Over the past 2-3 years, organic growth has been slow for Indonesian towercos. This has mainly been due to two reasons: 1) spectrum refarming of 3G sites to 4G sites, and 2) site relocations from the ISAT IJ (Buy) and Hutch 3 Indonesia (H3I, unlisted) merger. We believe that Indonesian towercos have gone through the worst and are out of the woods. We expect tenancies, and therefore earnings, to improve for Indonesian towercos.

Recently, ISAT and TLKM IJ (Buy) posted their 1H24 results (Fig. 1 and 2, respectively). We note that both the operators no longer have any 3G BTS (base transceiver station). In the same manner, EXCL IJ (Buy) (which has not released its 1H24 results – Fig. 3) has only 377 3G BTS left (-64% q-q, -70% y-y). We expect EXCL to completely shut down its 3G network by end-2024.

Previously, operators could improve their network quality simply by refarming spectrums that were used for 3G with 4G, thereby increasing their 4G data capacities with or without very limited tower site additions. Given that operators no longer have (or have minimal) 3G BTS left, we can conclude that spectrum refarming of 3G sites to 4G sites is over, and operators will have to install new sites (both towers and fiber) to improve their 4G network quality. With 3G shutdown complete, we see evidence of a resurgence in organic growth within the tower sector, given that all the three operators had an all-time high number of BTS as of 1H24 (1Q24 for EXCL).

Fig. 4 shows that organic growth for tower companies have picked up in 2024 (we have used a conservative projection for TOWR IJ [Buy], which has not released its 1H24 numbers). Excluding MTEL IJ (Buy), which due to rent discounts in 2023 and a low base effect (whereby previously [before its IPO] non-Telkomsel (TSEL, unlisted) operators were excluded from renting most of its sites) has seen strong growth, both TOWR and TBIG IJ (Buy) have seen a recovery in organic growth. 1H24 additional sites and tenants for both companies are on track to outpace total additional sites and tenants in FY23. In fact, TOWR and TBIG have seen more additional tower sites in 1H24 than they did in FY23. Our conservative 2Q24F tenancy growth for TOWR is due to the impact from IOH relocations/or cancellations, which have translated into lower tenancy growth vs growth in the number of towers. We believe going forward, this should (gradually) reverse (i.e., tenancy vs tower growth should be similar, ultimately resulting in higher co-locations when tenant growth exceeds tower adds).

We reiterate that the worst is over for TOWR, as Fig. 5 shows that revenues from ISAT have gradually recovered (+4% y-y in 1Q24). As ISAT’s site relocation ends, in order to improve network quality, ISAT will have to install new sites (both towers and fiber) going forward, in our view.

Fig. 5: Tower revenue split

TOWR remains our top pick in the Indonesia tower space, as it is the most profitable tower company in Indonesia (while also being the most inexpensive). The company has the lowest cost of funds among towercos, meaning that it can offer much more competitive pricing for mobile operators. It is also the only tower company in Indonesia with significant fiber assets, thereby providing the company with additional sources of growth. After all, we expect increasing data traffic for both mobile (MBB) and fixed (FBB) broadband services.

Fig. 6: FY24F EV/EBITDA x

Valuations and risk

TOWR – Our DCF-based TP of IDR1,780 for TOWR assumes a risk-free rate of 6.2%, a discount rate of 7.4% and a terminal growth rate of 2.5%. We assign a WACC of 9.0% to reflect rising interest rates. At our TP, the stock would trade at 13.4x 2024F EV/EBITDA. Downside risks include adverse macroeconomic developments, irrational competition leading to lower rental rates, lower-than-projected tower renewal rental rates, slower organic growth, higher opex trends and/or co-los, and/or difficulties in securing new sites to accommodate telecom operators' network expansions as well as consolidation of cellular operators.

TBIG – We derive our TP of IDR2,300 based on a DCF-based model, assuming a risk-free rate of 6.2%, cost of debt (after tax) of 5.3% (6.0% earlier), cost of equity of 14.4%, equity risk premium of 7.4%, WACC of 8.2% (8.7% earlier), a terminal growth rate of 2.5%, and beta of 1.1x. Downside risks include adverse macroeconomic developments, irrational competition leading to lower rental rates, lower-than-projected tower renewals, slower organic growth, higher opex trends and/or co-los, and/or difficulties in securing new sites to accommodate telecom operators' network expansions.

MTEL – Our TP of IDR820 is based on DCF, assuming a risk-free rate of 6.2%, equity risk premium of 7.44%, beta of 1.0x, and a terminal growth rate of 2.5%. At our TP, the implied FY24F EV/EBITDA is 11.2x (compared to 8.6x at the current price). Risks are adverse macroeconomic developments that would reduce operators’ network expansions (either build-to-suit / B2S or co-lo), irrational rental price competition, a higher tower rental churn rate, difficulties in securing new sites to accommodate B2S, and/or higher opex increases.