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Fitch: Capex Fall to Benefit Indonesia Tower Companies' Profiles.

Singapore: Indonesian telecom tower companies' credit profiles will benefit as they reduce capex due to the expected slowdown in tower demand this year, Fitch Ratings says. However, the pace of deleveraging will depend on the prudence of their financial policies.

In 2016, we expect lower capex to improve the pre-dividend free cash flows of the three largest independent Indonesian tower companies to around USD60m-70m in aggregate. Fitch forecasts revenue growth of 8%-9% this year, mainly driven by PT Profesional Telekomunikasi Tbk's (Protelindo, BBB-/Stable) pending tower purchase from Indonesia's third largest telecoms operator, PT XL Axiata Tbk (XL, BBB/Stable). Meanwhile, the industry's organic growth will stay sluggish following the slowdown in 2015. Our forecast assumes tower construction of below 2,000 towers for the three largest Indonesian independent tower operators, after peaking at around 3,000 in 2014.

Telecom tower companies enjoy strong recurring cash flows backed by long-term non-cancellable contracts, and robust EBITDA margins (above 80%) that should increase as scale improves. To date, Protelindo and PT Solusi Tunas Pratama Tbk (STP, BB-/Stable) have forgone dividends to invest in growth, while PT Tower Bersama Infrastructure Tbk (TBI, BB/Stable) says it will spend up to IDR1trn on dividends and share buybacks this year.

Fitch expects steady organic growth in towers in 2017 and 2018 due to the progressive roll out of long-term evolution (LTE) networks in major cities. The adoption of LTE services in Indonesia has been slow since its initial launch in December 2014, when spectrum was limited to just 900MHz. However, the reassignment of the 1800MHz spectrum and the government's push for localisation of 4G smartphones - with at least 30% local content by January 2017 - should accelerate LTE adoption in 2H17.

Fitch sees opportunities for more tower acquisitions that could raise the three independent tower companies' near-term leverage. Protelindo has the most resilient financial profile among the three companies, which should support future tower acquisitions. The latest tower sale-leaseback transaction involving XL and Protelindo is scheduled to conclude by mid-2016, and will expand Protelindo's portfolio to 14,700 towers (2015: 12,237), against TBI's nearly 11,400 and STP's 6,900 towers in 2015. PT Indosat Tbk (BBB/Stable) is also exploring a tower sale to monetise part of its towers.

Amongst the three independent tower operators in Indonesia, Protelindo has the lowest FFO-adjusted net leverage of below 3.0x, followed by STP's 4.8x-5.3x and TBI's 5.5x. Fitch believes the favourable business profile of tower companies and considerable cash flow stability justify their higher leverage metrics compared with that for most corporate credits.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:9INDO
Date:Jul 4, 2016
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