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

Hi. Good afternoon, everyone. Thank you for dialing in, and welcome to Sarana Menara Nusantara first half '24 with Mandiri Sekuritas. My name is Henry Tedja, Equity Analyst from Mandiri Sekuritas and moderator for this call. We are very happy to have Adam here. He will discuss in more details about the SMN's first half '24 earnings results and also other business updates. [Operator Instructions] So with without further ado, I'll hand over to Adam to start the first half '24 results discussion. Pa' Adam, over to you. Pa'.

Thank you, Henry. Thank you, everyone. Good afternoon. May all of you in good health and in a good mood, even though there has been a bit of a volatile geopolitical situation that we are seeing out of Middle East. Hopefully, everything gets peaceful sooner than later. So I'm going to walk you through, firstly, the press release that we be prepared and shared with people a couple of days back to be sure that we are up-to-date with these numbers. So revenue grew by 6.5% first half compared with the same year -- the same period last year. EBITDA, 4.5%. And then net profit attributable to [ parent ] after taking into account minority interest, sums to about 9.4% growth. For total tower, 5.7%. Total tenant grew slower by 1%. Tenancy ratio as a result decreased by 1.8 to 1.72. Total fiber grew strongly from 120,000, approximately, first half last year to become 140,000 kilometer year-over-year growth of our 16.6%. Fiber to the tower growth is about 6.1% and then -- better revenue generating, that means the billing that we are doing on the fiber that we have sums to -- grow by about 11.4%. Utilization ratio, as a result, grew from 181% to 190%. Fiber to the home, home pass assets, 464,000, grew by a good factor, 160%, to 1.2 million homes passed. Home connect, which is the take-up rate, some people calls it or the number of actual homes being -- using, comes to about 135,000, grow by about 255%. Connectivity activation still grows by accounts, is about 21% to 14,400. I think I need to say this upfront, and you will hear me repeat again that these numbers are still excluding IBST, the company that we bought in July 2024, which is 3 months ago -- sorry, yes, 3 months ago. And then we're about to close the -- we're due to make payments on the mandatory turnover on the remaining shares being offered to sell to us by the day after tomorrow, October 4. So we have not included the IBST into this review, just to be clear. And whatever IBST is showing for the first half will not be reflected into SMN numbers because we will only be consolidating starting July 1, which only -- you will only see IBST as part of Sarana by the time we release third quarter, which is likely to be end of October. Now the performance itself, the total second quarter from the Tower segment shows the impact of relocation of tower lease contracts following the merger of Indosat and Hutchison, which I think we have been talking about this for several quarters now. So we've been spending CapEx on this. And as a result, we're getting new business, longer contract lease periods, sometimes. And then we expect, since we've done probably 60% more, maybe 70% more, the impact will be the biggest in 2024 books here, which means we're spending CapEx to get the power lease contract relocated to a new locations without getting incremental run rate revenue for it. And then the entire process will be expected to be completed in the next 12 to 24 months, even though there could be a chance it could be done fully by 2025, yes, because given the size is smaller now than the current period or previous years. And then in addition, there was a public announcement here that XL is exploring merger with Smartfren. And this may have an impact here. We don't know the impact, how much the impact will be. We did make an announcement. We made an agreement with Sinar Mas Group that the leases under IBST, will be a fresh 10 years. So we expect little impact on nonrenewals post XL and fren merger. With XL itself under IBST, the leases is about 6 years left in contract duration. Total towers reached 31,500 and total tenants sums to about 54,000. Tenancy ratio, 1.72. On the other hand, business from non-Tower grows impressively. Contribution to the total revenue reached 34%, up from 32% in the last quarter. Revenue growth is quite good actually from the -- all the segment grew by 18%, 11% and more than 400%, respectively, for the segment here. And then the largest contribution is fiber leasing with total assets growing 16.6% that you see earlier on this table above that we've come to the possession of about 140,000 kilometers of fiber, physical cable that we seek to basically increase utilization for. Fiber utilization also reached to 1.9, excluding fiber utilization, fiber utilization resulting from synergies between fiber businesses within SMN Group. I mean, we try to use the excess capacity like we do with towers, whatever excess capacity, especially with fiber that, we try to basically be used -- to be used for other types of fiber solution. It can be fiber to the tower cable, hopefully, can be used for FTTH, can be used for a FTTT business. And whatever we do, new CapEx for FTTH can be used for other types of fiber businesses. So we try to do it like that and hopefully, ROA improves over time because we believe in densification, the way we believe that tower colocation will benefit from densification of wireless networks. Consolidated revenue, we talk about this. And then our CEO mentioned that we managed to increase it to 9.4% profit in the midst of significant impact of IOH release point relocation, which require a lot of capital expenditure and during high interest rate period. I think as of today, SRBI, the lending rate from banks like JIBOR is still quite high. BI just got cut by 25 basis points, but that only comes into play end of September, which is as recent as 1 or 2 weeks ago, at the same time, probably a little bit earlier than the Fed rate cut. So we see more of this impact on our books on fourth quarter 2024 instead of third quarter. But you've seen already what we have achieved so far, second quarter this year. And our strategy remains healthy growth on infrastructure needed by the industry. The industry needs relocation. So we accommodate -- we are accommodating that coming into our win-win solution between us and the operator in question. And we always review operating expenses, capital expenditure on a per unit basis, tower, fiber, steel, ground leases and especially interest costs. I think we are -- we have -- we can talk about this later in more detail when we come to the slides. And then again, we are repeating that we have not consolidated IBST, which will only be consolidated during third quarter. The IBST report that you saw was done in an audited manner to align accounting policies between us, the new owner, compared to the previous owner and management, and ensure assumption that we use in acquisitions. This is to say that we look at towers, we look at fibers and in whatever special relationship that IBST may have with the previous shareholder, we try to basically clean it up in the second quarter filing that we did as the new owner, new management. And then hopefully, we try to -- we are hoping to see better increment in performance by third quarter, especially for the first time in consolidating IBST. But we mentioned already that after realizing all these numbers that we see as achievable, as a new owner, we're still quite basically confident we can reach more than IDR 700 billion annualized EBITDA. And hopefully, that gets realized sooner than later. But at least we have refinanced a lot of debt. It used to be 8.5% to 9% borrowing cost per year. We have refinanced those and reaching around 6.5% borrowing costs. So that's the press release that we just shared with people 2 days ago. Now let me walk through the presentation slides. Are you seeing this, Henry, or not? Or not yet? Maybe this one? Okay.

