TOWR - Future is looking bright

TOWR’s efforts to expand offerings to fiber will drive up its growth over the long run, as it takes advantage of low fiber-based internet penetration and 5G adoption. However, ongoing consolidation could result in moderate topline growth in ’22 and ’23, respectively. Maintain BUY, with a target price of IDR1,500, implying 12.3x ‘23F EV/EBITDA, while it is trading at 10.1x or slightly below 5-year historical mean. Strong top line growth, yet dragged down by financing costs TOWR's net profit came in at IDR868 bn in 3Q22, bringing 9M22 net profit of IDR2.56 tn, or representing 72.4%/71.5% of ours/consensus. Soft bottom line yoy was dragged down by higher finance costs that jumped 120.9% yoy (-8.8% qoq) amid high interest environment. Meanwhile, 3Q22 revenue grew 3.5% qoq to IDR2.79 tn, making up 9M22 revenue of IDR8.11 tn, above ours/consensus at 79.8%/76.4%. Nevertheless, TOWR managed to maintain low growth of cost of revenue at 1.6% qoq, although cash cost added 4.8% qoq. Furthermore, 3Q22 EBITDA increased 3.3% qoq with margin relatively flattish at 85.9%. However, 9M22 EBITDA reached 79.1%/76.3% of ours/consensus or went up by 33.5% yoy. TOWR's net gearing was improved to 2.9x in 9M22. Offerings diversification comes to fruition TOWR's towers and tenants grew 1.5% qoq and 0.6% qoq in 3Q22 to 29,708 and 55,029, respectively, bringing tenancy ratio down slightly from 1.87x in 2Q22 to 1.85x. The lower tenancy ratio in 3Q22 was in line with industry’s ongoing telco consolidation phase. Nevertheless, TOWR's monthly lease fee/tenant grew 1.1% qoq to IDR13.2 mn, yet dropped 3.7% yoy in 9M22. On the other hand, TOWR managed to expand fiber revenue contribution to 9.5% in 9M22/10.5% in 3Q22 as revenue generating fiber reached 121,289 kms following Alita acquisition. Outlook remains bright despite consolidation In the midst of industry consolidation, we expect TOWR's growth to be modest in '22 and '23, respectively due to limited potential acquisition going forward. Therefore, revenue in tower will be mainly driven by organic growth. Nevertheless, we are sanguine that mobile consolidation will encourage providers to improve service and coverage expansion which mean higher demand potential for towers, despite potential pressure on lease rate. Over the long run, TOWR aims to diversify its offerings especially fiber FTTT/FTTH on the back of remained low penetration of fiber-based internet service and 5G that must be supported by fiber optic backbone. Reiterate BUY on the back of fiber expansion We maintain our BUY call with a DCF-based price target of IDR1,500/ share, implying 12.3x 2023 EV/EBITDA or below +2SD 5 year-historical mean. We like TOWR's move to expand fiber infrastructure in an anticipation of growing fixed broadband demand going forward and incoming 5G technology. However, we note that TOWR could be affected by high interest environment given increasing blended funding cost that may hurt EPS growth, as well as ISAT’s network integration program post-merger.