PT Sarana Menara Nusantara Tbk. (TOWR.JK) Earnings Call Transcript & Summary

Good afternoon. I'm Sachin Mittal. I lead the TMT Telecom Media Technology Research at DBS Bank. Along with me is Nash, who actually covers our Indonesia telecom sector space and Internet space. And we have with us management of Sarana Menara Nusantara, Mr. Adam Gifari, and he will be sharing the results briefing with us in the next few seconds. Okay. Over to you.

Hi, everyone. Thank you, Sachin. Thank you, Nash. I hope everybody is well. We're dialing in from Jakarta. Sachin is in Singapore. Hope everybody is well. So we just released our first quarter -- second quarter results yesterday. The company is very busy at the moment, consolidating companies. I think we're showing very good results. The one that we acquired last year, IBST, now it's June, has passed. So the company has been 12 months with us. The company is running 88% EBITDA margin now with about approaching 40% net profit margin. So the synergies, efficiency of tower business and fiber that we have done in the past has been repeated with IBST, which we feel good about. The company is running like about IDR 400 billion -- IDR 425 billion as of June yesterday. I just saw the number. I sit in the Commissioner Board member. And then now let's walk through the Sarana one, and then we can take it from there for Q&A. Right now, we are with 35,800 towers, a total of still amount of fiber optic, 170,000 kilometers. We retain still a much of our build-out under build-to-suit model, meaning that somebody is undertaking to pay 10-year contracts if they use our fiber and towers. I think the model is likely intact. We just did a Fitch rating review on this page. And then S&P is about to go into rating committee, but we were briefed by the analyst that came over 2 weeks ago in Jakarta that there should be no change to our investment-grade ratings for Sarana through Protelindo, our largest and most important subsidiary. Our ROI, 8% and then return on equity, 17.5% -- just one highlight. June, we are showing these numbers. And then in a matter of 3 weeks after June, we received the money from the rights issue, IDR 5.5 trillion. The dilution is about 13.7%, which is not as high as what people thought it would be because the standby buyer agreed to issue the new shares at a higher than the market price. So a lot of investors are taking the benefit of that. So when the announcement of IDR 680, the rights issue price was done, the market was about IDR 520 or IDR 510. And immediately after that share price went up, but the undertaking agreement by the standby buyer was already signed and submitted to OJK. So show must go on. And no issue on this one. But it shows the strength and commitment of the shareholders, of the family behind this company. And then since the dilution is about 13%, we don't expect like much of a hassle and a lot of people made money from buying up when it was [ 400 or 500 handle and now it's 600 handle ] in the share price. Sarana shares is included on all these bunch of indexes. We have also a very good ESG footprint. You can talk more about this later on when we meet [ in company more ]. And then the capital management, we have a very good capital management. I think the highlight of this quarter, second quarter is about how excellent the operations -- operational performance is. We actually collected IDR 1.6 trillion [ under which ] that we can use the money to pay down debt. So if you look at the capital management part of the second quarter compared to that with the second quarter, you can see the gross debt of the company actually went down, IDR 1.6 trillion and borrowing costs went down from [ IDR 6.25 to IDR 6.15 ]. And this is not taking into account the next expected BI rate cut that should happen in second half this year. I hope everything goes well. And Telkoms has reduced to 3 operators in 2025. I've been in the business for almost 20 years. So I think this is the moment that we are looking for the right kind of market structure. I think we are -- we will be working with Sinar Mas, XL, XL Smartfren after their merger on this consolidation of networks, making sure everything is smooth. This is not our first rodeo. We've done this before. We've done the heavyweight lifting with the largest merger in Indonesia, Indosat and Hutchison. So the next one, XL and Smartfren should be much more manageable since we have gained so much scale in fiber and towers that operation should be stable going forward. I think right before this call, we were just talking with DBS analysts, Mr. Sachin and then Mr. Nash about what's the kind of aspiration that XL Smartfren would want to have going forward. I think -- I think they see -- they realize the value of multiple players becoming 3 and now it has materialized legally. It's just going through the motion of technical and legal cleanups between the companies, including us, Protelindo and XLS. So it should be okay. I think we should be coming out okay. I think you've seen our ROE 17.5%, ROIC 8%, having seen a big merger as big as Indosat and Hutchison in 2022. So going forward, we should be with the skill and experience to manage such a merger. So going into the future, I think this year, another focus of the market will be to see what's happening with the spectrum auction, who's going to win that and then who's going to be rolling out 5G. The information that I get from this market is the same as what you guys are seeing or you guys are compiling looking at the newspaper headlines. So let's see what happens. I think we focus not only what's happening on the outside, but we also focus into our internals. We have to be sure that we -- when we roll out, we always utilize