Yes.

Okay. Okay. So we're the largest independent digital infrastructure companies in Indonesia, 31,500 towers, and this is the fiber relating only to FTTT. Our return on investment, 8.4%. ROE approaching 20%. Still focusing a lot on build-to-suit CapEx spend as much as we can, probably 90% of new business build-to-suit model here, which is -- not many market is actually having build-to-suit fiber in most markets like FTTT, FTTH that we do under build-to-suit-contracts. It's not available in most markets, especially in the Western world. And then investment-grade ratings are -- have been reconfirmed by both S&P and Fitch. I think Fitch as recent as last month, if I'm not mistaken. And then Sarana shares is included in all these indices. But now we have moved to MSCI Small Cap Index instead of the standard global index. So -- and then just highlighting some of the numbers here, IDR 1 billion liquidity amounts. And these are just a lot of the financials that want to lend to us. And we -- on top of this, we also have IDR 19 trillion of bonds that we can immediately issue under shared program that is already registered with OJK. And then we have reached a 19% ROE. We have been a successful consolidator. We have done STP in March -- the recent number that I saw from STP, the EBITDA margin is 93% because we are basically treating the company as an incremental tower revenue, and we try to replicate that same strategy with IBST going forward. Industry is consolidating. I was just talking to Henry that Link Net can be up for sale, the fiber. Indosat can be up for sale and could be some other tower names that could be up for sale also. We expect to hear more announcements going forward after this. And then let's see, how do I move the slide. Next slide [ please ]. Okay. So we have towers, the split between towers in Java and ex-Java is still about 52%. But just to look at these numbers, Maluku and Papua are increasingly being penetrated. It used to be a much smaller number. So now we see approaching Kalimantan here. Sumatra is relatively sparse compared to Java. But we are building a lot of fiber in the island of Sumatra. Total towers 31,500 again, excluding IBST. And then this is the fiber that we have. FTTT is about 1.9, utilization ratio. FTTH, about 17,000 km. Backbone is 19,800 kilometers. And then as you can see here, Sumatra, gaining traction in terms of fiber presence, trading a big lead way compared to Bali, Kalimantan and Sulawesi. And then on the build strategy, we continue to build-to-suit towers and colocation. We want to expand our fiber optic network. We are putting FTTH now ahead of FTTT because FTTT, I think, is a function of Wireless business. If people are still consolidating, I think we see opportunity a lot with FTTH. And we continue to employ a liquid balance sheet for strategic acquisition or expansion. We added, during the past 12 months, 1,700 towers, 19,700 kilometers are revenue generating fiber. [ 2,500 ] activations and then home connects of about -- almost 100,000 and [ 750,000 ] home passes. And then we managed to protect our investment grade. So it's important for us because it's, again -- access to cheap capital is important for these types of business that we have. Tenancy ratio, 1.72, 52% of towers located in Java. The rest being ex-Java. We are hoping to see more of the needs of additional services as managed service and in batteries. I think this will be a function of efficiency, better reliance on network availability. And in fiber to the tower, again, this is -- submission is about close to 200,000 revenue generating fiber by end of June. And then activation has sum to about 14,400. FTTH has reached 1.2 million home passes assets with 135,000 home connect with 11% penetration rate. And this is CapEx on towers. This is high because, again, a lot of relocation that we are doing. If you remove that -- this 1.8 , I think this huge part of that CapEx for towers is relating to relocations. And then the tenancy ratios, the blue