TowerXchange’s history of the Indonesian tower industry

Indonesia’s tower industry is one of the world’s most mature and strongest, combining efficient organic growth, strong MNO partnerships yielding substantial sale and leasebacks, and towerco-on-towerco consolidation. Towercos own almost two thirds of Indonesia’s towers, and other than China, there are no other tower markets that build 3,000 to 5,000 towers, rooftops and infill sites per year while delivering solid tenancy ratio and TCF (tower cash flow) growth.

The Indonesian tower market has come a long way; in the early 2000s, Indonesia was overpopulated with MNOs sub-optimally deploying capex to build parallel infrastructure. However, all of that was about to change. A 2006 regulatory policy change enforced tower sharing and laid the foundation for the Indonesian tower industry. Now Indonesia is the world’s #4 mobile market, with a thriving tower industry. Indonesian towercos own 64% of the country’s 85,537 towers, which serve a more sustainably structured operator market led by four tier one MNOs and three further challengers.

While the mobile market in Indonesia has experienced tremendous growth for several years, it is becoming more and more competitive and margins have been shrinking. MNOs have been bracing for change as growth rates have levelled off and tariff wars have intensified. The market is still dominated by Telkomsel with a 45% market share, but the landscape has changed with the addition of a number of newer operators backed by foreign partners: Indosat, XL Axiata, and Hutchison 3G. The market is rounded out by several other local players: Internux, Sampoerna Telekomunikasi and Smartfren, making a total of seven MNOs. Telkomsel was the first to launch 4G in December 2014, followed shortly by XL Axiata’s launch in three cities later the same month. Indosat received a 4G concession in the 800MHz, 900MHz and 1800MHz bands in early 2015.

Indonesia’s GDP per capita has surpassed the US$3,000 threshold, indicating the emergence of a fast-growing middle class. A healthy 60% of GDP goes on local consumption – Indonesia has relatively little dependence on imports. During the 2008 global financial crisis, Indonesia was one of a handful of countries whose GDP growth remained positive.

Indonesia is home to very diverse telecom infrastructure requirements, comprising dense metropolitan environments and very remote rural areas. There is a population of 28 million in the Greater Jakarta metropolitan area alone at peak, and mobile data demand is accelerating, which in turn is fuelling demand for infill capacity sites. Indonesia has a young population that moved straight to mobile and has embraced data services; mobile broadband penetration is at 37% and climbing, and handheld devices are the preferred method of accessing the Internet. Indonesia is still predominantly a 2.5G market, and leapfrogging from there to 4G is a huge task that will require substantial investment in infrastructure and equipment.

Protelindo is the largest towerco in Indonesia where they own over 15,000 towers after the recent acquisition of 2,500 towers from XL Axiata in Q1 2016.

Protelindo had a big impact on the market with its landmark sale and leaseback of towers from Hutchison. Over the last two years, Protelindo has significantly improved its scale and credit profile. Its leverage has improved through EBITDA growth, supported by a significant increase in the number of tenancies on its towers.

Protelindo has also begun to expand its microcell assets and fibre footprint to support the continued organic and inorganic growth of its portfolio. The company acquired iForte in June 2015 along with its 450 microcell towers, seven hotel BTS and 700km of fibre with over 180 PoPs in the city centre and business districts in Jakarta and Surabaya.

Based in Indonesia, the Tower Bersama Group comprises PT Tower Bersama, PT United Towerindo, PT Telenet Internusa, PT Batavia Towerindo, PT Bali Telekom, PT Prima Media Selaras and PT Triaka Bersama, all operated seamlessly under one management team. The group’s infrastructure extends to Java, Bali, Sumatra and Batam and is currently being expanded into Kalimantan and Sulawesi.

Tower Bersama has steadily grown its tower portfolio with acquisitions of smaller towercos, towers purchased from operators, and tower builds, and was the first towerco to achieve scale with its early acquisition of passive infrastructure assets from Telenet Internusa, Bali Telekom, Mobile-8, Prima Media Selaras and SKP.

A share-swap to gain control of Telkom subsidiary Mitratel was announced, but was overruled by the government in Q3 2015.