whatever we have already in store, increase the utilization, reduce the CapEx, right, reduce the OpEx, whatever we can reuse for different types of purpose in the same area, it can be towers, it can be fiber, and we try as much as we can to reuse that. So we do not sitting around all day waiting for colocation to come, which was the early -- the first 5 or 10 years of the company. But now we are actually very active looking for other types of purpose of whatever asset that we have in the inventory of the company. So that's what we've been doing every week -- of the day of the week in the company. I think fiber remains the model that we have. We see -- we can talk further, but there's a bit of an increase on fiber as well as tenancies first quarter coming from basically Indosat and XL executing what was already -- to some extent also Telkomsel, just executing what was promised during first quarter and then executing that. But the tenancy ratio still a bit down, 1.62 just last quarter. This quarter, 1.61 but we don't see that to be much of a problem. As long as we can get scale, we can manage our costs, we should be able to defend margins, even though the non-tower segment is growing faster than the tower. Margins and stays are about 83%. We focus a lot on getting contracts. I think the reason why people want to invest or commit to long-term contract is actually a healthier wireless and fiber market, fiber Internet. So I think we are -- we want to be that counterparty. So you'll see this long-term contracts attempt to find long-term contracts will come out of us always because we like getting scale, getting contracted revenue and then deliver the best value for that company. We don't mind seeing our capital being put into something that goes towards 6 to 7, 8 years kind of payback from EBITDA as long as we know there will be value of this asset that we have going forward. So that's the thought process that we have today. And this is the towers that we have across the country, Jawa Bali, 21,000 towers; Sumatera 8,100; Kalimantan 3,300; Sulawesi 2,700 and then Papua used to be closer to 0 like 6 to 12 months ago, now it's 500 towers. So I think this is quite encouraging. And then this is the first 2 lines, fiber-to-the-tower kilometer generating revenue in Sumatera, say it's 58,700. That's the amount of cable runs that we are charging, including the second core or third core. And then the FTTT kilometer pole in the second line is basically the physical cable that we have. So you can see that Sumatera has gained traction in utilization ratio. You can do the math yourself. Jawa approaching 2x, you can see it from here. Bali, Sumatera 1.5, 1.6 that wearabouts. Similarly with Kalimantan and Sulawesi. Kalimantan, Sulawesi is probably 1.2, 1.3. So this is the kind of thing that we like to do. So we are probably the only company in Indonesia or let's start -- let's get back one step. So Indonesia is the only market from what I can gather, talking to international analysts that has build-to-suit fiber model under long-term contracts. That's why the Wall Street banks don't typically can understand that we have build-to-suit fiber in Indonesia, and we go as far as 10 years. And in certain markets that we have like Sumatera, Kalimantan and et cetera, in this page that you are seeing, we market the second core to tenant # 2. And then whatever excess capacity in cores, we try to use for other types of businesses, FTTH or connectTP. And whenever we build a new fiber under FTTH, then we try to use it for FTTP as well. This is the kind of versatility and commitment to like investment, being patient about it as long as our customer is doing well, and we are part of that -- them being successful, I think we should be getting traction for more business into the future. We like the fact that we like to focus on arm's length contracts. We earn the business that we try to get rather than using non-sustainable measures of business dealings. So again, this page is about fiber. The total length is about 266,000 fiber to the tower -- comprised of fiber-to-the tower of almost 220 kilometers revenue-generating kilometer fiber with a physical cable of 122. And on top of that, we also have FTTH kilometer pole and then Backbone and Submarine about almost 25,000. Now going through what we have done in the past 12 months. We added about 4,300 towers. We added 27,000 kilometers of revenue-generating fiber. We added 4,500 activations under connectivity which means that we are still very much active. We can talk about revenue numbers later on. And then 71,000 home connect additional with additional 571,000 home passes. And then we are maintaining investment-grade ratings, supported by the shareholders, including the standby buyer. The rights issue has been concluded. The dilution is about 13%. And then the -- we are using today actually to pay down debt. The use of proceeds has been listed in the prospectus. And then what do we do with the relaxed borrowing headroom, we can -- we will see in the next coming few weeks, coming months on what kind of organic or inorganic opportunities after we pay down debt from the rights issue money, okay? So towers totaled 35,800. I think this should translate if you do your [ excess ] spreadsheet. That means I think we added about 123 gross tenants -- net tenancies during the quarter. That's coming from XL and Indosat. And then fiber-to-the-tower, you also see a smallish increase when it comes to fiber-to-the-tower business. Similarly, I think that comes also from XL and Indosat, basically cleaning up guys whatever we have received in orders in previous quarters, we're just finalizing. That's why the increase is not that much. I think the most of the