Sarana Menara Nusantara (TOWR.IJ Rp 835; BUY TP Rp 1,300) Navigating merger headwinds with strategic positioning in ex-Java

Stock Code	Last Price	Change	Change %
DSSA	45.800	950	2,12%
MFIN	3.350	670	25,00%
DCII	168.400	400	0,24%
DATA	1.535	225	17,18%
PACK	2.470	220	9,78%
LIFE	6.500	200	3,17%
PNGO	1.845	195	11,82%
AMMN	7.050	175	2,55%

Sarana Menara Nusantara (TOWR IJ)

Navigating merger headwinds with strategic positioning in ex-Java

We expect spending for IBST, FTTH, and site relocations to secure incremental EBITDA, recurring income and strong positioning in ex-Java.
Preemptive RI in the ~Rp8tr range will reduce leverage, fund growth, and maintain IG Status amid IBST acquisition and targeting IOH’s cables.
We maintain our Buy rating on TOWR with a TP of Rp1,300; TOWR is trading at an attractive level vs. peers and mean multiples.

Planting roots for larger captive market and growth in ex-Java

We see TOWR’s acquisition of a 90.1% stake in IBST (100% with a mandatory offer) to offer substantial growth potential. IBST's portfolio comprises 3,300 towers and 7,000 km of fiber, with FREN as its anchor tenant, allowing TOWR to secure ~Rp700bn in new recurring EBITDA. The imminent EXCL-FREN merger is expected to lead to a site overlap of 25-30%, potentially dampening growth due to site relocations from Java. However, we believe: a) the impact will be short-lived, as TOWR now provides broader colocation options in ex-Java, (b) relocations will unlock growth in these regions for the new mergeCo.

TOWR spend to fuel recurring income and revenue diversification

TOWR guides FY24 capex to reach Rp6tr, aimed at fueling FTTH deployment and supporting IOH relocations with new B2S towers. We expect non-tower revenue to grow significantly by 12% CAGR in 2023-26, offsetting the flat tower growth and enabling total growth of 4-6% CAGR in 2023-26. Hence non-tower revenue contribution should grow to 35% by 2026 (30% in 1Q24).

Preemptive rights issue in the near term to support spent and more growth

TOWR's FY24 capex is projected to increase gross debt to Rp50tr, up from Rp44.5tr in 1Q24. Combined with FY24 cash flow, this will result in ND/EBITDA of ~4.7x and incur additional financial costs of ~Rp340bn in FY24. Furthermore, TOWR is planning a preemptive rights issue with a potential size of ~Rp8tr, in our view, to allow Djarum to maintain its majority stake at the current price and reduce ND/EBITDA to below 4x (to potentially retain investment-grade rating). The rights issue could also position TOWR to target ISAT’s cable assets (link), which would potentially be a strategic fit for iForte.

Maintain BUY rating: strategic positioning amid MNO merger headwinds

We fine-tune our estimates awaiting pending release of 1H24 and 9M24 earnings. We reiterate our Buy rating on TOWR’s ability to weather the headwinds from MNOs mergers and potentially realize growth in ex-Java. Our DCF-based TP is unchanged at Rp1,300 (implying 10.4x EV/EBITDA). TOWR trades at 8.2x EV/EBITDA and 14.0x PE (vs. sector average of 12.7x/26.8x). Key risks are extensive churns from MNO mergers and prolonged relocations.

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