Equity Research Telecommunication Sector Sector Initiation | Telco Sector Data Boom Data consumption to support the industry We expect growth in the telco industry to be driven by a sizeable increase in data usage in the near future. With younger Indonesians (below 35) accounting for 61% of the population, we see that being online has become a basic need. With more practical and efficient chat services, complemented by free data calls, we expect legacy business would continue on its declining trend. Other than chat, we also see that social media has become one of Indonesia’s data growth sources, with apps like Facebook managing to grab some 79mn active users. Another app that would encourage data consumption is video streaming, which continues its popularity; thus there are many promotions, including a free quota bonus for streaming. Price war to repeat, but expected not to stay Currently, ISAT and EXCL are in the midst of a price war, providing promotions as low as IDR59/min to all operators for their ex-Java subscribers to foray in areas where they have minimal exposure, while on the data side, every operator is giving away bonus quotas to stimulate 4G utilization. Out of the three, TSEL has the highest data yield, compared to its peers, at IDR6/MB vs. IDR4/MB. Looking to 2017, we expect competition to rationalize since data subscribers will be dependent on high volume quotas. We also expect that operators will either increase their data package prices or lower their quotas. Regulation changes could alter competitiveness in the industry Based on current conditions, we see the government’s plan to lower interconnection rates by 26% is already being finalized, awaiting the President’s approval. We expect to obtain clarity on this matter by the end of the year. Once this regulation has been implemented, we see a minimal impact, as trends for interconnection revenue and costs both go down. Meanwhile, on the network sharing side, we see that there will be obstacles from TLKM, as they are frankly reluctant to share their network. If this regulation is executed, we expect a positive outcome for ISAT and EXCL, since they could minimize their expansion cost outside Java by sharing with TLKM. On the flipside, TLKM will be negatively impacted, having to expose its market share to competitors. Sector Overweight with TLKM and ISAT as the top pick We rate the sector OVERWEIGHT on the back of stronger long-term outlook, as currently Indonesia is at a beginning stage of 4G. Our top picks in the sector includes TLKM (market share leader, ability to maintain pricing and the broadest network in Indonesia) and ISAT (ability to increase subscribers with promotions and attractive valuations). We remain cautiously optimistic about EXCL: despite a positive outlook over the long term, the company is experiencing minor hiccups in terms of subscribers in 2016. However, we see attractive valuation due to recent share price underperformance, and is hence a BUY. Exhibit 1. Stock comparisons 2016F – 2017F Source: Bloomberg, BCA Sekuritas OVERWEIGHT 07 November 2016 Aditya Eka Prakasa [email protected]+6221 23587222 ext 182 PRICE PERFORMANCE Source: Bloomberg, BCA Sekuritas MARKET DATA YTD 1M 3M 12M Absolute -1.7% -2.9% -9.2% 4.7% JCI Return 17.3% 0.2% -1.3% 19.7% Relative -18.9% -3.1% -7.8% -15.0% Source: Bloomberg, BCA Sekuritas 21,000 23,000 25,000 27,000 Nov-15 Feb-16 May-16 Aug-16 Nov-16 .BCASTELC JCI Rebase as of 7-Nov-16 TP CP (IDR) (IDR) 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F TLKM BUY 4,700 4,150 19,551 22,711 26.2 16.2 21.4 18.4 7.0 6.2 24.3 25.0 3.0 3.5 ISAT BUY 7,400 6,375 979 1,807 na 84.6 35.4 19.2 4.0 3.5 7.5 12.1 0.8 1.5 EXCL BUY 2,800 2,270 511 704 na 26.4 43.5 34.4 4.6 4.5 3.6 4.7 0.6 0.9 ERAA BUY 720 610 286 339 26.8 18.2 6.2 5.2 5.6 4.2 8.8 9.7 4.9 5.7 TELE BUY 895 690 438 492 18.2 12.4 11.1 9.9 8.6 8.1 14.6 14.7 2.3 2.5 TOWR BUY 5,150 3,800 3,277 3,560 10.8 8.7 11.8 10.9 11.1 10.0 35.2 28.0 0.0 0.0 Sector 25,042 29,614 22.1 20.6 22.5 18.5 7.0 6.3 22.9 23.3 2.6 3.0 OVERWEIGHT Ticker Rating NP (IDRbn) EPS growth (%) PER (x) EV/EBITDA ROE (x) Div Yield (%)
Data consumption to support the industry We expect growth in the telco industry to be driven by a sizeable increase in data usage in the near future. With younger Indonesians (below 35) accounting for 61% of the population, we see that being online has become
a basic need. With more practical and efficient chat services, complemented by free data calls, we expect legacy business would continue on its declining trend. Other than chat, we also see that social media has become one of Indonesia’s data growth sources, with apps like Facebook managing to grab some 79mn active users. Another app that would encourage data consumption is video streaming, which continues its popularity; thus there
are many promotions, including a free quota bonus for streaming.
Price war to repeat, but expected not to stay Currently, ISAT and EXCL are in the midst of a price war, providing promotions as low as IDR59/min to all operators for their ex-Java subscribers to foray in areas where they have minimal exposure, while on the data side, every operator is giving away bonus quotas to stimulate 4G utilization. Out of the three, TSEL has the highest data yield, compared to its
peers, at IDR6/MB vs. IDR4/MB. Looking to 2017, we expect competition to rationalize since data subscribers will be dependent on high volume quotas. We also expect that operators will either increase their data package prices or lower their quotas. Regulation changes could alter competitiveness in the industry
Based on current conditions, we see the government’s plan to lower interconnection rates by 26% is already being finalized, awaiting the President’s approval. We expect to obtain clarity on this matter by the end of the year. Once this regulation has been implemented, we see a minimal
impact, as trends for interconnection revenue and costs both go down. Meanwhile, on the network sharing side, we see that there will be obstacles from TLKM, as they are frankly reluctant to share their network. If this
regulation is executed, we expect a positive outcome for ISAT and EXCL, since they could minimize their expansion cost outside Java by sharing with TLKM. On the flipside, TLKM will be negatively impacted, having to expose its market share to competitors. Sector Overweight with TLKM and ISAT as the top pick We rate the sector OVERWEIGHT on the back of stronger long-term outlook,
as currently Indonesia is at a beginning stage of 4G. Our top picks in the sector includes TLKM (market share leader, ability to maintain pricing and the broadest network in Indonesia) and ISAT (ability to increase subscribers with promotions and attractive valuations). We remain cautiously optimistic about EXCL: despite a positive outlook over the long term, the company is experiencing minor hiccups in terms of subscribers in 2016. However, we
see attractive valuation due to recent share price underperformance, and is
hence a BUY. Exhibit 1. Stock comparisons 2016F – 2017F
Ticker RatingNP (IDRbn) EPS growth (%) PER (x) EV/EBITDA ROE (x) Div Yield (%)
2
Rising apps user = higher data consumption As the 4th most populated country in the world, Indonesia naturally has a very high penetration of mobile subscribers. Against this, internet penetration has historically been very low, with only 93.4mn people (Exhibit 2), accounting for only around 36% of total population. Since the launch of 4G in 2013, Indonesia has seen an increase of internet connections through mobile devices. As of 2014, a large number of people connect to the internet through mobile devices (50%), laptops/computers (46%), and tablets (4%). In 2015, connection through mobile devices jumped to 70%, while laptops/computers and tablets declined to 27% and 3%, respectively (Exhibit 3).
