Broker: UOB Kay Hian
Date of Report: October 7, 2024
Sarana Menara Nusantara (TOWR): Non-Tower Business Drives Growth Amid Market Challenges
Sarana Menara Nusantara (TOWR), a premier telecommunication infrastructure company, is witnessing strong growth in its non-tower business, despite market uncertainties. The company’s focus on expanding its fiber-to-the-home (FTTH) segment has paid off, driving revenue growth and solidifying TOWR’s position in the market. However, challenges remain as the company navigates through changing market dynamics and potential mergers in the telecommunications sector.
Non-Tower Business Leading Growth
TOWR’s non-tower business has emerged as one of the main growth drivers for the company in 2024 and is expected to maintain this momentum into 2025. In 1H24, the non-tower segment reported a significant 25% year-on-year revenue increase. This impressive growth is primarily attributed to the FTTH segment, which recorded a stellar 469% year-on-year increase. Looking ahead, the non-tower business is projected to grow by approximately 20% year-on-year in 2025.
Acquisition of Inti Bangun Sejahtera (IBST)
In July 2024, TOWR’s subsidiary, PT iForte, completed the acquisition of a 90.1% stake in Inti Bangun Sejahtera (IBST) for a total acquisition value of Rp3.4 trillion. With the addition of IBST’s assets, TOWR is now positioned to consolidate IBST’s operations starting in 3Q24. This acquisition is expected to enhance TOWR’s tower portfolio, bringing the total number of towers to around 34,300 and tenants to 58,000, with a potential tenancy ratio of 1.69x.
Tower Business Outlook
The tower segment experienced a modest growth outlook, with an expected 3% year-on-year increase in revenue for 2025. The acquisition of IBST will boost the number of TOWR’s towers by 22% in 2024 and an additional 9% in 2025, assuming a tenancy ratio of 1.6x for 2024 and 1.5x for 2025. However, the process may face some headwinds as EXCL explores a merger with SmartFren (FREN), potentially impacting the organic growth of infrastructure usage.
Financial Performance and Forecast
TOWR recorded an EBITDA of Rp5.1 trillion in 1H24, aligning with both internal and market expectations. However, the 1H24 net profit (NPAT) of Rp1.6 trillion was slightly below consensus, mainly due to a lower-than-expected operating margin. The company witnessed a 52% year-on-year and 4% quarter-on-quarter increase in selling and marketing expenses during 2Q24, impacting overall profitability.
Despite these challenges, TOWR is expected to see a slight acceleration in revenue growth, reaching 9% year-on-year in 2025, compared to 7% year-on-year in 2024. This increase is partly due to the full-year effect of the IBST acquisition. The company’s net profit is also projected to recover, growing by 2% year-on-year in 2025 following a 5% year-on-year decline in 2024. The expected decline in interest rates, in line with Central Bank policies, is anticipated to support this recovery.
Beneficiary of Lower Interest Rates
TOWR stands to benefit from the recent shifts in interest rate policies. Despite the high-interest rate environment in 1H24, the company managed to grow its net profit during a period of significant capital expenditure. The anticipated lower interest rates from both the Federal Reserve and Bank Indonesia, which began taking effect at the end of 3Q24, are expected to improve the company’s financial health moving forward.
Key Financial Metrics (Year-End 2025 Forecast)
- Net Turnover: Rp13,319 billion
- EBITDA: Rp11,094 billion
- Operating Profit: Rp8,239 billion
- Net Profit: Rp3,542 billion
- PE Ratio (2025F): 10.7x
- Dividend Yield (2025F): 3.7%
- Net Debt to Equity: 238.9%
Revenue Contribution and Market Position
TOWR’s tower business faced slight pressure in 1H24 due to the relocation of tower lease contracts following the merger of Indosat (ISAT) and Hutchison. As the relocation process is anticipated to affect the company’s financial performance throughout 2024 and into the next 1-2 years, non-tower revenue is expected to become increasingly important. In 2Q24, non-tower revenue contributed 34% to TOWR’s consolidated revenue, up from 32% in 1Q24. The fiber leasing segment remains the largest contributor within the non-tower business.
Earnings Revision and Outlook
Following the 1H24 performance, the company revised its 2024 net profit forecast downward. However, the revenue expectation for 2025 was adjusted upward due to the acquisition of IBST. TOWR is monitoring the potential merger between EXCL and FREN and its impact on the organic growth of infrastructure usage, particularly in the tower business.
Valuation and Recommendation
- Rating: Downgraded to Hold
- Target Price: Rp930
- Upside Potential: 9.4%
The target price of Rp930 is based on an EV/EBITDA multiple of 9.0x (-0.5 standard deviation). The company is currently trading at an EV/EBITDA of 8.4x for 2025, below the -0.5 standard deviation of 8.9x. The slight downward revision of the target price (-2%) accounts for the higher debt levels anticipated to support the IBST acquisition. TOWR’s market position, non-tower revenue growth, and response to changing market conditions make it an essential stock to watch in the telecommunications infrastructure sector. However, potential downside risks include higher lease churn intensity from the Indosat-Tri merger and the prospect of further mergers among telecommunications operators.