increase is in connectivity. You will be able to see that the number seems to be going down. But actually, what has happened late last year, late 2025, is that one big government account was not renewing with us. But if we -- if you strip out that big government account, actually, our organic and our non-government connectivity account increased by 15% to 20% year-on-year. So we just have to wear out this impact of a one-time nonrenewal of government account. And then as the assimilation of the non-government account growing faster than the decrease, then we should see a net increase. And then on FTTH, the 11.6% penetration rate, I think the previous quarter was about low 11%. So we see an increase in penetration rate, mostly from Indosat and XLS. And then this is our diversifying business base, you see that our CapEx has gone down. This is as a result of our being efficient on where we spend and the timing of it of CapEx spend. We are -- this year, 2025, as a general comment, we have committed to basically conclude with all the relocations that Indosat and Hutchison would require for the merger. So this year, 2025 will be the final year. And then this year, at the same time, we're also seeing XL Smartfren merger. So we are still waiting to work out through the details with XLS. But I think we don't expect -- we are hearing that they want to basically continue with a lot of the strategy before, which is a focus on 4G and then maybe we can do a win-win solution between us and them. We are basically, used the balance sheet already to acquire IBST to build towers here and there. I think a lot of these assets that we own, including the fiber that we built for them should be able to be useful for them with the merger. And then tenancy and utilization ratio for tenancy ratio went down, 1.64 to 1.62. And then for utilization ratio FTTT, it declined a bit because we added more fiber than we added additional power usage. So that's where we are. And then you see after IBST on towers, we increased a bit to above 200,000 -- what is this to the right? Number of tenancy is about 54,000 here, the dark blue. And then the lighter blue is about the number of towers to the left, which is 35,000, 36,000. And then this one, fiber-to-the tower generating revenue, almost 220,000, Tower revenue -- tower -- number of towers flat. The number of tenancies increased a bit, 130 that were about. And the number of [ station ] actually grew very quickly, I think 15%, 20% growth. So this is the part that I was talking to you about. And then revenue towers is 7%, a bit less than 7% and then revenue non-tower is about 37%. EBITDA 11% IFFO growth, which is EBITDA after net interest is about 9.5%. Leverage profile, net debt to EBITDA, it's 4.6. We should see this number closer to 4.1, 4.2 after consolidation -- after rights issue and the acquisition that we have done. And then you see here gross debt IDR 50 trillion. It used to be IDR 51.6 trillion this last quarter. So we're paying down debt quite aggressively. Average cost of fund is 6.15%. If you round it up, it's 6.2%. So actually, there's a bit of a decrease. And we're hopeful second quarter -- second half should be another decrease in BI rate, the policy rate from Bank of Indonesia. This is the EBITDA, 2.2% in growth year-on-year. If you look at net income, 5.1%. If you look at revenues, 2.5%, operating income, $1.2 billion. So stable pro forma given the busyness of the company and then the headwind from various factors. If you remember, April was the tariff announcement. Rupiah was weaker, but now it's back up again. But Indonesia is able now to announce that there should be another cut later this year. So we're quite cautiously optimistic in managing our balance sheet. And this is the cash flow statement. Collection IDR 7.8 billion, CapEx plus OpEx, interest IDR 1.5 billion, acquiring Remala and then loan proceeds, paid dividend and a cash balance of IDR 782. On the profit and loss movement quarter-on-quarter and year-over-year, I think 2.5% year-over-year, revenue 0.7% decrease quarter-over-quarter. EBITDA, 2.2% increase and then 1.2% decrease quarter-over-quarter. Net profit, IDR 5.1 million and IDR 5.8 million for each of year-over-year and quarter-over-quarter. Towers increased for its segment 2.9%. Fiber-to-the-tower increased 9.9%. Connectivity 6.8%, and this is due to the government accounts I was telling you about. Fiber-to-the-home 29.3% and total revenue growth is 3.9%. So this is what we were trying to say at the start of the year when we talk about the growth is actually from fiber and then connectivity should be trying to offset the negative here, but towers is there. And then fiber to tower is also there. Again, the use of fiber to tower is actually very easy when people want to increase the capacity of their wireless network, they can use our fiber [ to fiber towers ] to towers. So we have a good position in the industry. And then operational data, tower count increased by 4,300, 13.7%. Tenancy 3,800, 7.1% so again, still towers are growing faster than tenancy, so tenancy ratio goes down. Fiber to the Tower 14.4% when it comes to kilometer chargeable. And then connectivity 31%. In terms of activation, FTTH Home Connect increased 52% from 155,000 to 207,000. And this is a lot of questions during when dollar went stronger. But I think we actually booked translation gain during second quarter. So this slide should not be any issue about -- should be able to answer questions about foreign exchange exposure, ladies and gentlemen. So I'm not going to spend too much time on this slide. Okay. So that's the -- that's all I have today. Feel free to come back to me with questions to be led by Mr. Sachin. Please feel free.

