Indonesia telecoms Capex to grow in 2018 and 2019

Indonesia telecoms Spectrum Ownership by TelcosFitch Ratings said average net leverage for the telecom sector in Indonesia is likely to stabilise at around 1.7x in 2018.

This follows periods of deleveraging in 2015-2017 by second-largest telecom operator PT Indosat Tbk (BBB+/Stable) and third largest XL Axiata Tbk (BBB/Stable) to reduce their forex debt exposure.

Telecom industry EBITDA will grow at mid-single-digit rates, underpinning the continuing rational competition in the Java region and gradual data monetisation.

Average CFFO should be sufficient to cover cash Capex and a progressive increase in dividends.

Industry Capex is likely to be higher in 2018 and 2019, as telecom operators invest to meet rising demand for LTE services. Incremental Capex comes on the heels of Indosat’s and XL’s plans to expand their network coverage outside Java – a region dominated by incumbent telecom operator Telkomsel  – while Telkomsel pursues its networkleadership strategy.

A sharper focus on data monetisation should drive rational pricing and boost profitability for mobile, despite targeted offerings for certain segments. The introduction of prepaid SIM-card registration may lead to a temporary dip in revenue or higher marketing costs should telecom operators offer incentives to register by the end-February 2018 deadline.

Meanwhile, there will be a strong fixed segment momentum for cable and fibre broadband services, propelled by a broadband network target of achieving 71 percent of urban households at 20Mbps by 2019, from around 10 percent.

The average Capex / revenue ratio for the three major telecom operators will remain high at around 26 percent in 2018.

XL and Indosat are each gradually rolling out their networks outside Java, following delays in their network-sharing collaboration.

The conclusion of the 2100MHz and 2300MHz spectrum auctions in October 2017 is likely to drive higher Capex, as telecom operators intensify 4G network expansion rather than just pursuing upgrades of existing infrastructure. However, we expect them to weigh investment needs with their desire to maintain balance-sheet strength.

There will be fewer tower sale prospects, but industry consolidation is likely to take place since smaller independent tower companies lack economies of scale. This should reduce competition and drive market share gains for larger tower operators such as Protelindo and TBI. Protelindo has the most resilient financial profile among the domestic peers, deepening its capacity to undertake future acquisitions.

The conclusion of Indonesia’s 2100MHz and 2300MHz spectrum auctions is likely to accelerate telecom capex, and drive tenancy additions in 2018. However, telecom operators would first need to refarm their 2100MHz, which we expect by 1Q17.

XL’s and Indosat’s plans to expand their footprint outside Java areas should also lead to stronger tower additions. TBI and Protelindo will benefit from any accelerate Capex expansion by their respective largest tower tenants – Telkomsel and PT Hutchinson 3 Indonesia, given the telecom operators’ recent spectrum wins.