWR has ample headroom to raise debt to fund inorganic expansions. ~3,800 towers are owned by independent tower companies in Indonesia (excluding ~6,600 towers of PT Solusi Tunas Pratama), along with ~4,000 towers owned by XL Axiata and ~8,600 owned by Indosat, which TOWR could potentially target, to partially offset the potential loss of Hutch tenancies. After the acquisition of KIN, management indicated that it would continue to look for favourable acquisition targets to fuel future growth. We expect TOWR to add ~1,500 tenancies over FY19/20 inorganically.

Towers

Total tenants

Tenancy ratio

Capex (Rp tn)

EBITDA margin (%)

Source: Company, DBS Bank

14562 14854

1725417959

19304

0.0

2785.3

5570.5

8355.8

11141.1

13926.3

16711.6

19496.8

2016A 2017A 2018F 2019F 2020F

24144 25011

2851129676

31126

0.0

6349.7

12699.4

19049.1

25398.8

31748.5

2016A 2017A 2018F 2019F 2020F

1.66 1.68 1.65 1.65 1.61

0.00

0.34

0.69

1.03

1.37

1.72

2016A 2017A 2018F 2019F 2020F

0.66 0.66

3.74

1.16

3.27

0.0

0.8

1.5

2.3

3.0

3.8

2016A 2017A 2018F 2019F 2020F

87.2 86.2 85.5 84.6 83.8

0.0

17.6

35.2

52.9

70.5

88.1

2016A 2017A 2018F 2019F 2020F

Company Guide


Appendix 1: A look at Company's listed history – what drives its share price? Tenancy ratio is the most critical factor, followed by tower growth. In the critical factor analysis which was conducted over the past ~8 years, tower companies’ share price movements followed new tower additions and tenancy ratios. TOWR’s share price changes have a positive correlation with the growth in towers and changes in tenancy ratios. One possible explanation for this trend is that due to the acquisition-driven model of TOWR, the market appreciates the addition of more tenants on the acquired towers. Higher new tower additions generally indicate a bullish market for tower players, while higher tenancy ratios indicate higher revenue per tower and return on invested capitals (ROICs). TOWR’s indexed share price vs tenancy ratio

TOWR’s indexed share price vs tower additions

Source: DBS Bank

1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

0

500

1000

1500

2000

2500

3000

Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17Indexed share price (LHS) Tenancy ratio (RHS)

0

500

1000

1500

2000

2500

0

500

1000

1500

2000

2500

3000

Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17Indexed share price (LHS) Tower additions (RHS)

Company Guide


Balance Sheet:

Under-levered balance sheet. TOWR had a net debt-to-last quarter averaged (LQA) EBITDA of around 1.8x as of 30 September 2018 vs. the sector average of 3.7x, indicating room for further inorganic expansion. About 20% of TOWR’s debt is held in US$ while ~60% remains floating and unhedged. We have factored in higher interest expenses on potential upticks in floating rates. Share Price Drivers:

Trading near replacement cost despite positive economic value add. TOWR is trading at an attractive 12-month forward EV/EBITDA of 6.0x, ~2SDs below its historical average of 11.0x while offering 6.7% FY18F-20F EBITDA CAGR and ~5.5% yield. With TOWR’s current valuation below 7x, the stock is now trading near the replacement cost of towers despite generating an ROIC over the company’s cost of capital. Being the largest operator in the Indonesian tower sector, TOWR is poised well to capitalise on the expanding Indonesian tower sector, set to grow at 6-9% over the next 5-8 years. Full-year consolidation of PT Komet Infra Nusantara (KIN) and a pipeline of over ~1,100 orders are expected to drive FY19F growth. Bull-case TP of Rp850. In our bull-case scenario, we have assumed for 80% of Hutch leases to be renewed over FY20-23, along with stronger organic growth in tenancies as TOWR gains better traction with Telkomsel. We expect TOWR to record net tenancy additions of 11,400 over FY18-23F vs. 7,700 under our base case, along with a new tenant lease rate of Rp13m vs. Rp11m under our base case, supported by a conducive economic climate and lower competition from TBIG. Key Risks:

Bear-case TP of Rp500. In our bear-case scenario, we have modelled for TOWR to secure only 20% of the Hutch leases due for renewal over FY20-23, along with slow growth in organic tenancy additions and nil inorganic tenancy growth. Under our bear case, TOWR would record net tenancy additions of 400 over FY18-23 vs. 7,700 under our base case, as expiring Hutch leases and the lack of acquisitions weigh on tenancy additions. This coupled with a lower new tenant rate of Rp7m vs. Rp11m under our base case owing to a tighter competitive environment would lead to TOWR recording FY17-23F EBITDA CAGR of -0.2% vs. 3% under our base case. We believe the terminal growth rate should also be lowered to 2% under the bear-case scenario. Company Background

PT Sarana Menara Nusantara Tbk, through a subsidiary, builds telecommunications towers. The company constructs, operates and rents the towers to mobile telecommunications service providers.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.2

0.2

0.3

0.3

0.3

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2016A 2017A 2018F 2019F 2020F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2016A 2017A 2018F 2019F 2020F

Capital Expenditure (-)

Rp bn

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2016A 2017A 2018F 2019F 2020F

Avg: 13.5x

+1sd: 19.4x

+2sd: 25.3x

‐1sd: 7.6x

‐2sd: 1.7x1.5

6.5

11.5

16.5

21.5

26.5

Nov-14 Nov-15 Nov-16 Nov-17

(x)

Avg: 3.41x

+1sd: 5.39x

+2sd: 7.37x

‐1sd: 1.42x

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

Nov-14 Nov-15 Nov-16 Nov-17

(x)

Company Guide


Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F Towers 14,562 14,854 17,254 17,959 19,304 Total tenants 24,144 25,011 28,511 29,676 31,126 Tenancy ratio 1.70 1.70 1.70 1.70 1.60 Capex (Rp tn) 0.70 0.70 3.70 1.20 3.30 EBITDA margin (%) 87.2 86.2 85.5 84.6 83.8

Income Statement (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 5,053 5,338 5,733 6,261 6,643 Cost of Goods Sold (1,394) (1,172) (1,229) (1,488) (1,533) Gross Profit 3,659 4,166 4,504 4,773 5,110 Other Opng (Exp)/Inc (436) (457) (519) (598) (668) Operating Profit 3,223 3,709 3,985 4,175 4,442 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (613) (619) (681) (749) (824) Exceptional Gain/(Loss) 260 (287) 0.0 0.0 0.0 Pre-tax Profit 2,870 2,803 3,304 3,426 3,618 Tax (733) (703) (826) (857) (905) Minority Interest (3.3) 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,134 2,100 2,478 2,569 2,714 Net Profit before Except. 1,874 2,387 2,478 2,569 2,714 EBITDA 4,457 4,604 4,904 5,300 5,570 Growth Revenue Gth (%) 13.1 5.6 7.4 9.2 6.1 EBITDA Gth (%) 18.0 3.3 6.5 8.1 5.1 Opg Profit Gth (%) (28.5) 15.1 7.5 4.8 6.4 Net Profit Gth (Pre-ex) (%) (36.7) 27.4 3.8 3.7 5.6 Margins & Ratio Gross Margins (%) 72.4 78.0 78.6 76.2 76.9 Opg Profit Margin (%) 63.8 69.5 69.5 66.7 66.9 Net Profit Margin (%) 42.2 39.3 43.2 41.0 40.9 ROAE (%) 31.3 32.2 32.4 29.2 27.2 ROA (%) 10.6 11.2 12.1 11.0 10.7 ROCE (%) 13.0 16.3 16.3 15.1 14.7 Div Payout Ratio (%) 32.8 57.1 55.0 55.0 55.0 Net Interest Cover (x) 5.3 6.0 5.9 5.6 5.4


Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 Revenue 1,335 1,360 1,362 1,443 1,540 Cost of Goods Sold (292) (300) (310) (359) (425) Gross Profit 1,043 1,060 1,052 1,084 1,115 Other Oper. (Exp)/Inc (118) (105) (116) (124) (134) Operating Profit 924 955 936 960 981 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (153) (140) (158) (184) (247) Exceptional Gain/(Loss) (63.4) (170) (77.3) (31.1) 106 Pre-tax Profit 708 645 700 745 841 Tax (177) (171) (182) (184) (214) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 531 474 519 561 626 Net profit bef Except. 595 644 596 592 520 EBITDA 1,149 1,521 1,168 1,217 1,295 Growth Revenue Gth (%) 0.4 1.9 0.1 5.9 6.8 EBITDA Gth (%) 1.1 32.5 (23.2) 4.2 6.4 Opg Profit Gth (%) 0.8 3.3 (2.0) 2.6 2.2 Net Profit Gth (Pre-ex) (%) 0.2 8.2 (7.4) (0.7) (12.2) Margins Gross Margins (%) 78.1 77.9 77.2 75.1 72.4 Opg Profit Margins (%) 69.3 70.2 68.7 66.5 63.7 Net Profit Margins (%) 39.8 34.8 38.1 38.9 40.7