Exhibit 2. Indonesia’s internet and mobile phone users, 2012-15
55.0 62.0 72.7
93.4
267.0 282.0
308.2 326.3
0
50
100
150
200
250
300
350
2012 2013 2014 2015
Mn people
Internet users Mobile subs
Source: Statcounter, Wearesocialsg
Exhibit 3. Indonesia’s internet usage by device, 2014-15
46%
50%
4%
2014
Laptop Mobile Tablet
27%
70%
3%
2015
Source: Statcounter, Wearesocialsg
Previously, social media and chat apps were the main drivers in mobile data growth. Nowadays, mobile phone usage has expanded with chat apps leading (27% of total population), followed by video, maps, mobile banking and games (Exhibit 4). With the increasing numbers of startup companies from both outside and inside Indonesia, we expect mobile device usage to continue to strive. Going forward, we expect more apps to contribute to the usage of smartphones, backed by the communications ministry plan to boost startups in Indonesia by using USO fund to help establish tech companies.
Declining usage of laptops, as people are moving to more
affordable and practical mobile phones
Despite high mobile phone penetration, internet usage is still low
3
Exhibit 4. Mobile activities as a percentage of smartphone users, 2015
19%
20%
22%
22%
27%
0% 5% 10% 15% 20% 25% 30%
Games
Mobile banking
Maps
Video
Messengers
Source: wearesocialsg
On the social media front, compared to other websites and apps, Facebook has become the most active app, with around 79mn registered. A relatively young
demographic composition (61% of the population under 35, 36.3% under 20) (Exhibit 5) means social media will contribute more to the growth of mobile data, as most social media apps are set up for smartphones.
Exhibit 5. Indonesian population pyramid (mn people), 2014
12.3
11.9
11.4
11.2
10.8
10.4
10.2
9.8
9.1
7.9
6.7
5.3
3.8
2.5
1.7
1.8
11.8
11.3
10.9
10.8
10.6
10.3
10.3
9.8
9
7.9
6.7
5.2
3.7
2.8
2
2.5
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75+
Female Male
Source:BPS
Another driver for data expansion is online video streaming. With the presence of streaming services such as YouTube and Netflix, we see that young people,
especially those living in big cities, are starting to shift their preference from
conventional television broadcasts. These apps are thirsty, consuming great amounts of data, and have become a basic need for urban people. Additionally, with the banking sector’s more advanced payment system, we also see data usage pushed upward by online payments as well as banking transactions.
Chat apps still dominate in terms
of usage among Indonesian subscribers
Indonesia has a relatively young population
4
Exhibit 6. Most active social platform, 2015
19%
15%
14%
13%
12%
11%
10%
7%
0% 5% 10% 15% 20%
BBM
Facebook
Whatsapp
FB Messenger
Line
Twitter
Instagram
Others
Source: Wearesocialsg
E-commerce + benign interest = higher handheld device sales Other than traditional and modern markets, we have seen an increased portion of handheld device sales through e-commerce channels. Even modern retailers under our coverage, such as ERAA, have set up online businesses. With the likes of marketplace websites/apps such as Tokopedia and Blibli, traditional retailers can expand their market for a relatively small fee, while transactions are supported by online payments backed by the banking and telco sectors. Many modern retailers and marketplaces are currently offering promotions to spur sales. As we are expecting subdued interest rates going forward, we see handheld sale continuing upward, backed by consumers switching from 3G devices to 4G. We note that the largest chunk of handheld sales will come from low-middle 4G devices, in a price range of IDR1.5-3mn, which we suspect have a shorter life span, thus a higher turnover.
Price war came, but not expected to last Recently, ISAT launched its campaign to boost 4G usage by allowing extra data, voice and SMS bonuses while offering IDR1 per second voice calls for ex-Java subscribers. This step has proven effective in snagging subscribers, as ISAT gained an additional 12mn subscribers in 1H16. Next, EXCL and TSEL were forced to hand out bonus data as well as voice and SMS (Exhibit 7). In terms of data pricing, TSEL leads the race with IDR6/MB, followed by ISAT and EXCL with IDR4/MB and IDR3/MB, respectively. Going forward, as data consumption picks up and 4G networks continue to expand, we see data pricing settling down while SMS and voice pricing continue to decline, as they are replaced by data. Data is currently a basic need for ‘the crowd’; we thus expect the price war to end in the short term. Going forward, operators might dare to increase their data pricing or shrink quotas with current level pricing. Once all settles, we should see ARPU climb from its current level as operators monetize their data revenue.
Data threat arising from Smartfren As competition in data heats up, we see that one on of the biggest threats emerges from Smartfren (FREN IJ). As a dedicated data player, FREN has managed to secure 10MHz of spectrum in 850MHz and 30MHz in 2,300MHz. Note that the 2,300MHz spectrum is reserved specific for data, with TSEL and ISAT only having 15MHz each; thus FREN has higher a 4G capacity.
Exhibit 8. Spectrum allocation
7.5 2.5 - -
10
10
10 7.5
-
22.5
20 22.5
10
10
10 15
10
15
15
30
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
TSEL ISAT EXCL Hutch FREN
(Mhz)
850 900 1800 2100 2300
Source: Government of Indonesia
Smartfren dominates the 2,300MHz with its 30Mhz, thus becoming the greatest threat to operators
6
Additionally, they pursue an aggressive promotion strategy, bundling smartphones with their SIM card, while giving away an initial 100gb of data – all starting at a price as low as IDR800k (Exhibit 9). We test-compared this product, and found that FREN’s connection speed could reach 30mbps, while TSEL, EXCL and ISAT could only provide us a considerably lower speed at 10-15mbps. We suspect that since its capacity is still underused, unlike its big operators, high connection speeds can be maintained. However, given their limited network, this phone only works in selected areas. Once FREN’s network manages to expand, especially ex-Java, it will pose a major threat.