[Operator Instructions] Maybe I can get the ball running with the first 2 questions. So how do you -- I mean, this is an often asked question that this XL Smartfren merger in terms of time line and in terms of the complexity or the capacity, how do you see this is similar or different versus the Indosat and Hutch merger. I mean, how do you -- what is your thinking here? And secondly, now that your balance sheet is very healthy after the rights issue, where do you see more number of -- where there are more number of fragmentation, whether in the fiber to the -- in the fiber market? Or do you see more -- still more in the tower market? Where do you see which is more fragmentation and hence, more opportunity for you to acquire? Two questions.

Yes. Number one, I think it will be an overstatement -- sorry, understatement to say that a merger will be easier than the other merger to conclude because I think what I'm hearing is that multiple vendors for equipment also creates additional capacity to the network consolidation. But I think XLS had an earlier start in talking and discussing what's the new network going to be. I have not heard a single week where the new configuration for the merged entity is finalized. I have not heard that in meetings. So I expect to be changes. I think what's going to happen, there will be gradual implementation. And I think it's likely to be by area. So say, Greater Jakarta, [indiscernible] that's the first one. And then only after that, then people do depot, maybe Bogor as part of that Greater Jakarta, so the later part. So in terms of time lines, I'm thinking 2 years, given that Indosat XL -- sorry, Indosat and Hutchison concluded in year 3. And I'm talking about the relationship between the STP merger entity with us and not just the taking down of equipment and then move elsewhere on those equipments, but rather restructuring everything, the locations of the new leases, get everything cosigned by both parties, the newly merged entity and the STP tower companies. I think I mentioned in the call that we are about to conclude 2025 with the last batch of relocations. So that means it took a full 3 years from 2022 January when they first announced the merger. So I think -- but there's a potential for XLS to be concluded in about 2 years. And then what will be the next target of acquisition you mentioned, Sachin? I think we are trying to digest already several acquisitions. This is not to say that we will not be participating. People ask us a lot about what's happening with Indosat Fiber. No comments on that. I think I also observed that the media is about -- a bit quiet on this one, on this front, yes, which means -- nobody can say anything, even the potential bidders can say anything. Typically, we have to wait around for the seller or the adviser of this authorized adviser of the seller to say something. The -- we are looking at opportunities, but this is not to say that we will jump board and then hop on into buying something like immediately from the time we get the money from rights issue. In other words, my answer to you, Sachin, is that we don't know which one that we will try to get. We have -- we are working for several organic opportunities. I think there could be a chance that after mergers that people are feeling good about. And then the talks about price repair, if it materializes, I think something could happen on that front as well, which means that it's just organic, which is very good for everybody. Obviously, I invite everybody on this call to monitor this together. We are in the business and you guys in the markets as well as your clients, your investors. So let's always check and then feel free to [indiscernible] and invite me for coffee and talk about what's happening in the industry. But I think there's already talks about discussions trying to do something about this. It's just -- I don't know the timing of this when it comes to price repair, okay? So going back -- back to you, Sachin.

Yes. So just a follow-up. So on one hand, we are saying there's a more... it's more complex than the Indosat and Hutch in terms of more decision-making required?

Actually, no, I'm saying is that Indosat and Hutchison also had similar problem. They had, I think, Nokia, Huawei and Ericsson as their vendors. With XL Smartfren, they have Huawei ZTE. I hope that puts the next -- the third name. So -- but they started a bit earlier with XLS, given that a part of XLS management is also part of [indiscernible], who has done merger before with Axis sometime back in 2016. So those are my assumptions, Sachin.

Okay. So -- I mean, not much different in terms of timeline. I mean you saying it could be 3 years, this could be 2 to 3 years again, similar, very similar.

Yes. But yes, yes, I think that's possible.

Got it. [Operator Instructions] So while waiting for the question, I have just this question again on your latest acquisition in the Remala Abadi, right, Data IG. What do we expect from this -- because this is actually not -- you have a 40% stake or so, right, in this company. So how should we think about the impact that we will see where and what time frame we will see the impact and which line of your income statement will see the impact of this merger?