Balance Sheet (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F Net Fixed Assets 12,269 12,601 15,418 15,456 17,601 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 2,923 3,113 3,113 3,113 3,113 Cash & ST Invts 2,905 2,348 3,095 5,555 4,903 Inventory 0.0 0.0 0.90 1.00 1.10 Debtors 352 624 399 436 462 Other Current Assets 338 77.4 77.4 77.4 77.4 Total Assets 18,787 18,764 22,103 24,638 26,158 ST Debt 1,515 634 634 634 634 Creditor 189 272 505 614 625 Other Current Liab 1,598 1,325 2,078 2,108 2,156 LT Debt 8,403 8,365 9,365 10,365 10,365 Other LT Liabilities 1,121 1,066 1,305 1,544 1,783 Shareholder’s Equity 5,960 7,102 8,217 9,373 10,594 Minority Interests 0.0 0.10 0.10 0.10 0.10 Total Cap. & Liab. 18,787 18,764 22,103 24,638 26,158 Non-Cash Wkg. Capital (1,098) (895) (2,105) (2,208) (2,240) Net Cash/(Debt) (7,014) (6,650) (6,904) (5,444) (6,096) Debtors Turn (avg days) 29.7 33.4 32.6 24.3 24.7 Creditors Turn (avg days) 461.2 303.3 457.7 562.3 558.1 Inventory Turn (avg days) 12.6 N/A 0.5 1.0 0.9 Asset Turnover (x) 0.3 0.3 0.3 0.3 0.3 Current Ratio (x) 1.1 1.4 1.1 1.8 1.6 Quick Ratio (x) 1.0 1.3 1.1 1.8 1.6 Net Debt/Equity (X) 1.2 0.9 0.8 0.6 0.6 Net Debt/Equity ex MI (X) 1.2 0.9 0.8 0.6 0.6 Capex to Debt (%) 38.0 8.2 37.4 10.6 29.8 Z-Score (X) 2.6 2.5 2.5 2.5 2.5


Company Guide


Cash Flow Statement (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F Pre-Tax Profit 2,870 2,803 3,304 3,426 3,618 Dep. & Amort. 1,185 895 919 1,125 1,127 Tax Paid (874) (925) (73.5) (826) (857) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (161) 59.1 457 72.4 (15.4) Other Operating CF 812 622 239 239 239 Net Operating CF 3,833 3,454 4,846 4,036 4,113 Capital Exp.(net) (3,767) (741) (3,736) (1,163) (3,272) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 42.1 (564) 0.0 0.0 0.0 Net Investing CF (3,725) (1,305) (3,736) (1,163) (3,272) Div Paid 0.0 (997) (1,363) (1,413) (1,493) Chg in Gross Debt (212) (920) 1,000 1,000 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 85.9 (827) 0.0 0.0 0.0 Net Financing CF (126) (2,744) (363) (413) (1,493) Currency Adjustments (63.5) 37.3 0.0 0.0 0.0 Chg in Cash (81.5) (557) 747 2,460 (652) Opg CFPS (Rp) 78.3 66.6 86.0 77.7 80.9 Free CFPS (Rp) 1.29 53.2 21.8 56.3 16.5


Target Price & Ratings History

Source: DBS Bank

Analyst: Sachin MITTAL

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 02 Apr 18 696 900 BUY

2: 13 Aug 18 540 900 BUY

3: 11 Oct 18 466 750 BUY

4: 02 Nov 18 500 750 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

435

485

535

585

635

685

735

785

835

Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18

Rp

ed: KK/ sa: MA, CW, CS

HOLD Last Traded Price ( 14 Nov 2018): Rp3,940 (JCI : 5,858.30) Price Target 12-mth: Rp4,000 (2% upside) (Prev Rp5,750) Analyst Sachin MITTAL +65 66823699 [email protected]