Exhibit 9. Smartfren Andromax promotion
Source: Company
Risk imposed by government regulations Recently, the government has proposed implementing changes, in terms of cheaper interconnection charges and broader network sharing. Interconnection tariffs would be cut by 26%. However, this has been postponed following TSEL’s strong objections (they counter with a proposed IDR284 interconnection tariff); other operators expect the government to lower the tariff more than 50% from its current level. The latest update is that TLKM has brought this matter to the Public Advocate (Ombudsman) to further push implementation of the proposed regulation. Another issue within the regulators’ domain is network sharing. The government is currently coaxing operators into this efficiency move. The revision of PP 52/2000 would require telco operators to share their networks, particularly their backbone, in certain areas under certain conditions. Other sources state that the government may allow spectrum-sharing along with shared networks. If this were to be realized, ISAT and EXCL would most likely be the ones to benefit, since both companies have a considerably smaller presence ex-Java compared to TSEL, which already controls an 85% market share. We managed through our channel to ascertain that the interconnection issue will most likely be settled in the near future, awaiting President Jokowi’s approval. This will however have a limited impact, as interconnection business trends are declining. We expect interconnection revenues and costs will continue to go down (Exhibit 10 & 11) as subscribers shift from legacy business to free data calls and chat going forward.
One of the cheapest handset with a very large data package
7
Exhibit 10. Interconnection revenues, 2013-17F
4,843 4,708 4,290
3,992 4,045
2,431 2,213
1,925
1,434 1,497
3,033 3,007
2,392 2,133 2,019
-
1,000
2,000
3,000
4,000
5,000
6,000
2013 2014 2015 2016F 2017F
(IDRmn)
TLKM ISAT EXCL
Source: Companies, BCA Sekuritas
Exhibit 11. Interconnection expense, 2013-17F
4,927 4,893
3,5863,193 3,236
2,9472,555
2,3762,138
1,925
3,7263,356
2,3212,027 1,980
0
1,000
2,000
3,000
4,000
5,000
6,000
2013 2014 2015 2016F 2017F
(IDRmn)
TLKM ISAT EXCL
Source: Companies, BCA Sekuritas
While we see further headwinds persisting on the finalization of the network sharing issue: TLKM will resist sharing their network infrastructure as they have spent a huge amount of capex establishing networks in remote, low-traffic areas. However, if this issue were to be settled in the near future, we see only a minimal threat in the short term to TLKM, since network sharing might in fact not be so easy to implement. However, in the medium and long terms, network sharing poses a big risk to TLKM, as ISAT and EXCL could nibble away market share ex-Java, where they could increase exposure without having to spend much capex.
Towers: Steady with looming pricing risk As the industry trends toward an asset-light strategy, independent tower companies will continue to thrive, catering to expansion needs of telco operators. Within the past years, Indonesia’s three largest telco operators have been focusing on the expansion of 3G and 4G, adding around 99.3k thousand BTSs within the archipelago (Exhibit 12). Going forward, to further improve data networks, operators will continue to expand their 3G networks, while adding more 4G to increase data quality. In line with our view that operators are currently switching over their legacy business revenue to data, BTS leases will continue to grow in line with data rollout.
Interconnection revenues to
gradually go down…
…followed by lower interconnection costs
8
Exhibit 12. Telco companies BTSs, 2013-1H16
Source: Companies
However, competition from smaller tower operators is heating up, as many are aggressively lowering lease prices to pull away customers. This can be seen as current telco companies annual lease rates are between IDR10mn-12mn per tower, down compared to 3 years ago, when the figure could reach IDR15mn. Our view remains positive for the tower sector as contracts for most leases are binding for 10 years; thus we see no contract price reduction risk in the near future.
Valuation & pick: Prefer TLKM and ISAT Looking to 2017F and 2018F, we expect telco companies margins will gradually improve, to an average EBITDA margin of 49.9% and 50.6%, respectively. Higher data consumption is the catalyst which will replace a declining trend in legacy business. Thus, we are looking at higher ARPU as an aftereffect, as telco companies manage to normalize their data pricing – once price wars have become history. On the cost side, following the resolution of the dispute between the government and TLKM over interconnection, we should see interconnection costs tone down, pumping margins, even at the risk of lowering interconnection revenue. As we look at regional markets, Indonesia’s EBITDA margin is relatively higher than that of regional countries, standing at 50.6% vs. 36.0% of regional average in 2017F (Exhibit 13). Additionally, Indonesia is in the best quadrant in the valuation matrix, given its cheap high EPS growth (19.4%) and EBITDA margin, which justifies a premium valuation against regional peers (Exhibit 14).
In terms of top picks, we select TLKM, due to its capability of maintaining premium pricing, even in the midst of a price war, and its ability to monetize their data. Additionally, its balance sheet, healthier than that of peers, means TLKM is better-positioned to execute their expansion plans; we see their dominance in Indonesia will continue, going forward. We also like ISAT given their initiative to increase subscriber numbers and attractive valuation. We initiate EXCL, TOWR, ERAA and TELE with a BUY, considering their recent weak share performance, making valuation more attractive.
Risks to our call include, but are not limited to: Lower purchasing power, as this would impact the sale of vouchers. Weakness in IDR, since a major portion of telco equipment is USD-
indexed, while all operators under our coverage are exposed to USD-denominated debt.
Prolonged competition, with continued price suppression, thus resulting in weaker revenues.
Uncertainties in regulation, particularly in spectrum tenders, since operators are complaining about capacity constraints.
