Tower Bersama Running Out Of Gas

We reinitiate coverage on Tower Bersama with a NEUTRAL call and a TP of IDR6,450 (2% downside from current price). In our view, the intensifying competition, consolidation in telcos, and slowdown in capex for BTS – will have a negative impact to Tower Bersama’s future lease rate and new tenancies. Despite, there is an opportunity to grow inorganically, we think that the company could not utilise the opportunity – as the company has a tight balance sheet. Currently, the stock is trading at 16x FY16F EV/EBITDA or 30% premium over Sarana Menara.

Organic growth will be muted in FY16
In the past, Tower Bersama developed a good reputation as a company with an ability to grow organically. Based on the clients profile, Tower Bersama has 78% of total revenue came from big 3 telco players. However, in the current condition whereby most of the telcos operators are withholding their investment in BTS – we think that it could negatively impact on Tower Bersama growth. Some of the telcos players like Indosat and Excel will most likely to hold their investment after the completion of refarming of 4G in FY15.

We estimate the tower tenancies net adds of 1,400/1,600 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 – in our view, the rapid growth of tower in the past few years will outpace the company’s ability to find new tenants.

Concerns on balance sheet – hinders organic and inorganic growth
We notice Tower Bersama’s net debt/EBITDA has reached 5.3x in FY15 (almost reach their covenant of 6.5x). This implies that Tower Bersama has a limited room to further leverage its balance sheet to either build more towers ahead or grow inorganically. In FY16, where we expect the organic growth to remain muted. While, we see that tower sale from the telcos players are still on the table.

The next tower tender would probably come from Indosat. In our view, inorganic growth is a way to improve their revenue and EBITDA simultaneously, and in turn it could drive the share price in the event of muted organic growth. However, given their stretched balance sheet – it is unlikely for the company to grow inorganically.

Reinitiate with NEUTRAL call with TP of IDR6,450 (2% downside)
We reinitiate Tower Bersama with a NEUTRAL call as we only estimate the tenancies addition of 1,400/1,600 in FY16/FY17 – vs FY13/FY14 of 2,985/2,772 respectively – given that the telcos operators are witholding their capex on BTS. We see a limited catalyst ahead for Tower Bersama and the stock is currently trading at a 30% premium over Sarana Menara. In our view, Telkomsel and Hutchinson will more likely to disburse more capex to BTS compare to Indosat and Excel in FY16, accounted only 49% of Tower Bersama total revenue (vs. 75% of total revenue for Sarana Menara) in FY15.

1Q16 results inline with our/consensus number
Tower Bersama reported a 1Q16 EBITDA of IDR783.5bn (+3.4% QoQ; +11.8% YoY) driven by a higher revenue and improvement in margin. The results was inline with our/consensus estimate of 25.3%/24.5%. EBITDA margin climbed the highest in 1Q16 of 86.9% – as we see a reduction in maintanance expenses. While, revenue was also jumped by 9% YoY to IDR901.5bn due to the higher contribution from Telkomsel and Smartfren.

Meanwhile, in 1Q16, Tower Bersama’s earnings was surprised at IDR746bn (+17.9% QoQ) – this was due to restated of accounting standards and resulted into a restatement in the deferred tax liabilities. The core profit (exclude 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 with the tenancy ratio slightly picked up to 1.66x (from 1.65 in 4Q15). Net tenancy adds grew by 627 net adds in 1Q16 (from 154 in 4Q15) – which is the strongest net adds since 3Q14. Based on the management, the improvement was supported by the roll out of 4G network and capacity addition by telcos, given rising smartphone penetration.

Net debt to EBITDA remains at 5.1x in 1Q16
Tower Bersama’s net debt was at IDR16trn at the end of 1Q16 – which remains flat compare to the 4Q15 net debt. Their net debt/EBITDA slighly reduced QoQ to 5.1x from 5.2x in 4Q15. This remains lower than its debt/EBITDA covenant of 6.5x.