STP is the third largest tower company of scale in Indonesia, owning and operating 6,938 telecommunication sites with a tower tenancy ratio of approximately 1.7x. STP has seen steady growth thanks to the acquisition of existing portfolios from local operators such as Axis, Bakrie and Hutchison Telecom, and also acquired tower portfolios from a few small tower companies over the past years: Nurama Tower (176 towers, 182 shelters and 100km of fibre), HCPT (200 towers) and ISP Group (493 towers and 287 shelters).

STP has also started building towers as of December 2012 creating organic growth in addition to its inorganic growth; their revenue and EBITDA are growing at a CAGR of around 40%, and EBITDA margins remain over 80%.

Founded in 1995, PT. Dayamitra Telecommunications (Mitratel) is the fourth largest towerco in Indonesia. Mitratel is a wholly-owned subsidiary of PT. Telekomunikasi Indonesia, Tbk (Telkom).

PT Komet Infra Nusantara (KIN) is a towerco renowned for their entrepreneurial flair. The company started operating in Indonesia in 1995 and was created on the basis of the simple notion of introducing infrastructure sharing in a relatively virgin market by its (former) CEO, David Burke, who was then employed by Telkom (David was also credited as being one of the architects of Mitratel). David was one of the few expats to work for the state-owned company, to whom the whole concept of tower sharing was very new. To date, KIN enjoys a portfolio of 1,000 towers built thanks to both organic and inorganic growth and is run by CEO and COO, Mohamad Iwan.

PT Inti Bangun Sejahtera Tbk (IBS) is one of Indonesia’s “big four” publicly traded independent tower companies, founded in 2006 and listed in August 2012. IBS is a fully-owned subsidiary of the Sinar Mas Group, which also includes MNO Smartfren among its telecoms assets. Starting as an in-building system solution provider, IBS has since focussed its resources on passive infrastructure, earning it a significant presence in the market.

Founded in Bali in 2006, and a relative newcomer to the Jakarta telecoms market, Balitower has been making waves with its unique business model for infrastructure sharing. After its role in the decommissioning of parallel infrastructure in Bali, Balitower set its sights on Jakarta, entering this market in 2015, and rolling out a large number of new light towers and poles as part of a deal with the local government to install CCTV on its towers and poles in exchange for access to land.

Established in 2006, PT. Persada Sokka Tama started off constructing BTS towers before becoming a tower provider in 2008 and providing co-locations for telecoms service providers in Indonesia. The company has over 1,000 towers mostly concentrated in Java and Nusa Tenggara.

At the outset, the Indonesian tower industry looked closely at the Indian model and used it as a benchmark. However, the two countries ended up taking very different paths with Indonesia being able to allocate risks and rewards more evenly between towercos and MNOs and more closely replicating the North American tower industry model. And the profitability of the Indonesian tower industry is one very obvious measure of its success.

Indonesian towercos, particularly Protelindo, Tower Bersama and STP, quickly drew the attention of the investment community. Debt was made available and capital flowed, enabling further organic and inorganic growth. Successful bond issuances and IPOs followed. There are five towercos of scale in Indonesia and over forty ‘mom and pop shops’ and middle market towercos in Indonesia, ranging from local community managed assets to substantial regional entities, owning anything from a handful to 1,000 towers each.

In a recent TowerXchange article New Street Research referred to a Single Tower Model the research firm built to compare colocation growth, economics, and returns of towers in different markets around the globe. The model analysed base station density, smartphone penetration, leasing rates, escalators, pass-through expenses, construction costs and regulatory risk, and they concluded that Indonesia was the most attractive tower market for investors, and generated one of the highest day one cash flow yields (at 15%, excluding pass-through expenses). New Street Research estimated prevailing lease rates in Indonesia to be around US$1,200pcm at the end of 2015.

