Sarana Menara Nusantara Steady Performance

We maintain BUY on Sarana Menara with a IDR 4,700 TP (18% upside), premised on the following :
1. Superior balance sheet vs its closest peer (net debt/EBITDA of 1.6x vs Tower Bersama (TBIG IJ, NEUTRAL, TP: IDR6,450)’s 5x;
2. The new growth catalyst from its micro poles12 venture.

We expect good 2H16 numbers from the additional lease revenue from the acquisition of XL towers. The de-rating of its share price in the past few months was due to soften organic growth, in our view. We think that it is in a better position for inorganic growth, given the potential opportunities. It remains our Top Pick with an attractive 10x EV/EBITDA.

Acquisition of XL’s towers to drive 2H16 growth
The completion of XL tower acquisition will boost Sarana Menara Nusantara’s (Sarana Menara) revenue in the 2H16. As it is able to add 2,500 new towers, this would translate into a higher tower tenancy adds in 2H16 from XL Axiata (XL). As at 2Q16, the tenancy ratio dropped to 1.67x (vs 1.71x in 1Q16).

We are confident that this ratio will improve in 2H16 and therefore maintain our tenancy ratio assumptions of 1.7x in FY16. However, we also expect the lease rates from XL to decline – based on the last conference call with management – the company is planning to reduce the cost of tower rentals.Thus, we maintain our topline growth of 15%, 12% and 9% for FY16F-18F respectively.

Higher net debt/EBITDA from tower acquisitions
Sarana Menara’s net debt/EBITDA increased to 1.6x in 2Q16 (1Q16: 0.9x) which is still manegeable compare to Tower Bersama Infrastructure (Tower Bersama) of 5x. In our view, the better balance sheet would give the company a competitive advantage to capitalize on inorganic growth compare to peers. There is potential for more tower sales, as telcos look to hive off non core assets.

Maintain BUY based on an unchanged TP of IDR4,700. We like it for:
i. Its healthy balance sheet which presents opportunities for inorganic expansion;
ii. Stronger 2H16 showing on the back of additional lease revenue from the acquisition of XL’s towers;
iii. Valuation remains attractive at 10x EV/EBITDA FY17F vs peers of 14x EV/EBITDA FY17F.

2Q16 Performance In Line With Expectations
Hutchinson and Telkomsel supported the growth of Sarana Menara in 2Q16
2Q16 results in line with our/consensus numbers. Sarana Menara reported 1H16 EBITDA of IDR1.1trn (+11% QoQ; +23% YoY), which formed 49%/50% of our/consensus estimates. 2Q16 EBITDA margin widened by 3ppts QoQ to 88.5% in 2Q16 on higher revenue growth and lower G&A expenses (-24% YoY). 2Q16 revenue expanded by 17% YoY to IDR1.25trn (+7% QoQ), driven by stronger revenue contribution from Hutchinson Indonesia (+19.5% YoY; +14.6% QoQ) and Telkomsel (+15.3% YoY; +12.5% QoQ).

Tenancy ratio eased slightly QoQ
Tower tenancy adds of 3,775 in 2Q16 is higher compare to -87 tower tenancy adds in 1Q16. Meanwhile, Sarana Menara’s towers addition increased 2,500 from the acquisition of XL’s (EXCL IJ, BUY, TP: IDR4,000) towers to 14,775 towers in 2Q16 (vs 12,255 in 1Q16). Its tenancy ratio however eased to 1.67x in 2Q16 (1Q16: 1.71x).

Net debt/EBITDA rose to 1.6x in 2Q16.Overall debt stood at IDR10.8trn at end-2Q16, above 1Q16’s IDR6.4trn. This contributed to higher net debt/EBITDA (1H16 annualised EBITDA) of 1.6x at end 2Q16 (vs 0.9x in 1Q16). We believe Sarana Menara’s balance sheet remains manegeable and below its net debt covenant of 5x. The higher debt was due to IDR3trn to finance the purchase of XL’s towers.