What’s New 3Q18 EBITDA of Rp 938b (3.8% yoy, 4.5% qoq) was in

line with our expectations

Street is underestimating pressure on lease renewal rates and expiry of ISAT leases in FY22

Maintain HOLD with a revised TP of Rp 4,000

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2017A 2018F 2019F 2020F Revenue 4,023 4,310 4,548 4,815 EBITDA 3,495 3,722 3,918 4,139 Pre-tax Profit 908 1,131 1,204 1,320 Net Profit 2,316 726 776 862 Net Pft (Pre Ex.) 2,612 726 776 862 Net Pft Gth (Pre-ex) (%) 190.4 (72.2) 6.9 11.1 EPS (Rp) 511 167 178 198 EPS Pre Ex. (Rp) 576 167 178 198 EPS Gth Pre Ex (%) 190 (71) 7 11 Diluted EPS (Rp) 511 167 178 198 Net DPS (Rp) 166 172 172 172 BV Per Share (Rp) 681 703 709 735 PE (X) 7.7 23.6 22.1 19.9 PE Pre Ex. (X) 6.8 23.6 22.1 19.9 P/Cash Flow (X) 5.6 13.4 11.8 10.9 EV/EBITDA (X) 10.8 10.3 10.0 9.7 Net Div Yield (%) 4.2 4.4 4.4 4.4 P/Book Value (X) 5.8 5.6 5.6 5.4 Net Debt/Equity (X) 6.3 6.5 6.5 6.3 ROAE (%) 99.8 23.6 25.2 27.4 Earnings Rev (%): (15) (20) (18) Consensus EPS (Rp): 227 273 308 Other Broker Recs: B: 6 S: 0 H: 11

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Fair valuations for mediocre growth

65% valuation premium to its peers may not expand further. PT Tower Bersama Infrastructure (TBIG) is trading at a 12-month forward EV/EBITDA of ~10.5x, at 65% premium to Sarana Menara Nusantara (TOWR) versus its 3-year historical average premium of 35%. We think that the premium may not expand further as TBIG is also likely to face similar pressure on tower leasing price from top-3 telco customers. TBIG offers 5.5% FY18F-20F EBITDA CAGR while its 5.3x net debt to EBITDA limits potential for significant acquisition in the future. Where we differ: We expect consensus to lower FY19/20F EBITDA by 3%/7%. We model new tower leases at ~Rp12.5m per month versus average price of Rp15m due to the pressure on telcos to reduce their costs. Besides, ~2,500 leases acquired from Indosat in FY12 and ~3,500 leases from Telkomsel and others are expected to be renewed at a much lower price in FY22F, adding further pressure on top line and EBITDA growth of TBIG. Potential catalyst: Industry consolidation. Potential consildation among telcos may lead to reduction in tower leases. Valuation:

Maintain HOLD with a lower TP of Rp 4,000. We cut our TP to Rp 4,000 (9.4% WACC, 3% terminal growth rate) from Rp 5,750 as we (a) factor in lower lease rates on major renewals from 2022 onwards, (c) Raise WACC to 9.4% vs. 9.1% earlier on higher volatility of the share price and lower terminal growth to 3% vs 4% earlier. Key Risks to Our View:

Bull case valuation of Rp 4,800 if Telkomsel and Indosat ramp up faster. FY17A-20F net tenancy additions of 7,600 vs, 6,100 under our base case and a lease renewal rate of Rp 13m vs Rp 12.5m under our base case are our bull-case assumptions. At A Glance Issued Capital (m shrs) 4,531 Mkt. Cap (Rpbn/US$m) 17,854 / 1,211 Major Shareholders (%) Wahana Anugrah Sejahtera PT 29.1 Provident Capital Indonesia 26.5 Tower Bersama Infrastructure TB 6.1

Free Float (%) 38.3 3m Avg. Daily Val (US$m) 0.59 ICB Industry : Telecommunications / Fixed Line Telecommunications

DBS Group Research . Equity 15 Nov 2018

Indonesia Company Guide

Tower Bersama Infrastructure Version 8 | Bloomberg: TBIG IJ | Reuters: TBIG.JK Refer to important disclosures at the end of this report

