TOWR - For the sake of future

• TOWR’s 1H22 net profit was Rp1.7tn, growing 0.1% (+0.7% in 2Q22) 

• We expect revenue and net profit to grow to Rp10.2tn and Rp3.5tn, respectively

 • We reiterate our “BUY” call with 21% upside potential on a 12-month view on positive impact from higher demand for data 

Fairly in line TOWR's 1H22 net profit came in at Rp1.69tn, or relatively flattish YoY (-1.9% QoQ), accounting for 47.8% of our FY estimate. The flattish growth of net profit was partly due to higher finance costs combined with forex loss in 1H22. Meanwhile, its revenue surged 33.9% YoY in 1H22 to Rp5.32tn (+3.0% QoQ), representing 52.4% of our 2022 estimate. GPM was also stabilized at 72.9% in 1H22 (72.9% in 2Q22) as cost of revenue remained controllable, in our view. Furthermore, TOWR's SG&A grew 31.9% YoY in 1H22 on the back of higher from salaries and employee welfare. However, TOWR managed to maintain EBITDA margin at 86.0% in 1H22 (86% in 2Q22) compared to 85.8% in 1H21. In addition, TOWR’s net gearing was at 3.3x in 1H22. Strong non-tower growth TOWR's top line in 1H22 was propped up by tower rental revenue that strongly grew 30.7% YoY (+0.1% QoQ in 2Q22). The company managed to add 252 towers QoQ in 2Q22 to 29,263 towers (7,688 towers in YoY) with tenancies were up to 54,716. This brought tenancy ratio to be at 1.88x in 1H22 or 1.87x in 2Q22. On the other side, non-tower revenue increased 48.8% YoY (+16.0% QoQ in 2Q22). As a result, non-tower revenue contributed 19.5% of its revenue in 1H22 (20.6% QoQ in 2Q22), growing from 17.8% in 1H21. Higher contribution was also followed by margin expansion of 56.4% in 1H22 from 50.3% in 1H21. TOWR has added 84.6% YoY tower generating revenue to 95,400 in 2Q22 with 13,333 activations. Focuses on securing sustainable growth We expect TOWR's revenue to grow 18% YoY in 2022 to Rp10.2tn, supported by tower revenue with growth of non-tower revenue continues to accelerate further in line with recent trend of data expansion. Meanwhile, we estimate TOWR's net profit of Rp3.54tn in 2022, or relatively flattish YoY with EBITDA margin at 87%, or higher YoY. We view that planned acquisition of fiber optic asset of BIT Teknologi Nusantara (BIT) will help it capture growth opportunity amid strong data demands going forward. The transaction is slated to complete in 3Q22 with a value of Rp801bn. According to management, by acquiring the asset, TOWR will add 10,730km of revenue generating fiber with estimated non-cancellable revenue valuing Rp845bn that mostly serves for EXCL and IOH covering Solo, Malang, Surabaya and Bali. On the flip side, we view that highly competitive market in mobile will prompt operators to carry out efficiencies, therefore lower contract negotiation could become a risk in the future. Reiterate BUY on the back of growing demand for data improvement We maintain our BUY recommendation with a DCF-based price target of Rp1,500 per share. The stock is currently traded at a 2022F PER of 20.4x and EV/EBITDA of 7.3x. We are sanguine with TOWR's performance, boosted by 1) strong demands by carriers to improve their data services; 2) commercialization of 5G; 3) the country's lower internet penetration compared to ASEAN peers; and 4) relatively stable margins. Nevertheless, we note a number of downside risks to our recommendation, namely 1) higher interest rates; 2) lower lease fee than expected; 3) forex and leverage risks.