Fitch Ratings has affirmed Indonesian telecommunications tower company PT Tower Bersama Infrastructure Tbk's (TBI) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'.

Fitch Ratings Indonesia has simultaneously affirmed the National Long-Term Rating and national senior unsecured rating of 'AA+(idn)'. The Outlook is Stable.

The Stable Outlook reflects TBI's high cash flow visibility, stable rating headroom underpinned by management's commitment to a leverage target, and business resilience against non-renewal of tower leases by its key tenant, PT Indosat Tbk (BBB-/AA+(idn)/Stable), following its merger with PT Hutchison 3 Indonesia in 2022.

'AA' National Ratings denote expectations of a very low level of default risk relative to other issuers or obligations in the same country or monetary union. The default risk inherent differs only slightly from that of the country's highest rated issuers or obligations.

Key Rating Drivers

Low Ratings Headroom: We expect TBI to maintain its EBITDA net leverage at around 4.9x during 2023-2025 (1H23: 4.7x), below the threshold of 5.3x, above which we may take negative rating action. Management is committed to its investment-grade ratings and targets to maintain its net debt/last-quarter annualised EBITDA below 5.0x, which corresponds to Fitch-defined EBITDA net leverage of 5.1x-5.2x. Its distributed shareholder returns so far in 2023 are lower than last year, to build cushion in its balance sheet against any additional non-renewal of tower leases by Indosat.

Lease Non-Renewal to Stabilise: We assume tower lease non-renewal in 2023 to be around 1,850 (1H23: 1,061), significantly higher than the annual churn of 320-570 tenants during 2019-2022. We expect TBI's tenant churn rate to stabilise starting 2024, as we expect the dismantling of Indosat's redundant sites to be completed by end-2023. We estimate that the share of lease expirations in overall leases in the next three years to fall as well, which will contribute to a lower churn rate.

Our base case does not factor in the impact from a potential acquisition of PT Smartfren Telecom by another telco. However, we believe this would have a smaller impact on TBI than the Indosat-Hutch merger.

Revenue Growth to Recover: We expect revenue to be flat in 2023 and rise by around the mid-single digits from 2024, driven by net tenancy growth and expansion of the fibre business. EBITDA margin is likely to fall gradually to 85% due to a higher share of revenue from the fibre business, which has lower margin than the tower segment. We expect TBI to add about 850 net tenancies in 2023 (1H23: 544) and about 2,000 a year in 2024-2025. 2023 revenue growth is hampered by higher non-renewal and lease rate resets to lower rupiah rates on 2,500 Indosat contracts in 2H22.

Strong Cash Flow Visibility: TBI's ratings benefit from long-term lease agreements that provide cash-flow visibility. Total locked-in revenue increased to IDR35 trillion by end-June 2023 (2022: IDR31 trillion) with average remaining contract life of 5.5 years, which is sufficient to cover all the company's outstanding debt. Renewal rates are typically high as towers are mission-critical infrastructure for telcos, which avoid relocating equipment to minimise service disruption. TBI's towers have limited overlap with other operators', which helps avoid price competition among tower operators.

Measured Shareholder Returns: We expect shareholder distribution to remain prudent and in line with TBI's leverage target. TBI paid IDR800 billion in dividends so far in 2023 (2022: IDR816 billion). We expect TBI to increase its dividends on reduced uncertainty in the lease churn outlook and recovery in revenue.

We expect TBI to buy back about IDR330 billion of shares in 2023 (2022: IDR766 billion). It repurchased less than 10% of approved shares so far and 80% of shares bought back since May were sold to its 75% parent, Bersama Digital Infrastructure Asia Pte Ltd (BDIA). We expect proceeds from treasury share sales to reach IDR1.1 trillion in 2023, more than the cash TBI will spend on share buybacks during the year.

Negative Free Cash Flow: We expect TBI's free cash flow (FCF) remain negative due to continued shareholder distributions and our expectation of higher fibre capex. However, the FCF deficit should narrow, driven by growing revenue and operating cash flow. Cash flow from operations should be enough to fund the company's capex. Management is cautious on M&A and indicated TBI will focus on organic growth rather than acquisitions. We believe the company has the flexibility to delay dividends or reduce the dividend payout ratio to meet its leverage target.

Rated on Standalone Basis: We rate TBI on a standalone basis based on Fitch's Parent and Subsidiary Linkage Rating Criteria because we believe BDIA's consolidated credit profile is the same to TBI's as BDIA's data centres are on a smaller scale compared with TBI. We believe BDIA's access to TBI's cash is limited to TBI's shareholder return policy. With 15% of shares owned by the public, significant affiliated-party transactions with BDIA or related entities require shareholder approval and are subject to regulations.

No Material Structural Subordination: We expect TBI's prior-ranking debt to remain at less than 1x of EBITDA. Therefore, bonds issued at the holding company level are rated at the same level as TBI's IDR. TBI's prior-ranking debt are mainly a US dollar revolving credit facility (RCF), which was less than 10% of its total outstanding debt at end-June 2023. The company reduced its reliance on US-dollar borrowings by subsidiaries and expanded borrowings from onshore lenders during 1H23.

