TOWR - Monetizing fiber asset synergy

TOWR's 1H23 results were broadly mixed with top-line and EBITDA beats ours/street’s estimates by 0.9-1.5% on lease rate improvement while 1H23 net profits miss by 7.5%/8.5% of ours/consensus estimates amidst higher costs. As such, we lift ‘23F/’24F revenue and EBITDA by c. 2-3%, yet reduce its earnings forecast by -7.5% on adjustment of CoF assumption. We like TOWR’s shifting focus to digital infrastructure and reiterate BUY with TP of IDR1,380 while currently trading at an appealing 9.0x forward EV/EBITDA. Still weighed down by higher costs TOWR's 2Q23 earnings rose 7.2% qoq to IDR807 bn, bringing 1H23 net profit of IDR1.56 tn or declined 7.8% yoy. This came in below ours/consensus at 42.3%/41.5%, caused by higher costs +2.2% on D&A, while cash cost to revenue increased by 12bps qoq. Despite flattish finance cost +1.04% qoq, annualized CoF inched up from 6.5% in 1Q23 to 6.7% in 2Q23. Furthermore, TOWR's 2Q23 EBITDA grew tepidly 1.5% qoq to IDR2.48 tn, pressuring EBITDA margin to decline 12.4bps/90.4bps qoq/yoy. Nevertheless, 1H23 EBITDA still topped ours/consensus by 1.2%/0.9%. This was supported by tower revenue growth of 2.1% qoq in 2Q23, making up revenue of IDR5.78 tn or achieving 51.5%/51.3% of ours/consensus. Leverage was improved YTD with net gearing down to 2.8x in 1H23. Improving lease rate 2Q23 top-line growth was largely supported by tower revenue that surged 3.5% qoq as it recorded an improvement in monthly lease rate/tenant by +3.6% to IDR13.2 mn thanks to its diversified services to customers, in our view. This despite a slightly lower tenancy ratio of 1.80x in 2Q23 (vs 1Q23: 1.81x) on the back of 49 net-churn tenants while net-add was 35 towers. Meanwhile, tower fiber revenue grew 3.3% qoq/74.8% yoy in 2Q23/1H23 as TOWR’s revenue-generating fiber expanded to 172,593 kms. Striving for more fiber synergy Management aims to shift its business focus from tower to digital infrastructure, especially FTTT- FTTH and connectivity, while striving to achieve synergy value on these fiber-based businesses. On FTTH, the company has an exclusive deal with EXCL, committed to deliver 500,000 km home passes, which is managed under B2S model for a payback period of 7-8 years on a 10 years contract with an expected return of c. 12%. The deal also enables the company to obtain incremental upside from the basic target that has been agreed upon. We revise up '23F/'24F revenue and EBITDA by c. 2-3% amid higher revenue recognition of other scope of works. On the other hand, we cut our '23F/'24F earnings by 7.5%/7.8% as we lift our CoF assumptions to 6.3% (vs. 6.2% on previous forecasts). Reiterate BUY with TP of IDR1,380/share Reiterate our BUY call with slightly lower target price of IDR1,380 (previously: IDR1,400), implying 11.4x '23F EV/EBITDA. Note that at current price, TOWR is trading at 9.0x forward EV/EBITDA, rather appealing at slightly above -1SD 5-year historical mean. TOWR has shown meaningful improvement to diversify away from tower to digital infrastructure that should prop up its performance over the long run. However, risks to our call included 1) higher leverage compared to peers; 2) stubborn finance costs.