TOWR - Gearing up for fiber expansion

TOWR's early adoption of fiberization has come to fruition, as non-tower was the prime revenue driver +27.5% qoq in 4Q22, amid declined revenue from tower -1.4% qoq. TOWR plans to spend 50-60% of capex for non-tower while expecting revenue generating fiber to grow 20% yoy in '23. Maintain BUY with target price of IDR1,400, implying 11.5x ’23F EV/EBITDA. 4Q22 mostly in line, but earnings dragged by surging finance costs TOWR's 4Q22/FY22 net profit was flat at IDR883 bn/IDR3.4 tn, arriving at 96.1%/96.8% of ours/consensus estimates. This was dragged by surging finance costs by 74.5% yoy in FY22 or 17.1% qoq in 4Q22. Meanwhile, TOWR managed to book a strong revenue growth yoy of 27.8%/0.4% qoq in FY22/4Q22 to IDR11.04 tn, or beating ours/consensus at 105.4%/104.4%. In the midst of high interest environment, worth noting that TOWR underwent efficiency efforts, reflected by lower operational expenses -27.2% qoq on G&A, as well as cost of revenue -1.6% qoq on declined depreciation, resulting in EBITDA margin to surge at 87.1% in 4Q22 or +120bps. B/S wise, net gearing surged yoy to 3.0x in FY22. Fiberized tower in limelight TOWR's 4Q22 top-line was mostly underpinned by non-tower segment that grew +27.5% qoq to IDR2.15 tn, bringing its contribution to expand from 17.8% in FY21 to 22.0% in FY22. Meanwhile, revenue from tower decreased 1.4% qoq in 4Q22, in line with lower tenancy ratio from 1.85x/1.88x in 3Q22/FY21 to 1.81x in 4Q22 as tenant loss stood at 1,062 qoq that in part, caused by IOH's network relocation initiatives following Hutch-ISAT merger. However, we highlight monthly tower/ lease fee increased 0.5% qoq to IDR13.3 mn. Meanwhile, revenue generating FTTT jumped 112.6% yoy/23.5% qoq in FY22/4Q22 to 149,811km with utilization stood at 169%, following strong demands for data. Banking on strong digital infrastructure TOWR seems to shift focus to non-tower segment, as it takes up 50-60% of IDR6 tn capex deployment this year. It continues expanding FTTT with revenue generating fiber estimated to add c. 30,000km in '23, banking on built to suit (BTS) model on tower tenants. Flattish revenue growth from tower is expected with FREN (non-rated) and especially, EXCL (BUY; TP: IDR3,300) are projected to make most of additions as the latter is strengthening capacity in ex-Jakarta and Jakarta areas. TOWR is entering currency swap contract and planning issue IDR bonds in 2Q23 as venues to refinance while diversifying finance source amid high interest rate. Blended finance cost is estimated to climb c. 50bps. Reiterate BUY on the back of non-tower diversification Maintain our BUY call with a lower DCF-based price target of IDR1,400 (previously: IDR1,500) as we raise TOWR’s cost of debt. Our price target is implying 11.5x '23F EV/EBITDA, while it is trading at 9.3x '23F EV/EBITDA or within -1SD 5-year historical mean, or rather appealing. Fiber expansion that have started to show meaningful result amid MNOs’ focus to improve its 4G services, fixed broadband roll out and upcoming 5G should be solid driver for future growth. We fine tune our '23 and '24 figures on higher than expected non-tower revenue figures seen in ’22 that should continue to compensate flattish tower segment.