…also in terms of EPS growth
10
Exhibit 15. Regional peers comparisons, 2015 – 2018F Ticker TLKM EXCL ISAT Indonesia 941 HK 215 HK 762 HK Hongkong IDEA IN BHARTI IN India DIGI AXIATA Malaysia STH SP Singtel Singapore DTAC TBADVANC TBThailand
Source: Bloomberg, BCA Sekuritas estimate, *pricing as of 7 November 2016 closing price
Equity Research
TELEKOMUNIKASI INDONESIA TLKM IJ / TLKM.JK Company Initiation | Telco Sector
Reigning champ
Still strong on voice Telekomunikasi Indonesia continues to dominate the telco sector, holding 55% of Indonesia’s total market share, with 85% domination of ex-Java. While the industry is shifting from voice and SMS to data, we see that TLKM’s voice
segment will continue to grow, since subscribers ex-Java still cling to older handsets, coupled with their ability to maintain pricing due to their zone-based scheme. This pricing method results in higher revenues from remote areas that has limited network coverage by other operators. Thus, expect voice revenue to continue as the largest top line contributor in 2017-18, before data takes over. On the data side, with current massive promotions, we continue to
expect strong growth going forward, helping to increase ARPU to IDR46k and
IDR49k in 2017F-18F, resulting in margin expansion. Indihome: an effort to revive fixed-lines As of 2015, TLKM is trying to revive its fixed-line business with Indihome, a triple play package for home owners, consisting of cable TV, internet and fixed-line telephone. While fixed broadband is still low in Indonesia (around 8%), Indihome will have broad room for growth. As of 9M16, Indihome has
managed to gain 1.5mn customers, becoming one of the largest mobile broadband + TV cable outfits. However we see more competition from more established companies such as First Media (LINK IJ), Nexmedia and Biznet. Hence, we expect subdued subscriber growth of 500k and 300k customers in 2016 and 2017, respectively.
Healthy balance sheet to support data expansion Going on 2017, we see that the industry is shifting from legacy to data, as operators actively expand networks, particularly for 3G and 4G. With subdued net gearing, TLKM has the ability to execute network expansion without taking
on any new debt, thus maintaining interest expense at a manageable level. Additionally, we see high likelihood of TLKM obtaining additional spectrum once the government decides to conduct a spectrum auction, considering their
balance sheet ability and need for additional spectrum. Initiate with a BUY, TP of 4,700 We initiate coverage on TLKM with a BUY call and TP of IDR4,700, based on +2SD 5-year average EV/EBITDA of 6.8x. We see that TLKM deserves a premium given their strong balance sheet, massive network and our view that long-term data growth will remain intact, despite TLKM’s ytd 16%
outperformance. Risk to our call: IDR depreciation, prolonged price competition and unforeseen regulations.
Exhibit 1. Financial Summary
Description (IDRbn) 2014A 2015A 2016F 2017F 2018F
Revenue 89,696 102,470 116,985 130,474 144,889
EBITDA 45,673 51,415 59,861 67,089 74,804
Net Profit 14,471 15,489 19,551 22,711 25,829
EPS (IDR) 144 154 194 225 256
EPS Growth (%) 1.2 6.0 26.2 16.2 13.7
DPS (IDR) 87 87 126 146 167
PER (x) 28.9 27.0 21.4 18.4 16.2
PB (x) 6.2 5.6 4.9 4.4 3.9
EV/EBITDA (x) 9.2 8.1 7.0 6.2 5.6
Dividend yield (%) 2.1 2.1 3.0 3.5 4.0
Payout ratio (%) 60.7 56.7 65.0 65.0 65.0
ROE (%) 22.7 21.7 24.3 25.0 25.5
Net Gearing (%) 8.5 8.6 0.4 1.9 3.1
Source: Company, BCA Sekuritas, *pricing as of 7 November 2017 closing price
EBITDA margins to continue expanding on the back of data growth
13
Legacy Business will still dominate With strong presence across Indonesia, TLKM remains the largest telco operator, with expected 173mn subscribers in 2017F and 181mn in 2018F. As the most dominant provider ex Java (85% market share), while only around 30% of TLKM subscribers have 4G devices, we expect voice and SMS will continue to dominate top line, backed by cluster-based pricing and a lack of promotions. While data segment continues to grow, we are seeing it contribute more to TLKM’s own growth, bringing revenues to top IDR130.5mn in 2017F, up around 11% YoY.
Exhibit 3. TLKM revenue, 2014-2018F
34.3 37.3 39.9 40.5 41.1
8.4 7.8 7.4 7.1 6.7 14.0 15.1 16.4 15.8 15.0
23.8 32.7
43.1 57.5
72.7
9.2
9.5
10.1
9.7
9.3
89.7
102.5
117.0
130.5
144.9
-
40.0
80.0
120.0
160.0
2014 2015 2016F 2017F 2018F
(IDRtn)
Voice-cell Voice-fixed SMS Data Others
Source: Company, BCA Sekuritas
As data will be the growth driver for TLKM going forward, we expect EBITDA margins to expand as data price war to ease entering 2017. Thus 2017F EBITDA margin will rise slightly to 51.4% before increasing to 51.6% in 2018F. In line with margin expansion, we see that blended ARPU should continue to go up, to IDR49k in 2017F as TLKM monetizes its data.
Exhibit 4. TLKM margins, 2013-2018F
50.4 50.9 50.2 51.2 51.4 51.6
31.3 31.8 32.1 33.7
34.3 34.8 17.1
16.1 15.1
16.7
17.4 17.8
15.0
16.0
17.0
18.0
19.0
20.0
20.0
27.0
34.0
41.0
48.0
55.0
2013 2014 2015 2016F 2017F 2018F
(%)
EBITDA EBIT Net Profit
Source: Company, BCA Sekuritas Healthy balance sheet to support expansion With current expansion mode, we expect TLKM will continue its aggressive expansion outside Java, adding more 3G and 4G BTS. To cater to need for expansion, TLKM has the healthiest balance sheet compared to its peers. Supported by subdued net gearing in 2017F and 2018F, we expect capex will be fulfilled without having to raise debt. Additionally, as the government is planning to auction two blocks in the 2,100Mhz spectrum, we find it likely that Telkomsel will secure at least one of these, given their healthy balance sheet and number of subscribers (higher than peers). In addition to a healthy balance sheet, TLKM also has around 1.7bn treasury stocks (worth around IDR7.1tn at current price) in their pocket to expand future capex spending.
Voice remain stable going forward, while growth to stem from data
Margin expansions in 2016F-18F on the back of data
14
Exhibit 5. TLKM net gearing, 2014-2018F
8.5 8.6
0.4
1.9
3.1
-
2.0
4.0
6.0
8.0
10.0
2014 2015 2016F 2017F 2018F
(%)
Source: Company, BCA Sekuritas
Regulatory changes: negative in the long run Government’s plan to reduce interconnection rate by 26% was disputed by TLKM. While we expect more clarity to be happening in the 4Q16, lower interconnection rate might have minimal impact to TLKM’s top line as they contribute only around 3% of 2017F revenue. However, on the network sharing side, telco companies are required to share their network with its peers. If this were to happen, we expect TLKM’s dominance in outer Java will deteriorate since competitors might enter the market with smaller capex and vast existing networks.