ones for towers has decreased because we basically relocate the towers with 2 tenants, Indosat and Hutchison. And then relocate to new locations with new towers with the same tenants, so tenancy ratio comes down. However, we are seeing a market increase in utilization ratio under Fiber-to-the-tower segment. And then we continue to be busy on the activations for Connectivity business, as you can see here, growing nicely. And then FTTT revenue-generating fiber also grows, still quite interestingly. FTTH is not here yet because it's a slow base -- a lower base. And then tower revenue 6.7%. From Non-Tower segment, 49%. EBITDA 11%. And AFFO, which is mostly deducting EBITDA with interest expense, sums to about 10% CAGR. So slower than EBITDA growth because still interest rate is considered still high in the second quarter this year, and only expect to see a marked decrease in 4Q 2024 after the rate cuts. Contracted revenue, IDR 74 trillion, a bit of increase from last quarter. Similar number with the end of 2023 in December, which I think this 72 -- 74% -- IDR 74 trillion is the largest number in the market among peer comparisons. Leverage remains at 4.3x given -- don't forget that we are getting a lot -- we are expanding -- we are incurring a lot of CapEx for relocations. But yet, we managed to basically maintain the leverage at 4.3x. Gross debt reached about IDR 46 trillion. Interest coverage ratio at 3.8. Average interest cost is about 6.3%. I remember the same number last quarter was about 6.4%. And we have not seen yet -- the rate cut yet in second Q. The same thing with 3Q because the rate cut will only happen in -- has only happened at the end of 3Q. So the [ market ] impact will be in 4Q 2024 on this average interest cost. I'm not going to talk again about results since we have gone through. And then this is the cash flow collection, IDR 7 trillion, and we expect annualized -- annual collection is about IDR 12 trillion. CapEx plus OpEx is about IDR 4.7 trillion. Interest expense is IDR 1.4 trillion. This number being similar to what we spent in cash out for interest and debt servicing. And then we end up with cash surplus from operations. And then we pay -- we got loan proceeds to pay for CapEx. Dividend IDR 28 billion and then acquisition is IDR 263 [ billion ]. Cash ending is about IDR 2.4 trillion. It's a bit high because we were preparing to purchase -- to pay for IBST the following day. The cut-off date of this reporting is June 30, and we were paying for 90% of IBST the following day, July 1. So the cash balance is reflected on this cash flow statement. Revenue grew by about 6.7% year-on-year, 2.5% Q-on-Q. EBITDA, 1.7% Q-on-Q. And then 4.6% year-on-year. Net income, 13% if you compare only the second quarter to second quarter of the same -- of the 2024 with that of last year. And then net income Q-on-Q, 10%. There is a decline in tower revenue here under revenue analysis. Fiber-to-the tower grew by about 18%. Connectivity, 11%. FTTH, a low base, 460%. And then consolidated about 6.5% to reach IDR 6.1 trillion for the 6 months ended in June 2024. And then -- and these are just operational data. Towers, 5.7%, reaching 31,500 towers. Tenants, still stable at about 54,000. So relatively flat at 1.0x. Fiber to the tower, 11%; Connectivity, 21% in terms of activations or account; FTTH, 255% from a low base. And this is talking about financial profile. This page was of particular interest for people when rupiah was IDR 16,000, but we basically have locked in the rate that we can pay back the USD debt maturing in 2028 and 2029 at FX rate of IDR 15,000 per dollar. And those are relevant for these 2 borrowing, yes. And then we also end up into Japanese yen. And then similarly, we have also locked in the price that we shall pay back the bank providing us the loan in rupiah and the fixed -- the exchange rate has been fixed from today until -- so from the time we need to make payments, we are already covered. Okay. That's it. Handing back over to you, Henry.