Company Guide

Tower Bersama Infrastructure

WHAT’S NEW

Lease rental pressures persisting

EBITDA of Rp 938b (+3.8% y-o-y, +4.5% q-o-q) was in line with our expectations of Rp 960b. TBIG managed to secure 1,089 net tenancy additions during the quarter, the highest in the past three years. This was driven by growth in orders for both build-to-suit sites (652 gross tenancies) and collocation orders (481 gross tenancies). Despite the strong growth in orders and low lease expiries (44 in 3Q18 vs. ~390 in 2Q18) TBIG’s top line of Rp 1,089b recorded mediocre growth of 5.3% y-o-y (+4.5% q-o-q) driven by lower lease rentals on the new orders. Costs remained largely in line with growth in revenue supporting a stable EBITDA margin of 86.1%.

TBIG’s management mentioned that it expects to surpass its guidance of 2,500 tenancy additions for FY18, in light of the accelerating momentum in 3Q18. We have raised our net tenancy addition projections to 2,200 from 2,000 previously, as TBIG has already added ~1,800 net tenancies (~2,350 gross) and the absence of major lease expiries over 4Q18 (only ~50 lease expiries are expected over 4Q18),

Tenancy ratio improved to 1.73x despite higher build-to-suit orders. Tenancy ratio edged up marginally to 1.73x from 1.72x in 2Q18 despite a higher proportion of build-to-suit orders, which represented ~58% of gross tenancy additions. TBIG added 626 towers in 3Q18 with net tenancy additions of 1,089, helping TBIG marginally improve its tenancy ratio to 1.73x.

TBIG becomes the controlling shareholder of PT Gihon. TBIG acquired a stake of 19.8% in PT Gihon Telekomunikasi Indonesia Tbk (with an option to acquire another 10% through a convertible bond), a listed tower infrastructure operator with operations predominantly within Java, in 2Q18 for Rp 191b. In 3Q18, TBIG entered an agreement with the controlling owners of PT Gihon to become the controlling

shareholder of PT Gihon. Accordingly, TBIG will make a mandatory offer to acquire ~8% of the ownership held by the public.

As of the end of June 2018, Gihon had 766 tenants consisting of 529 towers and 237 collocations. XL contributes ~50% to Gihon’s top line, which could be of appeal to TBIG given its relatively limited exposure to XL (~15% of 9M18 revenues). However, TBIG’s above average net debt to last quarter annualised EBITDA of 5.3x vs. the sector average of ~3-4x could potentially deter such inorganic expansions.

We have revised our FY19F EBITDA by 1.5% on the back of slightly lower average lease rate. We have modelled avergae lease rate of Rp14.4m per tenant per month versus Rp14.7m eralier on the back of higher pressure on the lease rentals.

Major renewals for TBIG starting from FY22. ~2,500 leases TBIG acquired from Indosat (ISAT) in FY12 would come up for renewal over FY22. These leases, marked at high premiums with rentals denoted in US$, are likely to be renewed at much lower rates. ISAT, which is already under heavy cost pressures, is pushing hard to renegotiate. Under our base case, we have also conservatively projected for ~30% of these leases to expire. ~3,500 leases of Telkomsel and other players would also come up for renewal from FY22 onwards, the bulk of which we believe would be renewed at significantly lower lease rentals. This would put further pressure on TBIG’s top line growth, as the tower company remains highly levered to explore potential inorganic opportunities to mitigate the impact of these lease renewals.

Company Guide



FY Dec 3Q2017 2Q2018 3Q2018 % chg yoy % chg qoq

Revenue 1,034 1,042 1,089 5.3 4.5

Cost of Goods Sold (171) (192) (199) 16.7 3.7

Gross Profit 864 850 890 3.1 4.7

Other Oper. (Exp)/Inc (85.2) (92.3) (96.2) 12.9 4.2

Operating Profit 779 758 794 2.0 4.8

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 0.0 0.0 0.0 nm nm

Net Interest (Exp)/Inc (474) (471) (528) (11.4) (12.2)

Exceptional Gain/(Loss) (19.8) (52.2) (6.1) 68.9 (88.3)

Pre-tax Profit 285 235 260 (8.8) 10.6

Tax (7.3) (63.8) (36.2) 394.8 (43.3)