Initiate with a BUY and TP of IDR4,700 We initiate our coverage on TLKM with a BUY recommendation and target price of IDR4,700. Our TP implies 2017F EV/EBITDA of 6.9x, a +2SD from TLKM’s mean EV/EBITDA of 5.3x. We think that a premium is warranted given their ability to deliver strong revenue growth ahead, while providing a thicker net margin compared to their peers. Despite YTD outperformance of the market, we still see a 12% upside to our target price. Risks to our call would be:
IDR depreciation: since TLKM has exposure in USD-denominated debt, any IDR depreciation would risk of fx losses. Additionally, since all relevant telco hardware is paid for in USD, this would impact capex spending.
Prolonged tariff competition: Price war may impede revenue growth, resulting in lower ARPU.
Regulations such as network sharing might erode TLKM’s market share, particularly ex Java.
Exhibit 6. TLKM EV/EBITDA band
Avg = 5.3 x
Std +1 = 6.1 x
Std +2 = 6.9 x
Std -1 = 4.6 x
Std -2 = 3.8 x
3.0
4.0
5.0
6.0
7.0
8.0
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
(x)
Source: Bloomberg, BCA Sekuritas
Net gearing remained low to
support expansions
Our TP is based on Std+2 of 6.9x
Equity Research
INDOSAT ISAT IJ / ISAT.JK Company Initiation | Telco Sector
Better with time
Still clinging to voice As the second-largest telco operator in Indonesia in terms of subscribers (25% market share), Indosat has a solid presence in Indonesia, particularly in Java. Early 2016 ISAT launched a marketing promo for their Sumatran subscribers: IDR1/second protocol for all operators, to increase penetration ex-Java. This promotion proved successful as ISAT managed to increase 12mn subscribers
YoY in 1H16. Going to 2017F-2018F, we see that ISAT will manage to maintain its legacy business revenue, maintaining it as a majority contributor to total revenue, 41.4% and 40.4% respectively. Additionally, we expect data to continue to grow as a result of their aggressive marketing campaign, pushing higher ARPU, translating to 2017F-2018F revenue of IDR33tn and
IDR36tn, respectively.
Network infrastructure sharing to ease capex Despite industry regulation uncertainty concerning network sharing, ISAT has joined forces with XL Axiata (EXCL IJ) with infrastructure sharing for this campaign. Currently, both parties team up in 4 cities, sharing their BTS. We see this as a positive initiative, since the management claims that with such network sharing, capex could be lowered 20-30%. We expect a more positive
surprise: once the government has finalized regulations on spectrum sharing, capex will dive another 50%. Revamping debt structure In 2016, management is planning to reduce exposure in USD-denominated debt, bringing it down to 10% from 70% of 2015. With this initiative, we see ISAT could reduce fx losses, which we see have plagued them for the last few
years. Management has also prepared around IDR3tn for debt repayment in 2016; thus we are seeing improving profit and loss going forward. We expect
ISAT’s net profit to reach IDR1.8tn in 2017F (+85% YoY) before reaching IDR2.5tn in 2018F (+36% YoY). Separately, with better performance ahead, we expect ISAT to begin distributing dividends. Initiate with a BUY, TP of IDR7,400
With 4% 3M market under performance, ISAT is currently trading at an 2017 EV/EBITDA of 3.5x, which we see very attractive, given the company’s early stage of data monetization and underutilized handheld 4Gs. Thus, we initiate coverage on ISAT with a BUY with a TP of IDR7,400, based on -0.5SD 5 year average EV/EBITDA of 3.9x. Risk to our call would include IDR weakness to burden capex, lower than expected GDP that could result slower adoption of
4G and uncertainty in telco regulations. Exhibit 1. Financial Summary
Legacy business to remain strong As the second-largest telco operator with 79.7mn subscriber as of 1H16, ISAT’s presence in Java is quite strong. To expand more ex-Java, the company recently launched a promotion for customers by giving an IDR60/minute rate for all operators. With this move, we expect that ISAT will strengthen its presence in areas with low penetration. Going on 2017, while data will continue to be ISAT’s growth driver, we see that voice and SMS will also dominate ISAT’s top line, representing around 40% with data accounting for 35% in 2017F and 2018F, respectively.
Voice SMS Data Interconnection & Inroaming MIDI Others Growth
Source: Company, BCA Sekuritas
Exhibit 4. ISAT data revenue & ARPU, 2014-2018F
4,530
7,031
9,356
11,549
13,948 27
25 26
28
30
(5)
-
5
10
15
20
25
30
35
-
3,000
6,000
9,000
12,000
15,000
18,000
2014 2015 2016F 2017F 2018F
(IDRk)(IDRbn)
Data revenue
Source: Company, BCA Sekuritas
From the data side, ISAT has also launched its promotion providing subscribers with 3G data plans and handing out bonus quotas in 4G as cheap as IDR59k, which we see is already higher than the company’s ARPU of IDR26k. Going on 2017, we should see ISAT start monetizing their data packages by raising price plans or reducing bonus quotas. Thus we see ARPU to continue to climb to IDR28k in 2017F before reaching IDR31k in 2018F. In line with ARPU hike, we expect EBITDA margins to continue to expand to 43.7% and 44.1% in 2017F and 2018F, respectively.
Top line growth to be supported by data despite legacy business remain strong
Higher data revenue brings ARPU to reach IDR30k in 2018F
Network sharing to reduce capex Prior to the implementation of the government’s network-sharing regulation, ISAT has already built a JV with EXCL for this purpose. Management claims that with current infra-sharing scheme, the company will manage to save 20% in capex costs. However, this sharing scheme is currently limited to 4 cities across Java. Going forward, this JV will be aimed at opening new networks ex Java. However, once finalized, we expect that the network-sharing regulation might also open up access to backbone and spectrum. This means capex savings of 50% while increasing presence in low-penetrated areas, thus resulting in higher market share for ISAT. Another regulation waiting to be approved by the regulator is the lower interconnection rate. By reducing 26% from current level, we see that it will minimally impact ISAT, since interconnection business is already declining. We expect this regulation to be approved by the President within 4Q16.
Exhibit 5. ISAT Capex & Net gearing, 2014-2018F
7,033
10,048
7,000 7,461
7,949
144.4
160.0
135.2
106.7
75.7
(30.0)
10.0
50.0
90.0
130.0
170.0
0
5,000
10,000
15,000
20,000
2014 2015 2016F 2017F 2018F
(%)(IDRbn)
Capex Net gearing
Source: Company, BCA Sekuritas
While continued expansion plans are in the pipeline, ISAT will preferably lease towers rather than building their own, in line with the company’s strategy to become asset light. Currently, ISAT has around 6,000 towers spread across the archipelago, thus giving them leverage if they ever needed additional capital. Of these 6,000, 2,000 are reserved as ISAT core towers, while the remainder are available for sale.