Yes, sure. Thank you, Adam, for the presentation. Now we will move to the Q&A session. [Operator Instructions] But perhaps allow me to start with 2 questions from my end. First, we understand that you've been discussing about all the growth trends in the fiber and also the tower part. But perhaps could you share more colors in terms of the order trend or the order outlook? I mean, how do you see the -- both the fiber and the tower orders or demand after the XL Axiata and Smartfren under discussion. Going to the third quarter, fourth quarter, how do you see the trends so far? Do you see some slowdown in both tower and fiber order? Or yes, perhaps you can share some color on that, but that would be my first question. And then the second question, perhaps regarding the latest announcement about the right issue. But if you don't mind, could you share some rationale of having this right issue? Mathematically speaking, this right issue profiles the EPS dilution of the shareholder, right, instead of the [ occasion ]. So what is the rationale of having this right issue but instead of, let's say, if you want to do some interest cost savings, why don't you do some kind of refinancing with all the bonds and all the loans that you have right now? So perhaps those 2 questions first, Pa'.

Okay. The number 1 on XL and fren potential merger and what is the impact on Asia. Yes, as we have said in the press release, even though they are still in the discussion stage, they are already trying to basically emulate similar assumptions for the merger scenario. So that results in rather slower organic growth from the side of XL and Smartfren as a result. And this goes for towers and fiber. We heard some -- a timeline that is quite aggressive for that announcement for the merger, but we have not heard anything. So that may drag down and then as a result, impacting our side of the XL and our fren contribution to the organic business. On -- the biggest expected growth on the fiber is actually for this year is coming from FTTH, Henry. I think earlier this year, I was saying -- sharing that the amount of FTTT should be around 25,000 to 30,000 additional for the year 2024. I think we have reached about half of that by June. But the larger increase when we closed December 2023, we accumulated about 800,000 home prices, and we expect to double that by year-end [ 1.6 ] to 1.8 home passes. At the beginning of the year, we were thinking since Indosat has not decided on their FTTH strategy, we thought the accumulated number of 1.6, 1.8 by year-end 2024, will be purely from XL. But now the mix has changed, fortunately, that somewhere during the past 6 months, that Indosat has started to roll out its FTTH strategy. So what is slowing down coming from XL has been made up by the growth in the FTTH order from Indosat. So just to give you a bit of color on how the things are split. So towers, we expect stable number of tenants as you can see from what we have achieved so far. So whatever churn -- natural churn that we expect is to be offset by organic growth coming from somewhere, probably Indosat or [ Mavicar home ] sale, But maybe some numbers from XL itself and fren. But not as big as we hope that it's going to be like more than offset the churn itself, right? As you know that every year, we typically have a churn of about 1% to 2% from various reasons, from all reasons, failure to renew ground leases or maybe micromanaging, last minute changes in the network configuration because they want to target higher revenue markets. So that can lead to churn -- and that may have an impact on our numbers, and you may see it as a churn. And then for towers, I think we continue to spend that for Indosat. Hopefully, we are performing quite well under FTTH because I think Indosat wants to be aggressive on the FTTH side organically since they're only starting. And then similarly, they want to defend their -- whatever they have achieved in becoming a strong #2 in the Wireless business. It's just that at the start of the year, we were also hoping for more exuberant estimates for ARPU coming from the industry, including investors, analysts as well as the companies themselves, the telcos. But we have not seen that yet, yes. So hopefully, similarly, we were let down by the fact that interest rates will remain -- would remain higher for longer which was -- we did not expect in January 2024, but that happened, the statement came out in May 2024. And then now we are seeing a totally different [ verbatim ] coming from the Fed chair. So hopefully, things can change for the better in the next coming quarters, Henry. So hopefully, that's helpful for you. For number two, I think the equity raise, I think we've considered this since June 2022. Wherever we think as -- I think in that Bloomberg article, our CEO, Pa' Aming mentioned that anything that is alternative financing that we can get in favor of the company, it can be in the form of lower cost of funding, it can be equity, it can be debt. So I think 2024 is just -- the difference is that rates are lower. And then we see basically opportunity to basically add equity during more benign time -- lower inflation, lower interest rates than before, Henry. So that's the thinking.

But perhaps one follow-up question on that. I mean you mentioned about during this declining interest rate times and asset threshold. So that makes me think or perhaps trigger me to a follow-up question on why should we have this right issue instead of the debt refinancing? Because we know in the next, let's say, 3 months or 6 months, we will have a lower interest rate as well, right? So that will affect the debt financing as well that will lower that cost of debt. So just curious why do you exercise this right issue instead of...

So we -- if you look at the reform on the interest rate reduction during the second Q, quarter 2, first Q, I think we have done a lot. We think there's still room for the banks -- for the rate to be cut. However, we are not that confident that the banks will readily cut their lending rate to us. So if we think the embedded cost of doing rights issue is better for us, I think we will do that. That's the thought process, Henry.

Okay. Sure. But thanks, I think we'll open the floor now. I think we have a question here from Ranjan Sharma.

I have a few questions. Maybe I can take them one by one. Firstly, on the FTTH side, where are you rolling out the network, which geographies?

A lot of ex-Java also. Sulawesi, Sumatra. I think people want to be -- try to avoid market where they are #3 or #4 player when they come in into an area or a housing complex. They want to be 1 -- #1, #2 when they come there. So we are helping them in that regard. And we are seeing pockets of opportunities in Java as well. So -- but I think Sulawesi is a good market to start usually.

And is it on the same basis that you had shared earlier that it's on a minimum guarantee basis that they will pay for at least next -- like a minimum number of houses passed?

Yes. So yes, the typical contract is like that. So that number tends to be there. The minimum revenue increases over time.

Okay. So basically your cost of build is covered?

Yes. It's able to do so. The way we design this is working together with the [ SEP ] MNOs whenever they want to go FTTH. So we're not going by ourselves. What we do for them, help them identify where the pockets of potential revenues take the pick up, and then they decide for themselves. And then we decide -- design how the cable will be rolled out. And as much as possible, we try to do synergies, in terms of asset synergies with our existing fiber as much as possible, Ranjan.

Okay. And why now? Because I mean, have these been lucrative households to cover, the telcos would have targeted these opportunities much earlier, right? I mean the industry revenue has not been -- wireless industry revenue has not been growing much.

