Tower Bersama Stretched Balance Sheet Hinders Growth

Tower Bersama’s 2Q16 EBITDA were in line with our/consensus numbers
Net debt/EBITDA ratio remains at 5x (1Q16: 5.1x), which is close to its 6.5x covenant. Management’s decision to pay an interim dividend of IDR330bn or IDR69/share (ie higher than our IDR55/share estimate) could have resulted a tight cash condition. Thus, we maintain our NEUTRAL rating and DCF-derived IDR6,450 TP (8% upside) that implies 13.8x FY17F EV/EBITDA, which we think is less attractive vs the 10x and our Preferred Pick – Sarana Menara Nusantara (TOWR IJ, BUY, TP: IDR4,700).

Lack of 2H16 catalysts for the company
We are of the view that the softening tenancy addition situation in the market will continue in 2H16. This is as most of the telcos are still holding back on their tower investments. We maintain our assumption of a tenancy ratio of 1.67x in FY16. Besides that, we think that Tower Bersama Infrastructure’s (Tower Bersama) lease rates will remain under pressure. This is as most of the telcos are looking at lower lease rates for upcoming contract renewals.

Balance sheet concerns
As Tower Bersama’s net debt/EBITDA is still at 5x in 2Q16 (1Q16: 5.1x), the company may have limited room to further leverage its balance sheet to pursue inorganic growth projects, in our view.

Risks to our call
An upside risk to our call is the improvement in telco capex, as this could lead to better-than-expected tenancy, and tower additions and tower sales. Key downside risks are slower-than-expected organic tower tenancy growth and pressure on lease rates from increased competition.

2Q16 EBITDA in line with expectations. Tower Bersama reported a 2Q16 EBITDA of IDR790.6bn (+10.8% YoY, +0.9% QoQ). This is driven by higher revenue and a slight improvement in margins. The results were in line with our and consensus estimates, making up 51% and 49% of full-year numbers respectively.

Softening net tenancy adds
Revenue rose 2% QoQ (+8.5% YoY) in 2Q16 – this was driven by higher rental revenue from:
i. PT Telekomunikasi Indonesia Persero (Telkomsel) (TLKM IJ, BUY, TP: IDR5,000);
ii. PT XL Axiata Tbk (EXCL IJ, BUY, TP: 4,833);
iii. PT Smartfren Telecom Tbk (not listed).

Revenue contribution attributed to Tier 1 telcos declined to 87.8% in 2Q16 (1Q16: 88.3%), as Indosat Tbk PT (Indosat) (ISAT IJ, NEUTRAL, TP: IDR6,700) lowers its rental revenue. Tower tenancies increased 2.8% QoQ to 19,972, with the tenancy ratio slightly dropping to 1.65x in 2Q16 (1Q16: 1.66x). Net tenancy additions dropped on a QoQ basis to 549 in 2Q16 from 627 in 1Q16.