Lower net gearing to support future expansions
19
Debt: switching from USD to IDR In previous years, ISAT’s bottom line was always hurt by the presence of forex losses, given their high exposure to USD-denominated debt. Based on 1H16 figures, ISAT’s USD-denominated debts reached around USD376mn, translating to some 70% of total interest-bearing debt. To lower exposure, ISAT management’s plans to cut down USD-denominated debt to around 10% of the total, switching to IDR loans. Management has also prepared up to IDR3tn to off-load some of the company’s debt. With this initiative, we expect to see 2017F net gearing go down to 107% before further going down to 76% in 2018F.
Initiate with a BUY and TP of IDR7,400 ISAT is currently trading at an EV/EBITDA of 3.5x 2017F EV/EBITDA, the cheapest of the 3 telco operators in our coverage. We initiate our coverage on ISAT with a target price of IDR7,400, reflecting -0.5SD 5 year mean EV/EBITDA of 3.9x. As we expect the utilization of 4G is still at an early stage, we expect growth from the sector to be robust. With a 16% upside, we put a BUY call on ISAT.
Exhibit 5. ISAT EV/EBITDA band
Avg = 4.2 x
Std +1 = 5.0 x
Std +2 = 5.8 x
Std -1 = 3.5 x
Std -2 = 2.7 x
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
(x)
Source: Company, BCAS
Our TP is based on -0.5SD 5 year average EV/EBITDA average of 3.9x
Equity Research
XL Axiata EXCL IJ / EXCL.JK Company Update | Telco Sector
Laggards but not last
Holding on to subscribers XL Axiata’s strategy to maintain higher value customer has seemed to backfire, reflected in a decline in number of subscribers. To stop the loss,
EXCL launched its ‘IDR59/min to all operators’ promotion as well as lowering its data package rates by around IDR10k. We see that this initiative has indeed checked the outflow of subscribers, despite similar promotional challenges from its peers. We expect the number of EXCL subscribers to hit 43mn in 2017F before increasing to 45mn in 2018F. We also see EBITDA margins expanding to 38.6% on higher data usage; top line growth should be
supported by data monetization by 2017. On the flip side, legacy business
revenue should gradually go down to IDR10.8tn and IDR10.4tn in 2017F-18F as EXCL focuses more on data, resulting in higher ARPU. The most modern network, compared to peers EXCL is in the lead with the recent launch of their 4.5G technology and the company has also set up around 5k BTS, considerably more than its peers.
Going forward, EXCL will continue to grow their network, especially expanding outside of Java into selected areas where the company has less penetration, spending around IDR7tn in 2017F and 2018F. Note that going forward EXCL does not plan to add any 2G BTS, instead focusing on 3G and 4G. Additionally, with recent tower sales to Protelindo and the company’s plan to lease instead of building more towers, we expect depreciation costs will be contained, going forward. Another initiative to reduce capex is EXCL’s infrastructure sharing
with ISAT, which the management claims could reduce infrastructure costs by 20%. Interconnection regulation to have minimal impact With government’s plan to reduce interconnection rates by 26%, we expect
EXCL will be only minimally impacted, as interconnection accounts for just 9%
of its revenue. On the flip side, spectrum sharing regulation might benefit EXCL by cutting capex needed for less covered areas, while carving away market share from the incumbent. Attractive valuation; Initiate with a BUY EXCL’s valuation has become attractive, following recent underperformance, and it is currently trading at a 2017 EV/EBITDA of 4.5x. Thus, we initiate
coverage on EXCL with a BUY and TP of IDR2,800, based on STD-1.5 of EXCL’s 5-year mean EV/EBITDA of 5.1x. However, we remain only cautiously optimistic, given its 2016F operational performance (weaker than that of its peers). Risks to our call would include fewer-than-expected new subscriber, slack GDP growth and IDR weakness. Exhibit 1. Financial Summary
remain on the IDR7tn level to expand its 4G network
Data to expand EBITDA margin around 39% for 2017F-18F
22
Higher value subs pose risks
EXCL’s strategy to hang onto higher-value customers has impacted negatively
on the number of its subscribers, which have since 2014 fallen to 42mn (in 2015) from 60.5mn in 2013. However, going on 2016, we expect an infusion of subscribers, following ISAT’s move to provide a promotional voice package of IDR59/min, specifically for ex Java. Thus, we expect 2017F numbers to pick up,
Voice + SMS Data Interconnection Others Revenue growth
Source: Company, BCAS
Exhibit 4. EXCL’s Data promo
XL Axiata Price (IDR) Voice SMS Data Bonus
Xtra S 39,000 - - 1 GB 800MB + 30 min voice
Xtra M 59,000 - - 2GB 10GB + 50 min voice
Xtra L 89,000 - - 4GB 15GB + 75 min voice
Xtra XL 129,000 - - 6GB 26GB + 100 min voice
Xtra 2XL 179,000 - - 10GB 40GB + 125 min voice
Xtra 3XL 239,000 - - 16GB 56GB + 150 min voice Source: Company
Meanwhile, EXCL has launched its promotional data package (Combo Xtra)
whereby subscribers can receive a total of 1.5GB with 30 minutes of voice, for just IDR39k. This is in line with industry strategy to employ promotional data packages to stimulate the currently-underutilized 4G network. In line with such an increase, ARPU will also rise to IDR40k and IDR41k in 2017F-18F. However, we expect EXCL will monetize its data next year, either by raising prices or cutting down on data. Thus, 2017F-2018F revenue should grow to IDR24.3tn and IDR25.9tn, translating to EBITDA margin expansion to 38.7% in 2017F.
Exhibit 5. EXCL’s EBITDA & margins, 2014-2018F
8,623 8,393 8,735 9,286
10,045
36.8 36.7
38.3 38.6
39.2
35.0
36.0
37.0
38.0
39.0
40.0
0
2,000
4,000
6,000
8,000
10,000
12,000
2014 2015 2016F 2017F 2018F
(IDRbn) (%)
EBITDA EBITDA margin
Source: Company, BCA Sekuritas
Data continues to grow while legacy business gradually coming down
EBITDA margins continues to expand on the back of data
23
The most modern network, compared those of peers
While EXCL has been actively modernizing its network, the company recently announced the launch of their 4.5G network. We note that EXCL is the first
provider to offer 4.5G technology in Indonesia. As for BTS, as of 1H16 EXCL has the most 4G BTS, with around 5k. As they focus more on data, we expect 3G and 4G BTS will continue to expand going forward while they will halt the
construction of any more 2G BTS. To fulfill such ambitious expansion, we expect that EXCL will spend around IDR6.5tn for 2017 capex.
