Towers: Larger opportunities from sector transformations; improves Tower cos strategic position in ICT (OVERWEIGHT)

Stock Code	Last Price	Change	Change %
DSSA	66,225	2,425	3.80%
MKPI	23,650	1,100	4.88%
BYAN	10,950	925	9.23%
MEGA	5,150	660	14.70%
MLPT	13,875	600	4.52%
IFSH	2,800	560	25.00%
IBST	5,350	450	9.18%
ARTA	2,940	220	8.09%

Towers

Larger opportunities from sector transformations; improves Tower cos strategic position in ICT

Resilient FY24F topline/earnings growth of 6%/11% in the cards as the non-tower biz catches up quickly. By seizing inorganic opportunities, Tower cos may render 2-digit FY24F growth at the topline.
Telco mergers provide catalyst for larger growth in ex-Java. Expect more sanguine view on the sector given the greater strategic role that tower cos are assuming.
Maintain OW on Tower cos, top-pick MTEL. A potential interest rate pivot will allow for lower oFCF discounting and lower costs to fund ex-Java rollouts.

Resilient growth in 9M23 despite IOH softness in orders. The three Tower cos under our coverage have >80% of the ICT infra market and together have the largest tower footprint, solidifying their strategic status. Tower co revenue grew on aggregate by +2.9%qoq on average and by +1.7%qoq in median value terms in 1Q21 – 3Q23 and by +6.9%yoy in 9M23. The non-tower biz with fiber has emerged rapidly, bolstering tower revenue. This has helped Tower cos to maintain solid generation of EBITDA and oFCF (EBITDA-CAPEX).

Paving the way for positive growth in the coming quarters. Our coverage is in position to achieve FY24F topline growth of ~+6%yoy, as telco operators’ annual capex will be substantial to support fiber backhaul overlays, while rebalancing their tower footprint between Java and Non-Java areas. The IOH merger is a fundamental catalyst for IOH building greater coverage in ex-Java areas. Similarly, a merger for the Java-centric no.3 and no.4 operators would enable the combined entity to deploy significant rollouts in new markets in ex-Java. We expect our Tower cos coverage to deliver ~+11%yoy growth in FY24F earnings underpinned by a number of potential deals involving the acquisition of revenue-generating assets.

Eyeing a better strategic position leading to higher valuations. Tower cos are moving into managing active assets such as BTS, antennas, and microwave equipment. This should extend their ICT value chain and result in better monetization compared to telcos. Furthermore, this expansion should significantly upgrade Tower cos’ strategic role in ICT infra, improving their bargaining power, and consequently render more premium valuations.

All the ingredients for more premium valuations. We recommend Overweight in ICT infra players: In addition to Tower cos strategic positioning, we expect them to grow in FY24F topline and earnings by +6%yoy +11%yoy respectively driven by fiber enhancements in Java and tower tenancies in ex-Java. The growth is safeguarded with acquisition opportunities for revenue generating assets that are currently presented. Moreover, the ongoing telcos consolidation should improve scale and opportunities for deeper telco penetrations in ex-Java. Mitratel is our top-pick given their relatively low leverage, higher collocation upside along with their comparative advantage in ex-Java footprints. MTEL also has a competitive valuation of 9.5x EV/EBITDA 2024, trading close to -1SD. TOWR and TBIG trade at 9.1x and 12.2x respectively, both at their 5yr average levels.

Potential interest rate pivot in FY24, should signal for a more sanguine view on discounting longterm cashflows of Tower cos. Moreover, Tower cos should fund capex at lower financial costs

… Read More 20240105 Towers