The biggest player when we started this in 2022 was only -- not only the biggest. The only MNOs doing FTTH was only Telkom when we started this early 2022, Ranjan. And the opportunity came our way in April 2022, I remember. And then we started doing this, and it takes much time -- much longer lead time to execute because it's a much more complex process than just building [ dark ] fiber under fiber to the tower or building towers. So it's a -- and then we try to do this build-to-suit as opposed to going out of limb and be on a CapEx risk kind of situation. So we follow where the market wants to be and what's the size they want to have, Ranjan. So when XL started this, they go by the millions. I think we are approaching 1 million now with XL. And then now Indosat starting with about 600,000 home passes. And hopefully, as we achieve more during -- at the time lines provided to us, we are able to get more orders. So these are -- the driver for this is the need, the execution, the decision by the operators to go fixed wireless, fixed mobile convergence strategy, which I think only started 2 years ago, 2024, Ranjan.

Yes. No, no, I understand that. I'm just trying to understand whether also -- whether you've been able to deliver any major cost savings? Because -- I mean, that's the reason why there was no infrastructure in the first place, right, the consumers could not pay for the build.

Yes, we have been delivering cost savings on our part. The numbers really varies as to how much FTTH assets on a per kilometer basis can basically overlap that of FTTT, for instance. So we don't have a number unfortunately, but surely, there is synergies between the 2 segments, helping out, rolling out in terms of speed to roll out as well as cost savings. And whatever the end customer price that they want to have with each of these, it's up to them because they're the one marketing. We only ask for a portion that would recoup our investment.

Got it. And if I think -- if I look at your lease rates, right, on the tower side, I mean these seem to be under pressure for a number of quarters. What do you see in the industry in terms of competition? Is there any lease rate pressure? Or where do you see your own lease rates stabilizing?

I think the way we price this, try to make this as a bulk kind of arrangement between the fiber and the towers. So we're not basically try to win ourselves on the towers, it's already very good margins anyway. But if we can try and utilize this situation and then get more fiber orders, we will do that, Ranjan. So I think what's important for us is to grow this fiber even more. And if we can do that while increasing our ROE, increase net profit margin, for instance, or make it stable, I think we should be okay.

Got it. And then that brings you to my last question. If I look at your margins as well, right, EBITDA margins have been under pressure for a number of quarters now. Why is that the case? And where do you see that stabilizing?

Okay. The tower margin is about high 80%. The non-tower margin is about low 70s to mid-70s EBITDA margin. It's just that the growth in non-tower is faster than the growth in the tower itself. So as a result, blended, the EBITDA margin is lower. That's the explanation, Ranjan. So what we do here is -- on the CapEx spend basis, protect the balance sheet, preserve CapEx outflow in such a way that is very efficient that we deliver values on ourselves -- to ourselves internally. So ROE is increased by way of CapEx savings and OpEx savings between these segments that we have. I think the strategy is not available for most of tower companies in the space because we're probably the only one independent fiber provider that we can market our fiber to anybody. And it can be for other types of fiber -- any other types of fiber solution that the market may need. So that's the competitive edge that we have compared to the others. So the other guys, they're probably lacking in fiber size, number one. And the other guys, probably they are focused more on the fiber to the tower, but not so much on FTTH, which is done on a separate box within their group. But in our case, we can use as much of the fiber that we have for multipurpose kind of fiber solutions.

I think we have next question here from Arthur Pineda.

Several questions as well, please. Firstly, with regard to the IBST consolidation, I'm just wondering how do you expect this to impact your P&L? Because when I'm looking at IBST, the profitability has been declining as, swung to the loss level in -- over the last 2 quarters. Is there a kitchen sinking there prior to consolidation? Or is this a trend that we should expect going forward because of the accounting alignments? So I'll start there first, and I'll go to the next question.

Yes. Since you used the word kitchen sink, so let's stick with that. Yes, kitchen sink is happening first Q -- especially second Q. So I think in the press release, we mentioned that the reason why we audit the books of IBST second Q, prior to consolidation on July 1, we want to see better alignment of accounting policies to our accounting policies, depreciation, collection, aging, et cetera. And number two, the assumption that we use when we buy the company is being realized closer to reality in the books of second Q. So you have seen in IBST books, write-offs, cleanups, which were not part of our assumptions and when we were evaluating the acquisitions. And at the moment, we took over the Board in August 2024, the audit process has been like that. And we expect, I think, in the press release also separately, 2 months -- or 2 weeks ago, if I'm not mistaken, we mentioned that we expect to achieve a clean EBITDA of a minimum IDR 700 billion per year annualized. So that may be achieved starting 4Q 2024, and full realization will start in January 2025. Does that help you?

Understood. Second question I had is a bit of a housekeeping question. In terms of your tax rate that's been going up, what's been driving that? And where should we see that for the balance of the year?

I think we see a bit of a -- with the tax office, right? If you have a case that you have to go to the tax court, for instance. You have to make payments for it and then we accrue for it and then we -- only reverse it later on. That's one possibility, the ups and down in tax rate of the company. And number two, there's also an employee compensation increase in taxation. There's -- whatever in nature that the employees are receiving will be taxed on a higher bracket there. I think that's the most impact that we saw. I think on our end, we try to be -- we know towers are -- towers are final tax, right, whatever revenue that we get, we will be taxed on a 10% basis. However, we -- on the non-tower, the tax base is on a nonfinal basis. So we try to be as efficient as much as we can to achieve a more efficient tax structure.