Okay. So the accounting method of consolidation is one thing. What we are looking at is actually the more strategic basic reason why we buy this company is to work together to increase utilization of our fiber. And whenever there is an area of -- new area of fiber that people need, we can build for them. So rather than working as separate companies, so we are -- we will be working together basically, making it an aggressive market penetrator, if you will, going into new markets, getting new accounts, corporates, small to medium enterprises, that kind of connectivity accounts. And then the impact on us is, I think we are still talking with our auditors on how to report this. We had questions about this as well previously. And then we are happy that the company is growing very fast. If you look at their perspectives. They're #1 typically, in Indonesia, if you drive our prospectives, then the first one that you mentioned is the most important one, including if it's a risk factors. But if it's like what's their business profile, their #1 is actually connectivity business, and then they serve a lot of government accounts, small to medium enterprises, and they're actually smaller than -- a smaller player for B2C. So I'm more keen towards saying that they are more of a big kind of customers provider. And then the -- it's -- if you look at the growth rate, the company has a small asset. But if you look like in comparison to their revenues, actually, they are very aggressive, not having too much asset, but they are able to deliver such a growth. So that's the kind of thing that the thought process if we can help them use our assets or if they need more assets in the future, then we can work together. And we have the capability to spend CapEx at the end of the day. Another point about CapEx is that if we are able to become the #1 best-in-class cost structure for CapEx and OpEx for one item that we have spent in the market, then we should be in a better position to compete. So that's the thought process we have, Sachin.

So would we see the impact on your EBITDA when you integrate this company or no it will below the EBITDA?

I think that should be a discussion to have with our auditors, and we'll come back to this later on.

I invite a question from the floor. There's a question from [ Sabrina ].

Yes. I only have one question. So regarding the FTTT, I think it's the first time I'm seeing like quarter-on- basis -- sorry, on FTTH, I think it's the first time that I see on a Q-o-Q basis that actually the revenue went down. So maybe can you share some colors on that?

FTTH or connectivity.

FTTH. So this quarter is IDR 146 billion versus last quarter was at IDR 168 billion.

Okay. I'm missing. So quarter-over-quarter is decrease? Are you sure?

Yes.

Because on this slide, Slide 20, I'm seeing connectivity was decreasing, not the FTTH.

Okay. Sorry, I might miss something. I'll come back.

Yes. Yes, that's okay. Because in my mind, connectivity is -- so FTTH is the product that we have already a lot of assets for. It's just a matter of getting it renewed, getting it marketed. The -- sorry, the B2B partner of ours, they have the assets already. They just have to market it. And then we decided before we roll out, before we decided which market that we want to go together, right? So there's not much reason for them to basically -- oh, this is the raw market that we want to go. So it's just a matter of monetization at the end of the day. I mentioned 3 times already in the earlier on that the decrease is on the connectivity because of certain government accounts. And then if we have several quarters going off already, then you should be able to see this decrease to be taper off. So that's -- yes, sorry. Sabrina, you're okay?

I think I'm seeing the right number. I just checked the corporate presentation. I think your FTTH in first half was [ 314 ], right? Meanwhile, on the 3 months it's [indiscernible].

Give me 1 minute, and what is your question?

Okay. So in first half, I think FTTH is IDR 314 million. And then in 3 months '25, it's IDR 168 billion for the FTTH. So second Q figures for FTTH is IDR 146 billion. So on a quarter-on-quarter basis, I think has come down for the first time. So I'd just like to check what's causing this decline.

I'm confused because, okay, I think it's just a matter of billing than anything else, Sabrina. It's just a matter of billing because I'm seeing here the net number Home Connect actually increased quarter-over-quarter.

Okay. Okay. But I think I'm referring to the revenue.

Yes. Yes. I'm referring -- for you to claim revenue going up or going down, then you need to have the drivers, right? And I'm looking at the drivers in front of me. So, Home Connect generating revenue actually increased quarter-over-quarter from first quarter of IDR 182,000 and in second quarter, IDR 207,000. I think it's -- there's a bit of a billing catch-up that is between us and the B2B partner, something like that can happen. But I'm seeing here the activity actually goes up.

Okay. It's going to [Technical Difficulty]…

Yes. I'm giving you the numbers, yes. I'm giving you the numbers, yes. The Home Connect accounts as of second -- first quarter is IDR 182,000. And in second quarter is -- second Q numbers for 2025, IDR 207,000 Home Connect accounts. So an increase of quarter-over-quarter, okay?

Okay. Maybe I ask you 2 questions. One question is on your home broadband. How far or near are we in terms of our EBITDA breakeven, right?

What do you mean?

How do we look at the EBITDA contribution from this home broadband? How to think about that?