Minority Interest (1.4) (1.4) (3.0) (116.8) 106.6

Net Profit 276 169 221 (20.1) 30.2

Net profit bef Except. 296 222 227 (23.3) 2.3

EBITDA 904 898 938 3.8 4.5

Margins (%)

Gross Margins 83.5 81.6 81.7

Opg Profit Margins 75.3 72.7 72.9

Net Profit Margins 26.7 16.3 20.2

Source of all data: Company, DBS Bank

Company Guide


CRITICAL DATA POINTS TO WATCH

Critical Factors

Tower demand will be driven largely by ex-Java interest. EXCL and Telkomsel maintained robust network expansion, adding 18/31k 3G/4G BTS over the year ended in 9M18. EXCL will start expanding capacity in ex-Java regions now, with ~80% 4G population coverage expected by year-end. Telkomsel is also accelerating expansions of its 4G network on the 2.3GHz spectrum acquired in 2017. ISAT is currently upgrading equipment in its existing coverage regions, and we expect to see more order flow from ISAT towards the latter part of FY19. We believe markets outside Java (ex-Java) would be the key focal point for all three operators in FY19, as operators race to expand coverage in the region to leverage on the growing adoption of smartphones and data services. With a strong ex-Java tower portfolio and a close relationship with Telkomsel, we believe TBIG could add ~6,100 net tenancies over FY17A-20F vs. our previous forecast of 5,800 tenancy additions. Major telcos are beefing up their networks

Source: Companies, DBS Bank Relatively high gearing versus its competitor. TBIG currently has a relatively high net debt/last quarter annualised EBITDA of 5.3x compared to TOWR’s 1.8x. With tower investments remaining capital intensive, balance sheet strength is a key factor in future growth of tower players. In our projections, we assume that TBIG would maintain its current dividend payment of Rp 750b in the near future, resulting in net debt to EBITDA remaining above 5x over FY18-20F. As a result, despite ample opportunities for further industry consolidation, TBIG might not be able to pursue any major mergers and acquisitions (M&A) in the near future.

Tower sites

DAS & shelter only sites

Tower tenants

Tower tenancy ratio

Capex (Rp tn)


Company Guide


Appendix 1: A look at Company's listed history – what drives its share price? Tower additions and tenancy ratios are critical factors. In the critical factor analysis we have conducted over the past ~7 years, we have seen Tower’s share price movements following new tower additions and tenancy ratios. However, we believe that tower additions have had a higher impact on share prices than tenancy ratios. Higher new tower additions generally indicate a bullish market for tower players while higher tenancy ratios indicate higher revenue per tower and return on invested capital (ROICs).

Source: Company, Reuters, DBS Bank Source: Company, Reuters, DBS Bank

0

500

1000

1500

2000

2500

3000

3500

4000

0

50

100

150

200

250

300

350

400

450

Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17

Indexed share price (LHS) Tower additions (RHS)

1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

0

50

100

150

200

250

300

350

400

450

Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17

Indexed share price (LHS) Tenancy ratio (RHS)

Company Guide


Balance Sheet: Leveraged balance sheet but fullly hedged for currency volatility. TBIG’s net debt to last quarter annualised (LQA) EBITDA was 5.3x as of 30 September 2018 vs. the sector average of ~3-4x, indicating high gearing. With annual capex averaging ~Rp 1.5b in FY17-20F, continued payment of dividends and the ongoing share buy-back plan, we expect TBIG’s gearing to remain elevated at 5-5.5x. ~90% of TBIG’s long term borrowings are denoted in the US Dollar and have been fully hedged against adverse foreign currency movements. Share Price Drivers:

Pressure on rentals. The tightening competitive dynamics within the tower industry, with TOWR robustly growing its ex-Java portfolio, could lead to the shrinking of TBIG’s current 10-15% rental premiums and potentially leading to a de-rating. Growth in orders from ISAT. Better clarity on ISAT’s expansion plans and potential growth in orders over FY19/20 could lead to a reassessment of TBIG’s growth projections. Key Risks:

