Sarana Menara Nusantara (TOWR IJ)
Fiber-Driven Growth and Rate Cut Catalysts to Enhance Long-Term Value
- We expect contribution from non-tower rev. to continue (14% CAGR in FY24-26F), driving sustainable outlook amid ongoing tower relocations.
- We expect TOWR’s fiber synergistic model to sustain an 83.3% EBITDA margin, potentially benefiting from new gov.'s aim for FTTH expansion.
- We reiterate our Buy rating on attractive growth catalysts and roll forward our DCF valuation, resulting in a new TP of Rp1,400.
Sustainable growth in the cards even with tower relocations
TOWR’s strong 2Q24 revenue growth to Rp3.1tr (+2.0%qoq, +6.7%yoy), driving 1H24 rev to Rp6.2tr (+6.5%yoy, ex- IBST), has again demonstrated solid organic growth from fiber, which offsets soft tower rev. due to site relocations.
Highly synergistic model allows for sustainable high EBITDA margin
TOWR delivered non-tower rev. from fiber of Rp1.05tr (+9.0%qoq, 35.1%yoy, 33.8% topline contribution) in 2Q24 and 56% capex/sales ratio, vs. 104% in 2Q23. TOWR’s fiber is versatile with revenue coming from FTTT, FTTH, and business connections, synergistically achieving a stable 83.3% overall EBITDA margin in 2Q24. The new govt’s targets, FTTH/FWA connections of 100Mbps for tens of millions of households nationwide, shall offer long growth runway.
We expect pay-off from capex in towers and growth in ex-Java
Tower revenue came in at Rp2.06tr in 2Q24 (-3.6%yoy) and -5.4% since the onset of IOH merger in 4Q21, relatively resilient. TOWR spent large capex of Rp1.8tr in 1H24 and Rp8.3tr in the past 30 months, with more B2S towers in ex-Java, able to maintain total tenancies at +54,000. We believe the IBST acquisition will be accretive as a) TOWR secures additional ~Rp220bn quarterly revenue commitment with FREN tenant; b) XL-FREN MNO will also reallocate sites (~30% network overlap) potentially to IOH sites. Thus, we expect TOWR to get a faster payoff for the B2S capex.
Pursuing more M&As; beneficiary of rate cuts
The announced rights issue plan in Oct.24 of Rp4.5tr shall allow for additional war chest as we expect TOWR to engage in more M&A after IBST. We estimate ND/EBITDA to remain elevated between ~4.0 - 4.8x in FY25. With higher leverage, TOWR will be a big beneficiary of the ongoing rate-cuts after the RI.
Maintain BUY rating for its growth prospects and rate cut catalysts
We roll forward our DCF valuation to arrive at a new TP of Rp1,400 (implying 11x EV/EBITDA). We maintain our BUY rating on TOWR's proven positioning in fiber amid attractive growth opportunities. We believe TOWR’s current valuation under -1SD of 5-year mean and at a discount to the 11x peers' median is unwarranted. Key risk is the proliferation of illegal internet.
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