Derivation Summary

TBI warrants a notch lower rating than PT Profesional Telekomunikasi Indonesia (Protelindo, BBB/AAA(idn)/Stable) on both the national and international rating scales. This is based on Protelindo's more conservative leverage target and shareholder-return policy, record of maintaining lower EBITDA net leverage, slightly better market position and revenue diversification that mitigates the slowdown in the tower segment. However, TBI has lower M&A appetite than Protelindo. We forecast TBI's EBITDA net leverage to remain at around 4.9x in 2023-2024, while we forecast Protelindo to deleverage to 4.2x by 2024 from 4.6x currently.

TBI is rated two-notches below US-based tower operator, American Tower Corporation (AMT, BBB+/Negative), and second-largest operator Crown Castle Inc. (CCI, BBB+/Stable) due to its weaker business profile, despite a slightly lower EBITDA net leverage. AMT and CCI are significantly larger than TBI. The Negative Outlook on AMT's rating reflects Fitch's expectation that it will not reduce EBITDA net leverage below 5.5x until 2025, whereas Fitch expects CCI's EBITDA net leverage to remain at 5.1x-5.2x.

TBI warrants a similar rating as European tower company, Cellnex Telecom S.A (BBB-/Stable). Cellnex is larger and geographically diversified in 12 European countries, which reduces its dependence on a single market or customer. However, Cellnex's EBITDA net leverage will remain above 7.0x till 2024 before falling to 6.5x by end-2025, which is significantly higher than TBI's EBITDA net leverage of below 5.0x.

Indian tower company, Summit Digitel Infrastructure Limited's (BBB-/Stable) business risk profile is better than that of TBI. Summit has significantly larger scale, contracts with longer tenors and more favourable terms in the contracts than TBI. TBI's locked-in revenue and average remaining contract life are lower than Summit's, but these are mitigated by a better tenancy diversification and lower regulatory risks. Indian telcos have mostly consolidated, mitigating the risk to Indian tower companies from further customer consolidation. TBI's stronger financial profile counterbalances these factors, as we expect TBI's EBITDA net leverage to be around 4.9x in 2023-2024, lower than Summit's 5.4x-5.8x.

Key Assumptions

Flat revenue for 2023 (2022: increase of 5.6%) due to Indosat lease non-renewal. Revenue to increase by 4% to 6% during 2024 and 2025.

Net tenancy additions of 850 in 2023 (2022: 1,796), due to impact from Indosat-Hutch's network integration and normalise to 2,000-2,100 a year in 2024-2025.

EBITDA margin to gradually decline to 85% due to a higher share of revenue from the fibre business, which has lower margin.

Capex to moderate to around IDR2.6 trillion in 2023 and recover to IDR3.3 trillion-3.6 trillion a year in 2024-2025 driven by higher capex on new towers and fibre networks.

Dividends and share buybacks together to reach IDR1.2 trillion in 2023, including IDR900 billion in dividends. Dividends to increase to IDR950 billion-1,100 billion a year in 2024-2025.

Average interest rate of borrowing at 6.0% for 2023 and decline to 5.5% in 2024.

RATING SENSITIVITIES

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

EBITDA net leverage below 4.3x for a sustained period.

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

More aggressive shareholder returns, debt-funded acquisition or further telecom sector consolidation that leads to higher tenancy churn that causes EBITDA net leverage to remain above 5.3x for a sustained period.

Liquidity and Debt Structure

Robust Access: TBI had a cash balance of IDR909 billion and undrawn committed facilities of around USD160 million (equivalent to IDR2.4 trillion) at end-June 2023, with another IDR4.2 trillion in uncommitted facilities. Debt maturing in the next 12 months was IDR8 trillion at end-June.

We believe TBI's access to both onshore and offshore loan and bond markets remains robust. In April 2023, TBI secured a new US dollar RCF with total commitment of USD325 million. The new RCF interest rate ranged from 6.26% to 6.40% during 1H23 (at SOFR + 1.25%), comparable to the 6.0%-6.73% effective interest rate that TBI paid on the previous two USD RCFs during the same period. TBI also secured additional short-term unsecured bilateral loan facilities totaling IDR4.5 trillion from onshore lenders in 1H23.

Mostly Fixed-Rate Debt: TBI's effective interest cost dropped to 6.1% by end-2Q23 from 6.4% at end-2022 with over 86% debt at fixed rates. Debt maturity remains well-spread, with IDR3.7 trillion and IDR4.4 trillion of outstanding debt maturing in 2023 and 2024 respectively, which represented 30% of total outstanding debt at end-June 2023.

Issuer Profile

TBI builds, owns and operates telecommunication towers for mobile operators. It had 22,136 tower sites and 41,428 tenancies as of end-June 2023.

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.

BDIA is TBI's direct parent and owns 75% of TBI. BDIA is jointly owned by MAIF3 (32.3%), Provident Capital (38.2%) and Saratoga (29.5%). Saratoga retains 9% direct ownership in TBI, and the public owns the remaining 15% stake in TBI. We do not have access to BDIA's financial statements. According to TBI's management and publicly available information, BDIA owns some data centres acquired from Saratoga and Provident, but the overall scale of the operation is very limited compared with TBI.

TBI's management is committed to its leverage target. Transactions with affiliated parties require disclosure and significant related-party transactions also require approval from independent shareholders.

The company has distributed IDR800 billion of dividends so far for 2023, which is slightly lower than dividend distributed in prior year despite higher profit in 2022. Overall, we believe our assumptions on shareholder returns adequately incorporates the risk of the parent extracting cash from TBI.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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