I'm just wondering in the context of the IBST acquisition, given they've been posting losses, is there any benefit that you can you take from that?

Yes. I have here Pa' Daniel. Daniel Kosasih, our Chief of reporting. Pa' Daniel, can you comment on that, please, on the tax losses of IBST? Are you there? Let me get back to you if Daniel is not responding. I'll text you or e-mail you on that one, what's the main theme about the tax losses that -- whether -- because they're -- there's a tax books and there's -- which is called fiscal books when dealing with the tax office, and there's also commercial books. So we need to check on that, whether the commercial reporting that we've done and after the audit, we'll be able to -- that we can use for tax purposes in dealing with the tax office. Yes, I'll get back to you.

Last question on the revenue exposure on the tower side. I'm just wondering, if you look at your contracted revenues, what percentage would be exposed to potential consolidation?

I think for Smartfren, I think Smartfren is smallish part of -- I think Smartfren is about 5% before IBST, 5% of our revenue is coming from Smartfren. That's why it's not showing up as the top contribution to the consolidated revenue. However, under IBST, we managed to basically ask the group to get the approval from Sinar Mas Telecom, Smartfren, to extend that to 10 years. So we are pretty much not worried about that portfolio. And then the XL side, colocation tenants under IBST, the average life is at least 6 years here. So still a bit of time before we see any impacts. So as a result, we don't expect as big as Indosat, Hutchison merger, obviously, not to mention the fact that we have built a lot of new towers for IOH, which is now a strong #2 operator. And then whatever towers that we have built for IOH could become a workable location for them to relocate after the XL and fren merger. So that's my assumption at this stage.

No disclosures in terms of what overlaps there are with regard to footprints?

The reason why we don't know because we need to have a new Board at the Smartfren and let them decide what they want to do. We haven't been able to pinpoint IOH, for instance, as recent as 2 years ago. And only after the form of a new Board that they come up a number of 7,000 leases. So with Smartfren, we don't have a number yet.

And then our next question here from Pa' [ Sabrina ].

Congrats on the results. I have a question here. Could you provide an update on [ ESAT's ] tower relocations and whether we should anticipate any further churns in the coming quarters? I'll stop here.

Okay. The -- one of the reasons the weaker performance on the towers is actually a weaker-than-expected performance on the IOH side. The site that we had expected to have more renewals, there were lesser renewals than we had expected. But still, within the 1% that we mentioned to markets of annual churn rate. But I think that should reflect somewhat the dynamic in the industry in the telco market that we see. I was mentioning to people in this call that early part of the year, Indosat was very exuberant discussing about positive dynamics on the ARPU side. But now we are in the second quarter or third quarter yet, we have not seen improvement on that part yet. So that may have an impact on the renewals of tower leases that we have expected to be stronger and turns out to be weaker. But fortunately, whatever's slower on the tower side is being offset by the FTTH growth, Sabrina.

Maybe a follow-up question on that. I recall that in first quarter, I think 50% -- for the relocation of the towers has been identified. So is there...

What's the number that you mentioned, sorry?

50%. I think first quarter, you mentioned that. And then is there any progress from that figure?

So by year-end 2024, by my estimate, I think we should have found the locations and then found the solutions for and then executing for it sums to about 60% to 70%, even more than that probably, closer to 80%. So the remainder 20% should be conducted within the next 1 or 2 years. I'm talking about end of 2024 by -- because today, we are now in September, October, yes. We have identified -- worked together, getting confirmed the relocation would be achieving about 70% to 80% of total leases that needs to be relocated and the remainder to be done in the next 1 or 2 years. Hopefully, it gets done in 1 year, frankly speaking. So by end of 2024, everything will be done.

Okay. And on my second question on the extension. You mentioned the extension of the contract for fren post IBST acquisition. Any adjustments on the lease rates or it's maintained as is?

I think we are seeing market rate. I don't remember the particular of those deal because that depends on the height of the towers itself. We don't expect like -- we just look at whatever the value of EBITDA that we can get from this and then we focus on how much that we can pay. And then we come to about -- around 8x EV/EBITDA, 8.5x EV/EBITDA after adjusting for net cash and everything and then take it from there, basically. We don't look at particular leases to be -- at what level. We just look at about -- because we've seen in our portfolio itself, Protelindo on the Tower segment alone is still delivering very high EBITDA margin because of scale, right? So this IBST is going to be increasing even more to that economies of scale. So we don't look at a line-by-line kind of what kind of revenue that we expect to get. What we did was whatever revenue that has been signed by old IBST management, try to get that extended and then extract EBITDA from that IBST in the next 6 months, if not earlier.

Okay. And on the IBST acquisition, how much is the overlapping sites between fren and XL?

Can you repeat that again, how much of what?

So you have acquired IBST towers, right? So is there any -- how much are the overlapping sites between fren and XL post the acquisition?