Bull case TP of Rp 4,800. Under our bull case, we project a strong comeback in orders from Telkomsel and ISAT over FY19/20. This would result in FY17A-20F net tenancy additions of 7,600 vs, 6,100 under our base case. This coupled with a per tenant lease renewal rate of Rp 13m vs Rp 12.5m supported by benign competition from TOWR would result in FY18F-20F EBITDA CAGR of 7.5% vs. 5.5% under our base case. Bear case TP of Rp 3,000. Under our bear case, we have modelled for consolidation of telcos and a sharp decline in orders . This would result in FY17A-20F net tenancy additions of just 4,000 vs, 6,100 under our base case. This coupled with a per tenant lease renewal rate of Rp 12m vs Rp 12.5m under our base case, owing to rising competition from TOWR and rental pressure from Telkomsel, would result in FY18F-20F EBITDA CAGR of just 3.5% vs. 5.5% under our base case. Company Background

PT Tower Bersama Infrastructure Tbk (TBIG) provides telecommunications infrastructure services to Indonesian wireless carriers. The company develops and operates telecommunications-supporting infrastructure, including towers and in-building systems across Indonesia.

Leverage & asset turnover (x)

Capital expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide


Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F Tower sites 12,539 13,461 14,661 15,861 16,961 DAS & shelter only sites 71.0 48.0 48.0 48.0 48.0 Tower tenants 20,415 23,018 25,218 27,218 29,118 Tower tenancy ratio 1.60 1.70 1.70 1.70 1.70 Capex (Rp tn) 1.40 1.80 1.60 1.60 1.40

Segmental Breakdown

FY Dec 2016A 2017A 2018F 2019F 2020F Revenues (Rpbn) Tower revenue 3,667 3,979 4,294 4,532 4,798 Shelter-only & DAS 44.1 44.6 16.1 16.1 16.1 Others Total 3,711 4,023 4,310 4,548 4,815

Income Statement (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 3,711 4,023 4,310 4,548 4,815 Cost of Goods Sold (738) (668) (735) (779) (824) Gross Profit 2,973 3,355 3,576 3,769 3,991 Other Opng (Exp)/Inc (316) (343) (379) (404) (431) Operating Profit 2,658 3,012 3,197 3,365 3,560 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (1,686) (1,809) (2,066) (2,162) (2,240) Exceptional Gain/(Loss) (186) (295) 0.0 0.0 0.0 Pre-tax Profit 786 908 1,131 1,204 1,320 Tax (62.6) 1,431 (320) (337) (356) Minority Interest (9.4) (22.7) (85.2) (91.1) (101) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 714 2,316 726 776 862 Net Profit before Except. 899 2,612 726 776 862 EBITDA 3,220 3,495 3,722 3,918 4,139 Growth Revenue Gth (%) 8.5 8.4 7.1 5.5 5.9 EBITDA Gth (%) 10.6 8.5 6.5 5.3 5.6 Opg Profit Gth (%) (0.1) 13.3 6.1 5.3 5.8 Net Profit Gth (Pre-ex) (%) (35.9) 190.4 (72.2) 6.9 11.1 Margins & Ratio Gross Margins (%) 80.1 83.4 83.0 82.9 82.9 Opg Profit Margin (%) 71.6 74.9 74.2 74.0 73.9 Net Profit Margin (%) 19.2 57.6 16.8 17.1 17.9 ROAE (%) 46.3 99.8 23.6 25.2 27.4 ROA (%) 3.1 9.4 2.8 2.8 3.0 ROCE (%) 11.4 13.3 9.5 9.6 10.0 Div Payout Ratio (%) 139.4 32.4 103.3 96.6 87.0 Net Interest Cover (x) 1.6 1.7 1.5 1.6 1.6


Tenancy additions to remain high as operators continue expansions

Company Guide



FY Dec 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 Revenue 1,034 1,048 1,036 1,042 1,089 Cost of Goods Sold (171) (178) (188) (192) (199) Gross Profit 864 870 849 850 890 Other Oper. (Exp)/Inc (85.2) (89.9) (88.1) (92.3) (96.2) Operating Profit 779 780 760 758 794 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (474) (487) (510) (471) (528) Exceptional Gain/(Loss) (19.8) (69.1) (9.7) (52.2) (6.1) Pre-tax Profit 285 224 240 235 260 Tax (7.3) 1,460 (3.9) (63.8) (36.2) Minority Interest (1.4) (17.6) (2.7) (1.4) (3.0) Net Profit 276 1,666 234 169 221 Net profit bef Except. 296 1,735 243 222 227 EBITDA 904 908 896 898 938 Growth Revenue Gth (%) 5.0 1.3 (1.1) 0.6 4.5 EBITDA Gth (%) 5.7 0.4 (1.4) 0.2 4.5 Opg Profit Gth (%) 5.2 0.2 (2.5) (0.3) 4.8 Net Profit Gth (Pre-ex) (%) 41.1 487.0 (86.0) (8.9) 2.3 Margins Gross Margins (%) 83.5 83.0 81.9 81.6 81.7 Opg Profit Margins (%) 75.3 74.4 73.4 72.7 72.9 Net Profit Margins (%) 26.7 159.0 22.5 16.3 20.2

