Fitch: Slower Tower Additions to Benefit Indonesian Tower Companies

OREANDA-NEWS. Fitch Ratings says that the Indonesian telecom tower companies' leverage ratios are likely to improve by 0.5x-1.0x in 2015, as their capex declines due to lower demand for additional towers from telecommunications companies.

The three largest tower companies' free cash flow generation will improve by USD20m-80m due to lower capex and their ability to fund the capex through cash flow from operations. Tower additions for these three players - PT Profesional Telekomunikasi (Protelindo, BB+/Stable/AA+(idn)), PT Tower Bersama Infrastructure Tbk (TBI, BB/Stable/AA-(idn)) and PT Solusi Tunas Pratama Tbk (STP, BB-/Stable/A+(idn)) - are likely to decline by 25% to around 2,900 in 2015, after peaking at 3,900 towers in 2014.

The three largest telcos in Indonesia are likely to suspend orders for towers till early 2016, when the Ministry of Telecommunications and Information Technology is likely to complete the process of frequency rearrangement and telcos can roll out their 4G network services. Fitch expects market leader PT Telekomunikasi Selular (Telkomsel) (AAA(idn)/Stable) to lead tower demand in 2015 - given its solid free cash flow generation - although its demand is likely to be lower than in 2014. In addition, PT Indosat Tbk (BBB/Stable/AAA(idn)) will slow down its network investment in 2015 as it recently completed its network modernisation. PT XL Axiata Tbk (BBB/Stable) will also postpone its network expansion as it focuses on reviewing its overlapping networks after it completed the acquisition of PT Axis Telecom in 2014.

Protelindo, TBI and STP added around 200 towers during 1Q15 - much fewer than the 700 added during the same period a year earlier. Fitch forecasts that Protelindo and TBI are likely to build fewer than 1,200 towers each in 2015 after building more than 1,800 new towers each in 2014; while STP is likely to build fewer than 500 towers in 2015. This will reduce the companies' capex and generate additional free cash flow, which could be used to deleverage their balance sheet. At end-2014, FFO-adjusted net leverage stood at 2.2x for Protelindo, 6.2x for TBI, and 5.4x for STP.

Fitch, however, estimates that the organic growth of independent tower companies will resume in 2016 when new tower additions pick up. We expect telcos to initially roll out 4G networks in the densely populated areas, including the capital of Jakarta and certain regions of Java, in 2016.