Fitch Ratings Indonesia has assigned PT Profesional Telekomunikasi Indonesia's (Protelindo, BBB/AAA(idn)/Stable) proposed IDR5 trillion bond programme and the first-phase bond issue of up to IDR1 trillion under the programme National Long-Term Ratings of 'AAA(idn)'.

The bonds will have a maximum maturity of up to 2027 and the entire net proceeds will be used to refinance part of Protelindo's existing debt.

The issue is rated at the same level as Protelindo's National Long-Term Rating because the notes represent senior unsecured obligations of the issuer.

'AAA' National Rating denotes the highest rating assigned by the agency in its National Rating scale for that country. It reflects the lowest expectation of default risk relative to all other issuers or obligations in the same country or monetary union.

Key Rating Drivers

Low Rating Headroom: Fitch expects Protelindo's net debt/EBITDA to improve to 4.5x-4.6x in 2022 (FY21: 5.5x), the threshold above which we would consider negative rating action, in the medium term. The debt-funded acquisition of Indonesia's third-largest independent tower operator, PT Solusi Tunas Pratama Tbk (STP) drove up leverage. Our expectation of lower leverage in 2022 and 2023 is supported by the full integration of STP in 2022 and further organic growth. Protelindo started consolidating STP in its accounts since October 2021.

Commitment to Existing Ratings: Protelindo's management have expressed commitment to maintaining its financial discipline and significantly lower leverage than that of global tower peers. The company has historically demonstrated a conservative financial policy in shareholder returns and debt-funded M&A.

Market Leadership in Consolidated Industry: Protelindo is Indonesia's largest independent tower company with 29,011 towers and 54,580 tenancies at end-March 2022. This provides better bargaining power with telcos although this is offset by about 38% revenue exposure to post-merger PT Indosat Tbk (BBB-/AA(idn)/Stable), which has a weaker credit profile than Protelindo.

Protelindo and second-largest tower company, PT Tower Bersama Infrastructure Tbk (BBB-/AA+(idn)/Stable), now control half of Indonesia's towers with another around 25% under PT Dayamitra Telekomunikasi, a subsidiary of wireless leader PT Telekomunikasi Indonesia Tbk (BBB/Stable). The rest is fragmented with several companies having 1,000-3,000 towers, such as PT Bali Towerindo Sentra Tbk (A-(idn)/Stable).

High Cash Flow Visibility: Protelindo's business profile is supported by the presence of non-cancellable long-term contracts with Indonesian telecommunication operators. Its cash flow visibility is high as the company has locked in contracted revenue of around IDR57 trillion and a weighted-average contract maturity for towers of around six years.

Fitch expects revenue to increase by 22% in 2022 on full integration of STP, before moderating to mid-single digit growth in 2023 on organic growth. We expect the company to organically add about 1,000 towers and 1,800-2,500 colocations each year during 2022-2023.

Manageable Contract Renewals and Counterparties: We expect Protelindo to manage the renewal of its tenancy contracts, as only about 11% of its contracts are up for renewal during 2022-2023. Protelindo generated around 82% of its revenue from the top three operators in Indonesia, including the recently merged Indosat-Hutch, in 1Q22.

Higher Capex: We expect Protelindo's free cash flow (FCF) margin to decline to 11% in 2022 (2021: 14%) on higher capex. We forecast 2022 capex to increase to 38% of revenue (2021: 25%) on higher capex on fibre and renewal of ground leases. Capex on fibre networks will remain high as the company aims to expand its fibre connectivity services aggressively.

Wider Diversification: We believe revenue diversification will continue to improve as non-tower businesses, such as metropolitan wireless fibre optic and tower fiberisation, expand by 15%-30% in 2022-2023 and contribute about 20%-23% (2021: 18%) of 2022 revenue. Tower fiberisation has a similar business risk profile as the tower segment due to long-term non-cancellable contracts (10-14 years) and possibility of multiple tenants. However, its 70%-75% EBITDA margin is lower than the tower business's above 80%.