One of the largest proposed tower deals in the history of the Indonesian tower market was the acquisition of Mitratel from Telkom by Tower Bersama. First announced in late 2014, the initial phase of the swap deal was to see TBIG receive 49% of the shares in Mitratel in return for 290mn TBIG shares (approximately a 5.7% stake). No cash was to change hands in the first phase of the deal, although TBIG would assume ~US$234mn of debt. The second phase could follow anytime in the following two years, during which time PT Telkom Indonesia had the right to swap its remaining 51% stake in Mitratel for an additional 473mn TBIG shares – a further 8%. This would value the deal at the equivalent of around US$904mn, including ~US$142.5mn in cash as a deferred consideration if certain performance milestones were achieved. In the end this deal was cancelled in mid-2015 as it failed to gain the approval of the Indonesian government, and to date the future of Mitratel and its ~8,000 towers remains uncertain.

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The ebb and flow of sale and leaseback deals since 2008 has led to Tower Bersama, Protelindo and STP deploying around US$2bn to acquire 12,220 towers from Indonesia’s operators, and they’ve built a similar number of build-to-suit and build-to-fill sites over that period. For Indonesia’s ‘Big Three’ towercos, the prized assets are Telkom/Telkomsel’s 17,615 remaining operator-captive towers, the most pervasive network in the country, of which the operator has admitted as many as 13,000 could be sold, although they have no financial imperative to divest. With the cancellation of the Mitratel deal, it is unclear whether these assets can still be acquired or whether Mitratel is destined to continue as a captive towerco, in which case it could be a vehicle for the management of the aforementioned 13,000 Telkom towers.

In addition to the active tower market, operators are also continuing to partner with each other to remain competitive, especially the smaller market players. Indosat and XL Axiata have been engaged in RANsharing for some time, and this has also been extended to include co-operation on the rollout of some LTE sites. Partnerships like this can greatly reduce opex and help smaller operators to remain competitive, and keep shareholders happy. The model is so successful that Indosat and XL Axiata have proposed creating a separate entity to manage their networks outside of Java. Another possible step in terms of partnership for Indosat and XL Axiata would be the creation of a joint venture towerco to pool and optimise their tower assets. At this stage, however, these planned partnerships have been limited by the government, and it appears that they won’t advance anytime soon, raising concerns about the level of competition in the MNO market, and rumours of MNO consolidation and sales are starting to emerge.

There is significant cell site densification occurring in Indonesia driven by consumer demand for mobile data services, and the tower industry is starting to grasp the heterogeneous networks (‘HetNet’) opportunity. Rooftop installations make up a significant chunk of the assets of Indonesia’s ‘Big 3’ towercos, namely Protelindo, Tower Bersama and STP. The other major factor in the future of Indonesia will be diversification of product offerings to adapt to LTE. STP and Protelindo appear to be on the front foot in this regard with their diversification into fibre, microcells and DAS. As of September 2015, STP had a 2,454km fibre network and 384 microcell poles, thanks to their purchase of BIT Teknologi Nusantara, and their earlier acquisition in 2012 of PT Platinum Teknologi. Protelindo recently acquired iForte and their 450 micro cell towers, seven Hotel BTS and 700km of fibre. Meanwhile, Balitower have installed fibre and added over 2,000 micropoles in Jakarta.

The Indonesian tower market is elegant and investible because of its simplicity. A deep culture of infrastructure sharing has been rapidly developed: Indonesia’s towercos build 3,000-5,000 towers, rooftops and infill sites per year, tenancy ratio growth compares favorably to many other global tower markets, with around 0.13 tenants added per tower per year. Indonesia may be the most comparable tower market in the world to the USA, with MSAs and economics closely resembling the world’s oldest independent tower market, perhaps not surprising given the prominent role played by one of the US tower market’s forefathers, Michael Gearon, in the creation of Protelindo. Indonesia’s towercos are not encumbered by significant engagement in energy logistics - power is a pass through on almost all their sites, yet many are expanding their business model by investing in fibre and small cells.

TowerXchange are a little surprised by the relatively low valuations ascribed to Indonesian towercos, although STP and Protelindo have such a low float as to make poor benchmarks. Tower Bersama’s share price reached such an attractive point that the company recently instigated a substantial share buyback programme.

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TowerXchange think there is still value to be found in the simple, stable, mature Indonesian tower market, and there are many best practices to learn from the Indonesian market leaders attending the TowerXchange Meetup Asia in Singapore on December 12-13!

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