Balance Sheet (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F Net Fixed Assets 18,232 19,799 20,867 21,878 22,742 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,428 3,826 3,826 3,826 3,826 Cash & ST Invts 368 410 345 327 419 Inventory 217 20.3 252 266 282 Debtors 487 358 489 485 480 Other Current Assets 889 1,184 1,184 1,184 1,184 Total Assets 23,620 25,596 26,962 27,965 28,932 ST Debt 1,012 0.0 0.0 0.0 0.0 Creditor 185 193 233 257 284 Other Current Liab 1,703 1,795 2,064 2,080 2,100 LT Debt 17,885 20,369 21,366 22,211 22,917 Other LT Liabilities 1,211 53.8 53.8 53.8 53.8 Shareholder’s Equity 1,556 3,088 3,064 3,090 3,203 Minority Interests 68.4 97.1 182 273 374 Total Cap. & Liab. 23,620 25,596 26,962 27,965 28,932 Non-Cash Wkg. Capital (295) (426) (372) (403) (438) Net Cash/(Debt) (18,529) (19,959) (21,021) (21,884) (22,498) Debtors Turn (avg days) 58.0 38.3 35.9 39.1 36.6 Creditors Turn (avg days) 392.4 372.9 369.6 395.0 404.1 Inventory Turn (avg days) 544.5 234.4 236.6 417.9 409.0 Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2 Current Ratio (x) 0.7 1.0 1.0 1.0 1.0 Quick Ratio (x) 0.3 0.4 0.4 0.3 0.4 Net Debt/Equity (X) 11.4 6.3 6.5 6.5 6.3 Net Debt/Equity ex MI (X) 11.9 6.5 6.9 7.1 7.0 Capex to Debt (%) 6.9 7.4 7.5 7.0 6.3 Z-Score (X) 1.3 1.3 1.3 1.3 1.3


Leverage to remain elevated

Company Guide


Cash Flow Statement (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F Pre-Tax Profit 786 908 1,131 1,204 1,320 Dep. & Amort. 564 483 524 553 579 Tax Paid (182) (137) (51.4) (320) (337) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 983 218 (323) 14.3 16.3 Other Operating CF 1,625 1,715 0.0 0.0 0.0 Net Operating CF 3,849 3,186 1,281 1,451 1,579 Capital Exp.(net) (1,312) (1,506) (1,593) (1,564) (1,443) Other Invts.(net) (53.0) (284) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (1,365) (1,790) (1,593) (1,564) (1,443) Div Paid (592) (665) (750) (750) (750) Chg in Gross Debt 615 1,472 997 845 706 Capital Issues 428 0.0 0.0 0.0 0.0 Other Financing CF (2,860) (2,162) 0.0 0.0 0.0 Net Financing CF (2,409) (1,355) 247 94.8 (43.6) Currency Adjustments (4.6) 1.70 0.0 0.0 0.0 Chg in Cash 69.2 42.1 (65.1) (17.9) 92.0 Opg CFPS (Rp) 632 655 368 330 359 Free CFPS (Rp) 560 371 (71.6) (25.9) 31.1


Target Price & Ratings History

Source: DBS Bank

Analyst: Sachin MITTAL

High capex and dividends, likely to require additional debt-raising

Industry Focus


DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 21 Nov 2018 19:51:35 (WIB) Dissemination Date: 23 Nov 2018 17:52:24 (WIB)

Sources for all charts and tables are DBS Bank unless otherwise specified.

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Industry Focus


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Industry Focus


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Industry Focus


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Industry Focus


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tower sector industry guide 23112018 has ample room to expand 3g/4g coverage in regions outside java...

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