Towers: Building retail channels to invigorate supply and demand for fixed broadband (OVERWEIGHT)

Towers

Building retail channels to invigorate supply and demand for fixed broadband

We see a significant untapped inventory in fixed BB despite the low user penetration, implying a large fragmentation in the supply chain.
Smaller infra ISPs may disrupt the market by offering more affordable prices of Rp100-Rp200k/month, owing to their leaner cost structures.
Maintain OW rating in infra/towers; lower prices may unlock the supply chain and improve segmentation; TOWR should be the key beneficiary.

Plenty of homepass supply but with low penetration so far

We note a strong supply of homepass (HP) for fixed BB internet exists, controlled by infra players. Telkom TIF dominates supply with 20-25mn HPs with 10.4mn subs, LINK IJ (non-rated) 4mn HPs with ~19% penetration, and TOWR IJ (BUY, TP, Rp1,400) has ramped up capex with 1.5mn HPs and <11% penetration, quickly growing in size. Asianet and ICON+ own relatively large HP portfolios, followed by smaller entities Surge (WIFI IJ, ~175k HPs) and Remala Abadi (DATA IJ, which owns 11k km of fiber). These figures imply significant inventory lies untapped.

Infra players acquiring retail presence to expedite fixed BB penetration

By acquiring DATA, TOWR expands its HP distribution beyond XL Axiata and IOH to include direct sales via DATA's retail brand, Nethome.ID, at Rp200k/month. This move mirrors wholesalers Asianet, Linknet, and ICON+ supplying HPs to WIFI for retail sales under their Starlite brand (Rp250k/month for 500 Mbps). WIFI also offers its own budget plans (Rp100/month for 100 Mbps) using its own HP inventory. Telkomsel, Telkom's TIF client, promotes its currently cellular-based EZnet at Rp150k. TIF is currently piloting HP sales to MyRepublic. Komdigi reports a significant surge in ISPs (770 new in 4 years), forming a more informal yet integral segment of the retail market.

Fixed BB demand opportunities for Infrastructure companies

We estimate that fixed BB penetration in Indonesia is between 18% - 23%, with ~13-14mn subscriptions (incl. ‘illegal’ ones). In our view, the catalyst for growth is the ongoing segmentation in the market, emphasizing affordability at the low end. Smaller infra ISPs (no-frills) appear to have a leaner cost structure, selling services in the Rp100-Rp200k range, enabling them to drive uptake to 90% of their HPs. On the other hand, telcos will continue to outsource their HPs as part of FMC sales, offering differentiation with 2-plays (mobile + fixed) to grow and secure the traffic in their networks.

Maintain OW in towers; fixed BB market lower prices may unlock supply

The emergence of new, agile infra-to-retail players highlights opportunities to drive HP sales by targeting lower price points, as exemplified by TOWR's acquisition. We maintain sector OW rating with TOWR (Buy, TP Rp1,400) as our pick for the primary infra beneficiary, trading at 7.2x EV/EBITDA. We continue to favor MTEL (Buy, TP Rp1,000), which trades at 9.7x EV/EBITDA, due to its robust tower portfolio outside Java and its low leverage, which presents opportunities for M&A. Key risks stem from the recent telco merger, which may lead to a growth overhang in tower tenancies.

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