Tower Bersama Little Headroom For Debt

We reinitiate coverage on Tower Bersamawith a NEUTRAL rating and DCF-derived TP of IDR6,450 (3% downside). We think the following factors could crimp tenancy growth and lease rates going forward:

1. The pressure on lease rentals amidst intensifying competition;
2. The consolidation of the telcosector;
3. Falling capex intensity;
4. The company’s over-leveraged balance sheet may also be a stumbling blockin potential M&As.

The stock tradesata 14.7x EV/EBITDA multiple in FY17Fwhich we deem as fair given its FY16-FY18 EPS CAGR of 11% vs. Sarana Menara of 15% FY16-FY18 EPS CAGR.

Organic growth may be muted in FY16
Tower Bersama Infrastructure (Tower Bersama) has developed a good reputation as a company with the ability to grow organically. Based on itsclient profile, 78% of its total revenue came from the big three telco players. As mosttelcos are nowholding backinvestments on base transceiver stations (BTS), this maydampenTower Bersama’s earnings growth.

Telcos like Indosat (ISAT IJ, NEUTRAL, TP: IDR5,650) and XLmay likely hold back their investments until after the process of refarming the 4G spetrum in FY15 is concluded. We expect net additional tower tenanciesof 1,400/1,000 in FY16/FY17 (FY13/FY14: 2,985/2,772) respectively. Furthermore, we also expect the tenancy ratio to remain relatively flat at 1.67x in FY16 from 1.65x in FY15. In our view, the rapid growth of towers in the past few years may outpace the company’s ability to securenew tenants.

Balance sheet concerns
As its net debt/EBITDA reached 5.1x in 1Q16, it may have limited room to further leverage its balance sheet to pursueinorganic growth projects. In FY16,we expectorganic growth to remain muted. Meanwhile, we also note that the sale of towers from the telcos is still on the table. The next tower tender could probably come from Indosat. In our view, inorganic growth is a way for the company to improve its revenue and EBITDA simultaneously – which in turn could drive its share price in light of its muted organic growth prospects ahead. However, as its balance sheet is stretched, it is unlikely that Tower Bersama would grow inorganically.

Reinitiate coverage with NEUTRAL and a TP of IDR6,450
Our DCF valuation assumesa 9.2% WACC and a 3% TG. Our TP also implies 16x/14.7x EV/EBITDAsfor FY16F-17F respectively. Since telco operators are witholding their capex spending, we see limited catalysts ahead for Tower Bersama.

Risks to our call
An upside risk to our call is the improvement in the telco operators’ capex, which could lead to better-than-expected tenant and tower additions. Downside risks are pricing pressures driven by new players entering the market, and further consolidation in the telco industry.

Tower Bersama’s valuation at 14.7x EV/EBITDA in FY17Fis fair
A TP of IDR6,450 implies a 14.7x EV/EBITDA FY17F, which is a fair multiple for TBIG, in our view – given the worsening competitive landscape of Indonesia tower industry, which may reduce the company’s bargaining power on lease rate in the future. As we foresee that the EPS growth between FY16-FY18 of Tower Bersama’s is at 11% vs. 15% EPS growth between FY16-FY18 for Sarana Menara.

We deem the valuation for Tower Bersama is already fair at the moment thus we are NEUTRAL as we estimate the tower tenancies net adds of 1,400/1,000 in FY16/FY17 vs FY13/FY14 of 2,985/2,772 respectively. Furthermore, we also expect the tenancy ratio to remain flat in FY16 to 1.67 from 1.65 in FY15 – we think its organic growth will be subdued due to the slowdown in capex from the telcos. In our view, it would be more difficult for TBIG to grow inorganically due to its high gearing levels.

Telkomsel (TLKM IJ, BUY, TP:IDR4,000) is the source of growth for Tower Bersama
In our view, it is most likely that Telkomsel will be the source of growth for Tower Bersama for the next 2 years. Nevertheless this positive impact from Telkomsel comes with risks for Tower Bersama since Telkomsel is a big telco playerwhich works with a lot of other tower providers; this means that Tower Bersama could have less bargaining power on lease rates.

Based on the trends on the quarterly data, we observed:
Revenue from Telkomsel has steadily been growing. The exception was in 1Q15 when revenue came down due to a change in electricity bills arrangements that are now paid directly. Furthermore, we think that Telkomsel has a better balance sheet when compared to other telco operators therefore estimate it is more likely to disburse more capex than others in FY16.

Revenue from Indosat (ISAT IJ, NEUTRAL, TP:IDR5,650) has been growing mostly because it is pegged to the USD. In FY16, we do not expect Indosat to disburse more capex after the completion of its refarming in FY15.

Revenue from XL Axiata (EXCL IJ, BUY, TP:IDR4,550) has been stagnant in FY15 since the company has been focussing on cost management and USD debt reduction. We do not foresee XL to disburse a high capex for Tower Bersama in FY16.

Inability to grow due to a tight balance sheet
We noticed that Tower Bersama’s net debt-to-EBITDA ratio reached 5.1x in 1Q16 (a number close to its 6.5x covenant) which implies that it has limited room to further leverage its balance sheet to either grow organically (by building more towers ahead) or inorganically.

Slight Improvement In 1Q16 Results

Tower tenancy growth picked up slightly
1Q16 results are inline with our and consensus numbers.Tower Bersama reported a 1Q16 EBITDA of IDR783.5bn (+3.4% QoQ; +11.8% YoY), driven by higher revenue and improved margins. The results were in line with our and consensus estimates, making up 25.3% and 24.5% of full-year numbers respectively.

Its EBITDA margin climbed to a peak of 86.9% during the quarter, as it reduced its maintenance expenses. Meanwhile, its revenuejumped by 9% YoY to IDR901.5bn due tohigher contributions from Telkomsel and Smartfren.Tower Bersama’s earnings were a positive surprise – it booked IDR746bn (+17.9% QoQ) due to a restatement of its accounting standards which resulted in a restatement of its deferred tax liabilities. Its core profit (excluding deferred taxes, revaluation gains and forex gains) came in at IDR147bn (-41.6% QoQ).

Tower tenancy picks up in 1Q16
Tower tenancies increased 3.3% QoQ to 19,423, while its tenancy ratio slightly picked up to 1.66x (from 1.65x in 4Q15). Its net tenancy grew by 627 net adds in 1Q16 (4Q15: 154), marking its strongest increase since 3Q14. Management said that the improvement was supported by telcos rolling out 4Q networks and adding their capacity, in tandem with the rise in smartphone penetration.

Net debt-to-EBITDA ratio remains at 5.1x in 1Q16whichis still lower than its covenant of 6.5x.Tower Bersama’s net debt was at IDR16trn at the end of 1Q16, implying flatgrowth when compared to its 4Q15 net debt level. Its net debt-to-EBITDA dippedQoQ to 5.1x from 5.2x in 4Q15.

Valuation
We assume a risk-free rate of 8%, a market risk premium of 5%, beta of 0.9 and a terminal growth rate of 3% which results in a WACC of 9.2%. We believe that DCF is most appropriate valuation methodology as it captures the medium- and long-term growth prospects of the company.