Research & Stock Picks

Emiten Report

09 May 2023

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Telco Infra – Overweight – Impact of IOH Consolidation Remain in Effect

Impact of IOH Consolidation Remains in Effect

MTEL booked 1,311 new tenants in 1Q23 (+2.5% ytd, +23.7% yoy) mainly due to the acquisition of 997 towers from IOH. However, the rather disappointing collocation growth (+290 units) put some pressure on the company’s tenancy ratio (1.46x, vs. 1.51x in 1Q22). Also, MTEL posted 26k km of FTTT in its books (+53.3% ytd, +1,071.8% yoy). On its top line, MTEL posted revenue growth of +9.9% yoy (-3.2% qoq), in line with SSI’s estimate (24.3% of SSI’s FY23F target) but slightly lower than consensus (23.6%). The company posted EBITDA growth of +8.4% yoy (-4.3% qoq), in line with SSI and consensus estimates (25.1% of SSI’s, 24.0% of consensus), with an EBITDA margin of 85.1% (vs. 85.9% in 1Q22). Around 67% of MTEL’s contracts have maturities of more than four years, ensuring the company’s revenue in the medium term. In addition, with a low tenancy ratio, the company can maximize the collocation of its towers.

 

TBIG added +127 new tenants in 1Q23 (+0.3% ytd, +3.7% yoy), mainly thanks to collocations (+432), though the company’s figures were somewhat hurt by the loss of approximately -470 tower leases from IOH (which were not renewed). TBIG’s revenue stagnated in 1Q23 (-1.4% yoy, +1.0% qoq), slightly below SSI’s estimate and consensus (23.7% of SSI’s FY23F target, 23.5% of consensus). To deal with the telco industry’s consolidation, TBIG’s preferred strategy is to increase revenue from smaller telco operators, as reflected by the drop in the portion of tower lease revenue from ‘big 3’ telco providers (TSel, XL, and IOH) from 86.4% in 1Q22 to 84.8%. Due to the relatively flat tower lease business, TBIG’s EBITDA fell slightly by -2.8% yoy (+1.1% qoq), in line with SSI’s target (26.5%) but slightly lower than consensus (23.4%) with an EBITDA margin of 86.2% (vs. 86.1% in 1Q22).

 

TOWR lost -147 tenants in 1Q23 (-0.3% ytd, -1.14% yoy), primarily due to the loss of several IOH-related leases (which were not renewed). However, TOWR's 1Q23 performance was lifted somewhat by its 162K km-FTTT (+8.3% ytd, +99.6% yoy), enabling the company to book revenue growth of +9.4% yoy (-2.2% qoq), in line with SSI’s forecast and consensus (24.9% of SSI’s FY23F target, 24.7% of consensus). The growth of FTTT boosted the contribution of non-tower revenue to 28.0% of TOWR’s total revenue (vs. 18.3% in 1Q22). Also, TOWR managed to book EBITDA growth of +8.4% yoy (-4.3% qoq), in line with SSI’s estimate and consensus (23.9% and 23.8%, respectively) even with the spike in its cost of revenue (+22.6% yoy) and operating expenses (+11.0% yoy). Lastly, the company’s EBITDA margin was recorded at 85.1% (vs 85.9% in 1Q22).

 

Despite the short-term slowdown due to the consolidation of several telco operators, we remain optimistic about the long-term prospect for the telco tower industry. We expect the arrival of the 5G era and demand for fiber optic networks to boost the industry’s performance. Therefore, we reiterate our Overweight rating for the telco tower sector with two top picks: 1). MTEL (BUY, TP IDR 920 [13.0x EV/EBITDA 23F]) given its massive tower portfolio (36,439 units, Indonesia’s largest) and solid financial structure (DER 0.4x and Net Debt/EBITDA 1.43x), and 2). TOWR (BUY, TP IDR 1,310 [10.8x EV/EBITDA 23F]), considering its second-largest tower portfolio in Indonesia (21,880 units) and its readiness to compete in the fiber optic industry. Main risks: Decreasing demand and lease rates, interest rate hikes, and regulatory changes.

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