Following its tower sales to Protelindo, EXCL currently owns around 2,000 units. Going forward, rather than building their own towers, EXCL will only lease from independent tower companies or other telco operators. Thus we are expecting depreciation costs to be subdued. Additionally, despite the yet-to-be-enforced
network-sharing regulations, EXCL has set up a JV with ISAT to share network infrastructure. With this JV, management claims to able to reduce network capex by 20%. Currently, the infra-sharing is operational in 4 cities across Indonesia, while both parties are currently striving to broaden their JV to other cities.
Interconnection regulation to have minimal impact
As we expect clarification of interconnection tariffs to be released by the end of this year, we see that this will minimally impact EXCL. Interconnection revenues have been on the decline for the past few years; thus we see a more positive impact rather than a negative one, since this could stimulate more voice usage (it's cheaper). On the network-sharing side, we do not expect to
hear any firm decision any time soon. However, once approved and implemented, we would see EXCL gaining from this regulation, as they would increase their penetration with less capex than needed today.
EXCL to boost their 3G and 4G expansions while holding back on
2G
Lower interconnection tariff will minimally impact EXCL as revenue and cost are in the declining trend
24
Initiate with a BUY on IDR2,800 TP
While we expect EXCL to book further growth ahead, we see that risks still loom within its subscriber expansion. Going forward, EXCL performance should improve as data continues to support its growth. In terms of valuation, currently EXCL is trading at 2017F EV/EBITDA of 4.5x. Due to its 3M
underperformance, valuation has become attractive. Thus we initiate EXCL with IDR2,800, based on 2017F EV/EBITDA of 5.1x, reflecting EXCL’s 5 year SD-1.5 mean. With 23.4% upside potential, EXCL is a BUY. Risk to our call would include: USD appreciation, lowering purchasing power and unforeseen regulations.
Our TP of IDR2,800 is based on EXCL’s 5 year average SD-1.5 of 5.1x
Equity Research
Erajaya Swasembada ERAA IJ / ERAA.JK Company Update | Telco Sector
Standing strong
Benefit from TRIO’s fall With the recent fall of Trikomsel (TRIO IJ), Erajaya Swasembada has benefited by acquiring brands previously owned by TRIO. As the largest handset
distributor (42% market share), ERAA carries 14 well-known brands, including Xiaomi and Huawei, which they took over from TRIO. As of 1H16, ERAA has 603 distribution outlets, owning 78 retail stores spread across the Indonesian archipelago, while recently establishing a presence in Singapore and Malaysia. With addition in their brand lineup, we expect the largest revenue contribution will still come from Samsung, while Chinese brands (such as Huawei and
Xiaomi) will support growth, as they provide entry-level 4G devices. Thus we foresee revenue touching IDR24tn in 2017F (+22% YoY) and 25.9tn (+15% YoY) in 2018F. Against this, we predict headwinds for sales of fully-imported handhelds, since regulators require electronics to have 30% local software or hardware content. Foraying into new business arenas
To support its business, ERAA has tied up with ISAT and EXCL to launch retail stores. This partnership will allow customers to purchase mobile phones with a subsidy from operators, in the form of cash discounts or bonus quotas. Additionally, ERAA has also launched TecProtect, a JV with Amtrust to provide customers insurance for their newly-purchased mobile phones. To increase their retail sales, ERAA has partnered with 3 financing companies: Aeon, Spektra and Home Credit, to provide financing for potential customers
(particularly those without credit cards). Aside from more exposure, these financing companies will provide ERAA with an additional commission.
Higher margins on increased retail contribution Looking to 2017, we expect the contribution from ERAA’s higher margin retail business to increase to 40% from 30% in 2015, translating to an 8.8% gross
margin, while on the balance sheet side, as fast-selling cheap entry-level handhelds continue to dominate sales, we see inventory turnover days to improve slightly to 49. Initiating with a TP of IDR720 We initiate our coverage on ERAA with a TP of IDR720, based on ERAA’s SD-1.5 PER of 6.2x. As macro conditions improve next year, coupled with low
penetration of 4G handhelds, we expect ERAA’s sales to continue to grow. With a 26% upside, ERAA is a BUY. Risk to our call will be lower purchasing power, unforeseen regulations and higher rentals. Exhibit 1. Financial Summary
Exhibit 4. ERAA’s retailer & distribution channel, 2013-1H16
457 489556
603
9880
8978
0
100
200
300
400
500
600
700
800
2013 2014 2015 1H16
(Units)
Distribution outlets Retail Center
Source: Company, BCA Sekuritas
Exhibit 5. ERAA’s revenue breakdown, 2014-2018F
12,299
17,107
21,437 24,759
27,037 1,519
1,728
1,887
2,063
2,257
634
1,173
1,173
1,363
1,554
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2014 2015 2016F 2017F 2018F
Celullar phones Vouchers Others
Source: Company, BCA Sekuritas
Despite smaller having a smaller amount, retail center contributes 40% of revenue
2014-2018F Revenue CAGR of 17.6% will still be contributed by mobile phone sales
Our TP is based on SD-1.5 PER of 6.2x
28
Exhibit 6. ERAA’s revenue breakdown, 2014-2018F
8.9
7.5
8.6 8.7 8.8
2.8
2.0 2.1 2.2 2.2
1.5 1.1 1.2 1.2 1.3
-
2.0
4.0
6.0
8.0
10.0
2014 2015 2016F 2017F 2018F
(%)
Gross Profit EBIT Net Profit
Source: Company, BCAS
2016F-18F margins to expand as retail stores to contribute more to top line
Equity Research
Tiphone Mobile Indonesia TELE IJ / TELE.JK Company Update | Telco Sector
In line with Telkomsel
No 1 TSEL voucher distributor Tiphone Mobile Indonesia is currently still Telkomsel’s largest voucher distributor. With 25% of TLKM ownership through PINS Indonesia, we see
less risk of quota reduction for TELE in the future. Currently, TELE owns 28 clusters spread across the archipelago, with its strongest presence in Java and Sumatra. TELE distributes its vouchers through 3 channels, traditional distributors, and modern channel through mini marts and banking; the largest still comes from the traditional, accounting for 50% of TELE’s business. In line with TSEL’s growth, we expect its revenue to rise 16.6% to
IDR30.5tn in 2017F, before reaching IDR34.8tn in 2018F, as higher ARPU stems from data usage. Banking channel to play more prominent role As of end-2015, TSEL had appointed TELE as its sole distributor to provide private banks with electronic vouchers, while SOE will be provided through PINS. Revenue contribution from banks should be positive, since subscribers
through banks usually purchase higher nominal voucher (the smallest amount sold is IDR20k) compared to traditional channels, which sell for as little as IDR5k. However, higher nominal vouchers carry smaller margins (around 2.8%) compared to traditional (6%). We thus expect gross margin to contract in 2017F and 2018F, to 5.1% and 4.9%, respectively as banks and modern channel contribute more (15% and 35%) to TELE’s top line.
