Future Fiber Investments And FTTH Demand Will Strengthen Market Position

Key Takeaways

• Consolidation and increased fiber capacity promise revenue growth, improved operational efficiency, and diversification in telecommunication infrastructure markets.
  
• Debt refinancing and strategic expansions in less saturated regions can boost net income through reduced interest expenses and heightened demand for FTTH services.
  
• Consolidation impacts revenue growth; high leverage and client churn risks could pressure earnings amidst goodwill impairment concerns.

Catalysts

Owns and operates telecommunication towers for wireless operators in Indonesia.

• The consolidation of IBST, despite initial lower profitability, offers potential revenue growth and operational synergies that can enhance overall earnings. This consolidation can lead to increased revenue streams and potentially higher net income through operational efficiency improvements.
  
• With a significant increase in fiber capacity and utilization, the company is well-positioned for strong future revenue growth in the fiber-leasing segment, translating to higher earnings and margins due to scale efficiencies.
  
• The company’s strategic move towards more fiber acquisitions can diversify revenue streams beyond tower leasing, increase market penetration, and improve overall net margins by capitalizing on higher-margin opportunities in the telecommunications infrastructure market.
  
• Future debt refinancing, particularly if interest rate cuts occur, could reduce interest expenses significantly, leading to improved net income margins. Additionally, the upcoming rights issue will provide funds for debt reduction and expand capacities, positively affecting earnings.
  
• Strong demand for Fiber-to-the-Home (FTTH) services, especially in less saturated markets outside Java like Sumatra, indicates an opportunity for substantial revenue growth. This diversification within regions could result in expanded market share and an overall increase in revenue and profitability.

Sarana Menara Nusantara Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sarana Menara Nusantara's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.3% today to 27.7% in 3 years time.
• Analysts expect earnings to reach IDR 4053.7 billion (and earnings per share of IDR 78.27) by about March 2028, up from IDR 3274.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as IDR3481.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, up from 7.9x today. This future PE is lower than the current PE for the ID Telecom industry at 22.1x.
• 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 13.38%, as per the Simply Wall St company report.

Sarana Menara Nusantara Future Earnings Per Share Growth

Risks

• The consolidation of IBST has resulted in a lower tenancy ratio, which could negatively affect revenue growth if not addressed.
  
• The company's net income only slightly increased despite significant revenue growth, indicating potential issues with cost management or margin pressures that might affect future earnings.
  
• The leverage is relatively high at 4.35x, which poses a risk if interest rates rise or financial conditions tighten, impacting future profitability due to higher interest expense.
  
• There is a risk of revenue volatility due to potential churn from major clients such as Indosat and XL, as competitive pressures and weaker operator selling prices may cause fluctuations in tenancy growth and revenue.
  
• The company has goodwill from past acquisitions, and any impairment risk due to overvaluation of assets could lead to significant write-downs, impacting future earnings and profitability.

Valuation

• The analysts have a consensus price target of IDR1109.333 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 IDR700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be IDR14635.2 billion, earnings will come to IDR4053.7 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 13.4%.
• Given the current share price of IDR520.0, the analyst price target of IDR1109.33 is 53.1% 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.