Standalone Rating: We rate Protelindo on a standalone basis because of weak legal and operational linkages with its 52% ultimate parent, PT Sapta Adhikari Investama (SAI), based on a weak parent-strong subsidiary approach under Fitch's Parent and Subsidiary Linkage Rating Criteria. We do not have detailed financial information on SAI as it is a private company. However, Protelindo management have informed Fitch that there are no operations or debt at SAI.

Limited Upstreaming Cash: We believe that SAI's access to Protelindo's cash is limited to its shareholder return policy as 46% of Protelindo's immediate parent, PT Sarana Menara Nusantara Tbk (SMN), is held by public shareholders. Any related-party transactions with the parent requires approvals from shareholders and Indonesia's Financial Service Authority.

Derivation Summary

Protelindo's higher 'AAA(idn)' rating than TBI's 'AA+(idn)' reflects its larger post-acquisition market position, with a larger scale and, potentially, higher bargaining power with telcos. Protelindo and TBI have similar tenancy mixes, with more than 85% of revenue coming from investment-grade entities in 1Q22, including the recently merged Indosat-Hutch. Protelindo's tenancy ratio will remain stable at around 1.9x in 2022-2023, the same as that of TBI. Our funds from operations (FFO) net leverage forecast for TBI of around 5.0x-5.3x for 2022 is similar to that of Protelindo.

Protelindo is rated two notches higher than Indonesia-based consumer food and beverage manufacturer PT Mayora Indah Tbk (AA(idn)/Negative). Both have a solid market presence with the former being the largest independent tower company, and the latter being one of the largest packaged food companies in the country. Mayora has moderately lower FFO net leverage of below 1.0x, but Protelindo's stronger business profile justifies higher leverage. The tower company benefits from solid cash flow visibility based on long-term lease contracts, supported with a cost-escalation clause, whereas Mayora is exposed to commodity-price cyclicality as reflected by its Negative Outlook.

Key Assumptions

Fitch's Key Assumptions within Our Rating Case for the Issuer:

Organic addition of 1,000 towers annually in 2022-2023 (2021: 537)

Decline in average tower rentals of 2% annually to 2025

EBITDA margin of 84% in 2022-2023 (2021: 84%)

Capex at 38% of revenue in 2022 and 35% in 2023 (2021: 25.4%)

Dividend payout of IDR1.4 trillion in 2022 and then decline to IDR1.35 trillion annually during 2023-2025 (2021: IDR1.6 trillion)

Share buybacks of IDR200 billion annually in 2022-2023 (2021: IDR145 billion)

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Protelindo's Long-Term Foreign-Currency IDR cannot exceed Indonesia's Country Ceiling of 'BBB' as the company derives most of its revenue in Indonesian rupiah.

For the National Rating of 'AAA(idn)', no positive rating action is possible, as the company is at the highest level on the national scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Debt-funded M&A or a default by a tenant, leading to FFO net leverage remaining above 4.5x on a sustained basis.

Deterioration in revenue contribution from top-three telcos to below 60%.

Downgrade of Indonesia's Country Ceiling

Liquidity and Debt Structure

Adequate Liquidity: At end-March 2022, Protelindo had unrestricted cash balance of IDR1.8 trillion, committed undrawn facilities of IDR3.4 trillion, and uncommitted undrawn facilities of IDR5.6 trillion, against short-term maturities of IDR13.7 trillion, which included IDR6.2 trillion of revolver loans that can be rolled over. Protelindo's debt is mostly denominated in the local currency with about 92% in rupiah, 5% in Singapore dollars, and 4% in US dollars.

We expect liquidity to remain strong, supported by contracted revenue and robust refinancing ability with access to capital markets and local banks. Protelindo's cost of debt is one of the lowest in the industry at 5%, relative to TBI's 8% and STP's 11%, on a hedged basis.

Issuer Profile

Protelindo is the largest independent tower operator in Indonesia and offers passive infrastructure services to telecom companies.

Date of Relevant Committee

22 September 2021

Sources of Information

Protelindo's ultimate shareholder, SAI, is a private company for which we do not have detailed financial information.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

RATING ACTIONS

Entity / Debt

Rating

PT Profesional Telekomunikasi Indonesia

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