We don't look at that either -- focus on that either because the contracts are still long-dated, Sabrina. So if they move to another site needing relocation, our revenue is protected. And as I mentioned, we worked with the sellers, the Sinar Mas Group that we can basically attain a fresh 10 years on those leases under IBST leases, under IBST towers. So by the time they need relocation, it's just like a relocation of site. And hopefully, whatever thousands and thousands of towers that we have built for IOH colocation can be used for Smartfren and XL post-merger for their need for relocations rather than building a new. That's why we don't pay particularly about overlaps at this stage.

Okay. Probably my last question. For the Maluku and Papua orders, they are mainly coming from which MNOs? Just curious about it.

Indosat. That part of Indonesia, the Eastern part, Halmahera is Indosat.

Okay. So you are seeing Indosat is getting more aggressive in expanding to the Eastern part?

Yes, and Java -- including Eastern part of Java, yes.

I think we have next question here from Vera.

So this is Vera from MNC. Just one question from my end, Pa'. So considering the consolidation of IBST, effective by July 1 and also the stable demand growth, can we get the number of like what is the tenancy ratio and utilization ratio target for this year? And if possible, maybe next year as well?

Thank you, Vera. So I think 90%, if not 95% of what we do is build to suit. So identification of colocation potential that they can -- that is beneficial for clients, it's up to them. We just follow what we think should be ideal for them in order to make an equitable network, superior quality, for instance, between one operator to another person, we do all these exercises with them. But they're the ones basically identifying where the locations are. And then we don't know. The reason why we don't know can be as by the time there's a change in the speed of a merger, there could be a chance that Telkomsel, Indosat want to basically be more aggressive in expanding their network rather than wait because there's a moment of slowness on the part of XL and fren during the merger. So that could be a possibility as well. So what we do every year, Vera, is to devise a budget, and this is based on talking with operators at the start of the year, what they want to do, and then we try to build estimate on that. At the moment, we don't have a number for 2025.

I think we have also questions from the chatbox here. The first one is from Niko, which related to the -- your leverage ratio of net debt to EBITDA at 4.3x. So regarding the commentary from Fitch as well, is that level sustainable for the rating agencies? And what is the maximum leverage acceptable for them? And the ratings will change under which conditions? I mean, like, will it change if you raise liquidity?

At the moment, we are at 4.3. The rating agencies have seen the increase. But I think they're quite comfortable by the way we've done -- we have executed efficiency programs on the CapEx, OpEx as well as interest costs. So, so far, we are okay on the rating side. I don't have a number for anyone to give given that they are also taking into account industry dynamics, competition, but so far, everything is quite stable on our end. So there's not a set net leverage trigger that I have in mind to share with people given they also take into account various factors.

Okay. Pa', I think Niko is on the floor as well.

Interesting conversation that you had. You mentioned about -- can you hear me?

Yes. Loud and clear.

Yes. So you mentioned about some potential targets. So you -- I'm assuming that you do the fundraising also. So in order for you to have headroom to perform M&A -- further M&A, you mentioned Lignet, I understand maybe the synergies there. But is there Indosat assets the backbone? Is it one of your targets? And maybe you can set us with us the potential synergies coming out of this.

Okay. Just to clarify, I would just name in some of the deals that have been mentioned in the media, in the newsrooms. I think I saw Lignet and then fiber assets and then Indosat fiber assets, right? I'm not going to speculate which one that we're going to buy. And that's a clarification number one. Clarification number two, I think we've disclosed in the newspaper as part of our compliance with the stock market is that -- and regulators is that we will use the money to pay down debt. And then we may or may not go into -- and brought into acquisitions in whatever names that I've mentioned or being heard in the market. Yes, Niko. Just to clarify. But I think the reason why we choose to pay down debt is just to evaluate, right? We can just grow organically as far as I know. So that's where we are today, Niko. Not to jump my head 2 steps or 3 steps from where we are today.

Maybe one last question maybe for me. How much is the revenue contribution, which is beyond the MNOs? So maybe enterprises or...

Yes, that's a good question.

Please confirm if there's a spike up in terms of revenue contribution from other parties.

Maybe as one of the proxies that you can look for to answer your questions, try to look up Connectivity. That's quite likely to be nonoperators.

Yes. So that number is going up, yes, Business Connections.

Yes, Business Connection. So the clients include governments, the banks, universities, hospitals, needing multi-types of internet connections using fiber or otherwise. Hopefully, that's helpful.

I think we have next question here from the chatbox from [ June Lee ]. Do you expect the rental rate -- tower rental rate to decline further? Are you expanding FTTH too aggressively when the penetration rate is still low? That's 2 questions. And I think the last one here, but let me read it as well. Will [ family ] be a standby buyer of right issue, not subscribed by public? Or will there be a new strategic investor?

I think for number one, we look at total towers and non-towers. We have always been consolidating the 2 segments. The reason why we separate them just to show that we have done -- the non-Tower segment has been growing as the needs of the market is growing on that side. The wireless is experiencing consolidation as we speak, right? So when we go into new business venture, say with Indosat, or when they need FTTH, as long as we see volumes there for incremental fiber, right, we don't mind to basically talk about -- business sense about new pricing on the towers itself. If there is volume, if there is talks about extended contracts, if there's talks about batteries, managed service, we don't mind basically to mix all of them together. If you are a bank, say, a Bank Mandiri, it does all these things, right, or JPMorgan does all these thing, we don't mind cutting down our lending rate to a big customer of ours if we get the underwriting business or bond issuance deals with the [ shared ] company, for instance. So you may see this kind of dynamics happening on our books as well when it comes to your question. Does that help you?

