Expanding Fiber Connectivity In Sumatra And Sulawesi Will Boost Prospects

Key Takeaways

• Sarana Menara Nusantara is leveraging non-tower segment growth and industry consolidation to drive revenue through increased infrastructure demand despite potential churn.
  
• Expansion into Sulawesi and Sumatra alongside strategic acquisitions like Remala Abadi aims to boost long-term revenue, connectivity capabilities, and margins.
  
• Intense telecom competition and high leverage pressures, coupled with low-margin growth in non-tower segments, may challenge revenue stability and profit margins.

Catalysts

Owns and operates telecommunication towers for wireless operators in Indonesia.

• Sarana Menara Nusantara is positioning itself to leverage growth in the non-tower segment, particularly fiber-to-the-tower (FTTT) and connectivity services, which are expected to see continued high demand, driving revenue growth.
  
• The company is capitalizing on industry consolidation, such as mergers between telecom operators like XL Axiata and Smartfren, creating opportunities for increased infrastructure demands, which could potentially enhance revenue despite some churn.
  
• They have expanded their fiber optic network significantly, aiming to increase utilization through build-to-suit contracts, which guarantee long-term revenue streams, positively impacting earnings and cash flow stability.
  
• Sarana Menara Nusantara is investing in expansion outside of the Java region, focusing on high-growth areas like Sulawesi and Sumatra, which could bring substantial long-term revenue growth.
  
• Strategic acquisitions such as Remala Abadi are expected to enhance the company's connectivity capabilities, increase fiber utilization, and improve overall margins by integrating and expanding business operations.

Sarana Menara Nusantara Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sarana Menara Nusantara's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.2% today to 27.5% in 3 years time.
• Analysts expect earnings to reach IDR 4037.7 billion (and earnings per share of IDR 81.3) by about April 2028, up from IDR 3335.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the ID Telecom industry at 19.1x.
• 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 13.13%, as per the Simply Wall St company report.

Sarana Menara Nusantara Future Earnings Per Share Growth

Risks

• Intense competition within the telecom industry creates uncertainties and could pressure revenue growth, as noted by discussions on rational pricing and market consolidation. This could negatively affect future revenues if competition erodes market share.
  
• The company's EBITDA margins are expected to decrease as non-tower segments, which typically have lower margins, grow more than the tower segment. This could impact net margins negatively.
  
• The potential for significant churn due to industry consolidations, as seen in the churn rates from Indosat and anticipated from XL and Smartfren, may impact tenancy ratios and therefore revenue stability.
  
• The company's high leverage ratio of 4.58x, an increase from the previous year's 4.3x, could pressure earnings, especially in a rising interest rate environment, affecting net profit margins.
  
• Organic revenue growth is projected to be in the low single digits for 2025 due to challenges in organic business growth, potentially impacting earnings and overall financial performance.

Valuation

• The analysts have a consensus price target of IDR1044.412 for Sarana Menara Nusantara based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR1780.0, and the most bearish reporting a price target of just IDR680.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be IDR14686.3 billion, earnings will come to IDR4037.7 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 13.1%.
• Given the current share price of IDR515.0, the analyst price target of IDR1044.41 is 50.7% 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.