Underutilization And Short Contracts Will Restrain Profitability But Enable Recovery

Key Takeaways

• Declining tenancy and high exposure to traditional towers could limit revenue growth despite Indonesia's expanding data market and 5G rollout.
  
• Increased reliance on short-term contracts and diversification into lower-margin services is diluting profitability and increasing earnings volatility.
  
• Increased customer concentration, declining tenancy ratios, shift to lower-margin businesses, shorter contract tenures, and dependence on large contracts all threaten long-term revenue stability and profitability.

Catalysts

Owns and operates telecommunication towers for wireless operators in Indonesia.

• While Indonesia's rapid growth in mobile data consumption and expanding digitalization initiatives should, in theory, provide a large runway for revenue and lease growth, the recent decline in tenancy and utilization ratios suggests that capacity additions are outpacing demand, which could weigh on revenue scalability and net margin improvement in the near term.
  
• Although the ongoing shift to 5G and network complexity should increase demand for new infrastructure, the company's heavy exposure to traditional macro towers leaves it vulnerable to a migration toward small cell networks and alternative connectivity solutions, potentially limiting long-term revenue growth and pressuring margins as asset utilization declines.
  
• Despite Sarana Menara Nusantara's efforts in diversifying through fiber and managed services, a rising dependency on short-term enterprise connectivity contracts (many lasting six to twelve months) introduces earnings volatility, while lower-margin non-tower segments are already diluting consolidated EBITDA margins, moving down from 85% to 83% year-on-year.
  
• While sector consolidation among mobile network operators could create a more stable competitive environment for tower leasing, it also increases customer concentration risk; any further mergers or loss of key telecom tenants could erode recurring revenue and impair earnings stability over the medium to long term.
  
• Although strong cash flows and recent rights issue proceeds have improved the balance sheet and reduced funding costs, ongoing capital allocation into acquisitions and the potential for increased leverage mean that if industry pricing power remains weak or asset utilization fails to recover, net margins and future earnings could stagnate rather than improve.

Sarana Menara Nusantara Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sarana Menara Nusantara compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sarana Menara Nusantara's revenue will grow by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 26.1% today to 28.6% in 3 years time.
• The bearish analysts expect earnings to reach IDR 3897.8 billion (and earnings per share of IDR 62.64) by about August 2028, up from IDR 3382.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the ID Telecom industry at 21.5x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.03%, as per the Simply Wall St company report.

Sarana Menara Nusantara Future Earnings Per Share Growth

Risks

• The ongoing consolidation among Indonesian mobile network operators from more than a dozen to three players increases customer concentration for Sarana Menara Nusantara, raising long-term risks of reduced bargaining power and potential pricing pressure, which could adversely affect future revenue and earnings.
  
• The company reports consistently declining tenancy ratios (from 1.64 to 1.61 within recent quarters), indicating towers are being added at a faster rate than new tenants, which may signal slower organic growth and underutilization of assets, potentially weighing on recurring revenue and net profit margins over the long term.
  
• As Sarana Menara Nusantara expands into non-tower businesses like fiber-to-the-home (FTTH) and connectivity, management highlights that these segments carry structurally lower EBITDA margins compared to the core tower business (with blended consolidated EBITDA margins dropping from 85% to 83% in the past year), which could pressure group-wide profitability as the business mix shifts further toward lower-margin activities.
  
• The company's connectivity contracts, especially in the enterprise segment, are typically short-term (six to twelve months) rather than the long-term multi-year contracts seen in its tower business. This shorter tenor reduces long-term revenue visibility and increases earnings volatility, leaving the company more exposed to customer churn and competitive price pressure.
  
• Management acknowledges that some recent segment revenue growth has been driven by compensating for the loss of a major government account and that future organic growth from non-government sources will need to consistently outpace lost contracts; dependence on large one-off or government contracts heightens the risk of volatile revenues and deteriorating net profits if customer diversification is not achieved.

Valuation

• The assumed bearish price target for Sarana Menara Nusantara is IDR700.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sarana Menara Nusantara's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR1400.0, and the most bearish reporting a price target of just IDR700.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be IDR13634.8 billion, earnings will come to IDR3897.8 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 13.0%.
  
• Given the current share price of IDR620.0, the bearish analyst price target of IDR700.0 is 11.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.