Supported by well-known brands TELE carries 6 major brands of mobile phone, including Samsung, LG, HTC, Huawei, Sony and BlackBerry, aside from TiPhone, their in-house brand. In
2017, we expect Huawei to provide a higher contribution to top line as the brand has a lot of line up on entry level 4G handheld while Samsung remains the largest contributor. Against this, we expect Sony’s sales to slump, the
result of an import ban from the government, as their mobile phones contain no domestic content (TKDN). TELE has recently acquired a license from BlackBerry to use their software in its new ‘BB Merah Putih’. However, we expect this product to contribute only a little to top line as production numbers will be minimal in 2017F. Initiate coverage with BUY, TP of IDR895
We initiate coverage on TELE with a BUY and TP of IDR895, based on 4-year mean PER of 12.6x. We remain positive on the company’s long-term growth, given their ability to expand their distributional channels. Risk to our call: weak purchasing power.
Revenue growth in 2014 – 2018F with CAGR of 24% contributed from increase in voucher sales
Capex to remain subdued
Gross margin to deteriorate on the back of higher contribution from banks and modern
channel
31
Exhibit 3. TELE PE band, 2012-2016F
Avg = 12.6 x
Std +1 = 18.3 x
Std +2 = 24.0 x
Std -1 = 6.9 x
Std -2 = 1.2 x
-
5.0
10.0
15.0
20.0
25.0
30.0
20-Jan-12 20-Jan-13 20-Jan-14 20-Jan-15 20-Jan-16
(x)
Source: Bloomberg, BCA Sekuritas
Exhibit 4. TELE’s network coverage
Source: Company
Exhibit 5. TELE’s revenue breakdown, 2014-2018F
8,799
14,605 19,411
23,030 26,550
5,426
7,432
6,742
7,458
8,271
-
10,000
20,000
30,000
40,000
2014 2015 2016F 2017F 2018F
(IDRbn)
Vouchers Cellphones Other
Source: Company, BCA Sekuritas
As the largest TSEL distributor,
TELE covers across the archipelago
2014-18F revenue CAGR of 24.3%
will be stemming from voucher business
Our TP of IDR895 is based on 4 year average PER of 12.6x
32
Exhibit 6. TELE’s margins, 2014-2018F
5.6 5.5 5.4 5.1
4.9
3.5 3.4 3.3 3.0
2.8
2.1 1.7 1.7 1.6 1.5
-
1.0
2.0
3.0
4.0
5.0
6.0
2014 2015 2016F 2017F 2018F
(%)
Gross profit EBIT Net income
Source: Company, BCAS
Declining margins going forward
as we expect more contribution from modern channel and banks
Equity Research
Sarana Menara Nusantara TOWR IJ / TOWR.JK Company Update | Telco Sector
Steady sailing
Catering the data growth As Indonesia’s largest tower provider, Sarana Menara Nusantara, is well-positioned to serve the needs for network rollout and 4G conversion.
Currently, TOWR’s tower portfolio is spread across the archipelago, with around 80% located in Java, while the remaining is in Sumatra, Bali, Kalimantan and Sulawesi. Following the completion of its acquisition of 2,500 EXCL towers, TOWR’s assets counted 14,515 in 1H16. Coincidentally with the acquisition, TOWR tenants also increased, to 24,178. By 2017 we expect TOWR asset base to grow organically by 1,000, reaching 16,157 towers,
translating to revenue of IDR5.4tn for 2017F with capex of around IDR1.7tn in
2017F for tower expansion. Asset-light strategy to benefit TOWR Given telco companies’ plan to implement a light asset strategy, independent tower companies will benefit from the current massive 4G BTS roll-out. Currently, Hutch, EXCL and TSEL are TOWR’s main customers, contributing
around 82% to TOWR revenue. Going forward, we are expecting a higher contribution from EXCL as their management has revealed that it does not intend to build any more towers. Worth noting is that the recent acquisition, the rental rate for EXCL lease-back was IDR10mn / tower, with a contract of 10 years. Healthy balance sheet to support expansion
With the tower industry’s high debt orientation, we see that TOWR’s balance sheet is healthy enough to support expansion going forward. In 2017F, we expect TOWR’s net debt/EBITDA ratio to reach 1.8x before lowering to 1.5x in 2018F. 2017F net gearing also remains manageable, at 57.9%, compared to its peers. Given the above, we believe TOWR will have more flexibility for
organic growth or for further acquisitions going forward.
Attractive valuation; Initiate with a BUY We continue to like the long-term prospects of the tower industry, its growth in line with that of the telco industry. With TOWR’s healthy balance sheet, we expect future acquisitions and organic growth to be secured. Currently the company is trading on 2017F EV/EBITDA 10.0x. We initiate TOWR with a TP of IDR5,150, based on SD+1 EV/EBITDA mean of 12.9x. With a 36% upside,
TOWR is a BUY. Risk to our call would be pressures on tower rentals, delays or default in payments of customer, and regulation changes. Exhibit 1. Financial Summary
Description (IDRbn) 2014A 2015A 2016F 2017F 2018F
Revenue (IDRbn) 4,106 4,470 5,110 5,569 6,163
EBITDA (IDRbn) 3,418 3,776 4,321 4,737 5,242
Net profit (IDRbn) 1,100 2,958 3,277 3,560 3,753
EPS (IDR) 144 154 194 229 260
EPS Growth (%) 552.7 169.0 10.8 8.7 5.4
DPS (IDR) na na na na na
PER (x) 35.2 13.1 11.8 10.9 10.3
PB (x) 8.2 5.0 3.5 2.7 2.1
EV/EBITDA (x) 13.5 12.1 11.1 10.0 8.8
Dividend yield (%) na na na na na
Payout ratio (%) - - - - -
ROE (%) 26.1 47.7 35.2 28.0 22.9
Net Gearing (x) 155.5 90.0 84.2 57.9 40.4
Source: Company, BCA Sekuritas, *pricing as of 7 November 2016 closing price
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