Yes, I think so I think but -- sorry, Pa' the third question from June Lee I think regarding the right issue, but...

Okay. The question about who's going to be the standby buyer. I don't have an answer at this stage. We're due to release more details in due course to the market. I think the EGMS remains on October 25. And hopefully, before that we -- I think we will be able to share more information. It's just that not today, Henry.

Okay. But I think you still have 2 more questions. Do you mind if...

It's okay. Go ahead.

Okay, sure. I think we have another question from Selvi here. Could you please share the latest operational number of [ IBS ] in terms of the number of towers and also total tenants? Previously, you mentioned about IDR 700 billion EBITDA contribution from IBS. And IBS EBITDA was IDR 210 billion in the first half. So annualized, those numbers will be around IDR 400 billion to IDR 450 billion for the full year 2024. So how long...

What is this IDR 450 billion?

The annualized numbers of the EBITDA for the IBS from the first half numbers.

Yes, I think I saw somewhere in the chatbox, somebody asking about how should we treat the first half result of IBST with regards to Sarana Menara's book. Let me repeat, we will not -- you will not see IBST numbers for the first half anywhere in Sarana's results. Yes. So including revenues, EBITDA losses, write-offs, it's not going to be part of Sarana's book. We will only consolidate the books that we have deemed in accordance to our accounting standard and our assumptions as a new owner during the M&A buying opportunity starting July 1, 2024. So namely, third quarter that you'll be able to see. So you cannot annualize anything, right, under IBST published books. Does that help?

Yes. I think so. Yes. I think next question here in chat box as well. Sorry, I think there are 2 questions here. The first one is, can you share the number of site relocation as planned by Indosat and the majority relocation in the Java or ex-Java area? And then the second question is, can you share the average CapEx to build tower and fiber optic in ex-Java or the Java currently?

Yes. I think I mentioned the -- about 20%, 30% left for us to relocate under IOH relationship. So I did mention that. And then whether the relocation takes place in Java or around Java, we call them donor and then recipient towers. So the donor would be the one moving away the leases, moving away from the tower and then the recipient will be the towers getting the leases moved into that new tower. So the donor and the relationship between donor and recipient, I don't remember seeing them as -- has to be in the same island, for instance. In Java, you can move to a non-Java or vice versa. So what we get is we protect the cash flows, the customers is happy and then we grow from there together after relocation is done. Does that help you?

Yes, I think so. Perhaps on the CapEx part.

I'm going to tell you what the market rate, right? So for fiber is about -- I think, fiber-to-the-tower, CapEx is about USD 5,000 per kilometer including pole. And on fiber-to-the-home, I think CapEx is about USD 100, USD 110 per homes pass.

Okay. Got it. But sorry, perhaps last question here, but skip this one is, that one will be from [ Max Melfin ]. Do you expect to refinance some or all of the debt from IBST using your strong credit rating and lower financing costs?

It's been done, Marvin. Thank you for the question, Marvin. It's been done. I think we bought the company in July 1, and then we refinanced, I think, within 6 weeks after we own the company. So borrowing costs initially from 8.5% to 9%. We already refinanced that to 6.5%. And then you'll see in that -- those numbers in third quarter results as well for IBST. So I think I remember there was a question whether we see increase in earnings from IBST, consolidated to Sarana. I think, yes, we see incremental EPS, even though we have not realized all the synergies, even though not significant enough on the earnings from IBST. But we expect this is a stable company and then we can identify pockets of savings and efficiency. I think we should be able to realize better earnings profile coming from IBST towards Sarana results.

Okay. Got it. I think that's clear.

Yes, I mean, this is like -- if you look at first half, it's a lot of rates. But run rate, I think we should be able to see starting with a positive number.

Okay. Got it, Pa'. So yes, I think our time is up, and we have to wrap up the call. Before I hand over back to Adam for the closing remarks, on behalf of Mandiri Sekuritas, I'd like to express our gratitude to Pa' Adam for having us and also the participants as well to join the call to the end. So I hope we can get useful insights from this call. So Pa' Adam, back to you for the closing remarks.

Thank you so much for the questions, interest for the company. Very good questions. But I think we try to basically execute where the orders come from, telcos, wireless business is consolidating. We see to see a rebound on the ARPU side as we have mentioned every quarter. I think what we expect to see continuous growth is on the Connectivity as well as on the FTTH side, given that FTTH is a relatively new segment for a lot of people, including the MNOs themselves who have not been in the FTTH business and only starting like 2 years or 1 year ago. Connectivity is a market, very big, that we think a lot of potentials there. What we offer is a quality network, reliable network with very good service levels that we can deliver to the customers. I think that's it. Henry.

Okay. Thank you so much for your time.

Thank you.

Thank you, everyone.

Have a good day. Have a good evening. Goodbye.

Take care. Bye-bye.

Bye-bye.