Balancing Growth through FTTT
Key Takeaways :
• TOWR reported a single digit revenue growth of 9.4% YoY in 1Q23, totaling IDR2.9 tn, driven by the tower segment, despite a minor decline of 3.7% YoY due to a decreased number of tenants. Meanwhile, Fiber-to-the-Tower (FTTT) and connectivity segments grew 89.7% YoY and 49.2% YoY, respectively.
• EBITDA was at IDR2.4 tn (+8.4% YoY) with an EBITDA margin of 85.1% (vs 85.9% in 1Q22). Net income declined to IDR752.4 bn (-11.8% YoY), due to increasing financing costs and tax expenses. Consequently, the net margin declined from 32.6% in 1Q22 to 26.3% in 1Q23.
• With the rise in 4G technology users in Indonesia, there has been an increase in demand for FTTT services. TOWR's acquisition of PT Alita Praya Mitra and PT Varnion Technology Semesta, as well as a significant allocation of its capital expenditures for non-tower segments like FTTT, is indicative of the company's strategic direction to cater to this demand.
• Despite the positive prospects of FTTT, the company's top-line growth might be hindered by the potential loss of tenancies from the IOH merger. The management expects about 500 tenant churns in both FY23E and FY24F.
• We project TOWR to book a slight revenue increase in FY23E to IDR11.5 tn (+4.1% YoY) and plans to add 700-800 towers and 30,000-40,000 km of fiber in FY23E. EBITDA would be at IDR9.8 tn (+3.0% YoY), yet its margin contracted at 85.3% (vs 86.2% in FY22). Concurrently, net profit is expected to reach IDR3.6 tn (+4.3% YoY) with a net profit margin of 31.3% (vs 31.2% in FY22).
• We recommend BUY for TOWR, with a TP: IDR1,200 (+18.8% upside) which implies EV/EBITDA of 6.2x in FY23E. The FY23E expansion plans are highlighted by the high network demand in Indonesia, although the growth might be limited due to IOH consolidation. Downside risks: 1) Rupiah devaluation; 2) High interest rate; 3) disturbed earnings growth amid IOH merger.
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