Y-y and q-q improvements in line with our thesis of a better environment for tower companies; maintain Buy and TP of IDR820
We have become more positive on the Indonesia tower sector’s long-term outlook.
First, we believe the relocation risks from the merged EXCL (EXCL IJ, Buy) and FREN (FREN IJ, Not rated) entity should be muted, as opposed to when ISAT (ISAT IJ, Buy) and Hutch 3 Indonesia (H3I, unlisted) merged, considering the overlapping sites for EXCL and FREN are minimal.
Second, site relocation and contract repricing from the ISAT and H3I merger has ended, implying that going forward, to improve network quality, ISAT would have to install new sites (both towers and fiber).
Likewise, spectrum re-farming of 3G sites to 4G sites has also ended. This indicates that operators such as EXCL and TSEL (unlisted), which have conducted significant spectrum re-farming in the past few years, will also have to install new sites (both towers and fiber) to improve their network quality.
As such, we maintain our Buy rating and DCF-based TP of IDR820 on the shares of Mitratel.
3Q24 results summary
In 3Q24, MTEL reported revenue of IDR2.4tn (+5.5% q-q; +10.5% y-y). This brings 9M24 revenue to IDR6.8tn (+8.7% y-y), representing 74.2% of our FY24F revenue projection.
3Q24 EBITDA reached IDR2.0tn (+6.2% q-q; +15.8% y-y), which brings 9M24 EBITDA to IDR5.7tn (+12.1% y-y). This implies an improvement in EBITDA margin to 83.1% (+250bp y-y) and represents 76.0% of our FY24F EBITDA of IDR7.46tn. We attribute the margin expansion to: 1) economies of scale; 2) a higher co-location (co-lo) ratio; and 3) stable rental rates. In our opinion, MTEL should see a gradual improvement in its margins in the coming years, with increased scales as well as higher co-los.
On the bottom line, MTEL booked 3Q24 profit of IDR468bn (-13.8% q-q, +14.5% y-y), bringing 9M24 profit to IDR1.5tn (+7.1% y-y). This comprises 69.8% of our FY24F profit.
Valuation and risks
We derive our TP based on DCF using a risk-free rate of 6.2%, an equity risk premium of 7.44%, beta of 1.0x, and a terminal growth rate of 2.5%, all of which remain unchanged. At our TP of IDR820, the implied FY24F EV/EBITDA is at 11.2x (compared to 8.6x at the current price). Downside risks include 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.
Fig. 1: MTEL quarterly results
MTEL Quarterly IDRbn
1Q23
2Q23
3Q23
1Q24
2Q24
3Q24
Q-Q
Y-Y
YTD24
YTD23
Y-Y
Rev
2,055
2,074
2,143
2,206
2,244
2,368
5.5
10.5
6,818
6,273
8.7
- Tower leasing rev
1,920
1,907
1,939
2,058
2,063
2,214
Op. profit
948
833
880
1,009
1,006
1,039
3.3
18.2
3,054
2,660
14.8
Margin %
46.1
40.1
41.0
45.7
44.8
43.9
44.8
42.4
Ebitda
1,676
1,677
1,701
1,841
1,855
1,970
6.2
15.8
5,666
5,055
12.1
Margin %
81.5
80.9
79.4
83.5
82.7
83.2
83.1
80.6
Profit
501
521
409
521
543
468
(13.8)
14.5
1,532
1,431
7.1
Margin %
24.4
25.1
19.1
23.6
24.2
19.8
22.5
22.8
Source: Company data, Verdhana research
INVESTMENT RATINGS A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general.
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