Conquering Tower Giants
PT Dayamitra Telekomunikasi Tbk (MTEL IJ), as a subsidiary of PT Telkom Indonesia (Persero) Tbk which is engaged in the telecommunications tower business operates 28,206 towers. MTEL was just listed for IDR18.8 tn IPO on November 22, 2021.
More Network, Bigger Reward
As one of the largest telecommunication tower companies in Indonesia, MTEL plans to increase its total towers through inorganic expansion, with 3,000 towers planned to be acquired in FY22E and FY23F. As of FY21, MTEL has 28,206 towers spread throughout Indonesia and 42,594 tenants, making the tenancy ratio to be 1.51x. Currently, MTEL has 16,219 towers or 58% of its total towers in ex-Java region while having 11,987 towers or 42% of its total towers in the Java region. However, the Java region has a higher tenancy ratio than the ex-Java region with 1.65x compared to 1.41x. Furthermore, the tower expansion is necessary with the higher demand of data as seen from the increase in average data usage with an increase of about 20x since 2015 to all MNOs. We expect the tenancy ratio to increase at 2.06x in FY25F.
The Prospect of 5G Network during the Digitalization Era of Indonesia
With growing Indonesia’s digital economy, MTEL plans to further expand 5G network by upgrading its towers with optic fibers. With this 5G network, MTEL hopes that it might improve its user experience with its rapid data transfer and slightest buffering. However, even though 5G network has been in Indonesia since 2017, the use of the network is still minimal with only nine cities in Indonesia having 5G, such as Jabodetabek, Bandung, Batam, Balikpapan, Makassar, Surakarta, Surabaya, Denpasar, and Medan. As of Jan-22, MTEL has 11,851 towers connected with optic fiber. Collaborating with PT Alita Praya Mitra (Alita), MTEL plans to construct 6,000 km long of optic fibers in five provinces in Indonesia, including Java, Sumatra dan Sulawesi to around 1,500 MTEL towers. Furthermore, MTEL plans to lease these optic fiber towers to the Alita’s MNOs and to provide optical fiber installation service to the operators’ telecommunication towers. In addition, MTEL also plans to acquire 3-5km optic fiber network of TLKM and offers it to MTEL’s MNO clients after integrating the network with TLKM in FY22E.
Higher Colocations Translate to Higher Earnings
We believe the financial performance will remain solid throughout the year. We expect revenue to grow by 10.5%-11.5% in FY22E-FY25F along with a rising tenancy ratio, especially from its ex-Java networks (58% of MTEL's portfolio). Meanwhile, EBITDA could reach at IDR5.90 tn - IDR8.74 tn level (13.7%-13.4% YoY) in FY22E-FY25F, thus making the EBITDA margin to be ~82%. Moreover, we set out net profit target by 29.9%-30.2% in FY22E-FY25F, translated to a net profit margin of ~30%. The company's solvency ratio is relatively stable with a net gearing level of 0.02x in FY21 due to excellent working capital management. We expect management to be able to maintain its leverage, with a net gearing level in FY22E/ FY23F at 0.20x/0.11x. Manageable debt exposure should encourage superior margins in the future.
Initiate Coverage on MTEL IJ with a BUY call; TP: IDR1,000
We initiate coverage on MTEL IJ with a BUY rating and a target price of IDR1,000 (+28.2% upside), implying FY22E PE of 36.3x and EV/EBITDA of 14.4x. Our target price is based on DCF valuation with 7.3% of WACC, 2% terminal growth, and 6.8% risk-free rate. We expect MTEL should gain good momentum this year align with its plan on expanding its 5G network in more cities as well as acquiring more telecommunication towers in FY22E, which might boost its financial performance in FY22E. However, the downside risk to our call include: 1) competitive pricing plans and services between tower companies; 2) higher operational expense due to land rentals; 3) towers are prone for vandalism and natural disaster; 4) higher tower rentals churn rate; 5) increased post-merger integration costs.
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