With many stuck at home during the COVID-19 pandemic, bandwidth demand experienced astonishingly increases. People’s behavior shifted from offline activities to online as people were forced to stay at home. Internet consumption trends showed an unprecedented 15% to 20% surge during large-scale social restrictions (PSBB) implementation from early March to June, according to the Indonesian Internet Network Providers Association (APJII).
Telecommunication tower operator PT Sarana Menara Nusantara (SMN) plays a critical role in supporting mobile phone operators, internet service providers, and content service providers across Indonesia by providing backbone infrastructures such as telco towers and fiber optic cables. While many sectors are severely affected by the pandemic, SMN booked its most significant quarterly revenue growth in recent years. In the first quarter of this year, the company’s revenue grew 22% on a year-on-year basis, reaching Rp1.8 trillion. And despite the gloomy expectation of macroeconomic growth, SMN’s vice president Adam Gifari expects the company to book 15% growth to Rp 7 trillion in full-year revenue.
“Since the onset of the COVID-19 pandemic and the implementation of countermeasures, operators have reported record usages of data. While we may face challenges in this environment, we believe the telecommunications sector still has a strong demand potential. Therefore, we expect 2020 to be another strong growth year in both our tower and fiber businesses,” Adam says.
SMN was founded in 2008 in Kudus Central Java and backed by Djarum Group’s subsidiary, PT Sapta Adhikari Investama, who controls 51.71% of its share ownership. As a holding company, SMN’s current focus of operations is carried out through its primary subsidiary PT Protelindo, which was acquired in August 2008. Established in 2003, Protelindo is one of the largest companies in the country owning and operating towers for wireless communications corporations.
The company is known to be aggressive in tower acquisitions. It provides long-term build-to-suit contracts and accommodating co-locations on existing towers to the telecommunication operators. Protelindo’s key customers include the big operators in Indonesia, such as PT Telekomunikasi Selular, PT XL Axiata, PT Indosat, and PT Hutchison 3 Indonesia. As of last year, Protelindo owned and operated approximately 19,319 telecommunication tower sites with more than 33,346 tenants in Indonesia, primarily in Sumatra, Java, Bali, Kalimantan, and Sulawesi.
Since 2010, Indonesian telecommunications operators have increasingly used the services provided by independent tower operators like Protelindo to build and lease space on those towers under long-term lease agreements rather than building and operating their own tower portfolios. This arrangement is known as build-to-suit, which has become one of the telecommunication operators’ business strategies in reducing costs and streamlining their business. Protelindo has constructed 8,568 towers under the build-to-suit arrangement since 2007.
“All the telco operators who need towers come to us. We provide the towers to make it easy for them to focus on their products, rather than thinking about the infrastructure. Our communication infrastructure of towers and fiber-optic cables are generally built after we receive the order from our clients under long-term lease contracts,” says Adam, who also sits as a vice president of Protelindo.
Last year Protelindo spent Rp 5.5 billion to complete the acquisition of 1,000 telecommunications towers from Indosat with nearly 1,900 tenancies and this year, Protelindo plans to finalize the purchase of 1,600 towers from XL Axiata. With its growing tower ownership, Protelindo’s tenancies reached 33,346 tenants at the end of last year. The company has also renewed more than 7,300 leases for another ten years. The rise in rentals came mostly from 2,047 co-locations, driving the tenancy rate to 1.7x. Aside from the tower business, SMN has also seen a growing revenue contribution from the non-tower business through its fiber-optic subsidiary PT iForte Solusi Infotek.
The company has the capacity to deploy microcell sites, which are basically a mini cellular tower emitting signals for mobile phones commonly found inside a building. These microcell sites use a fiber optic infrastructure to provide a better and more stable indoor mobile connection. The company also offers fiberization between telecommunication towers using a fiber-optic line to improve wireless connection reliability.
As of the end of 2019, iForte owns and operates 27,527 kilometers of the fiber-optic network across Java, Sumatra, and Bali. Like the company’s tower business model, the fiber model for tower fiberization has long term contracts, from 10 to 14 years, making it another source for relatively secure and predictable revenue. The rising demand for iForte’s service in big cities like Jakarta and Surabaya fueled a 98% revenue growth last year to Rp500 billion.
Last year, iForte’s contribution to SMN non tower business had tripled to 16.5% from 5.2% in 2016. However, in the future, Adam sees the diversification of SMN’s non-tower portfolios as likely to increase as the demand for wireless internet spikes due to the pandemic. As of the end of 2019, both SMN’s tower and non-tower business have provided future actual potential revenue of Rp 51 trillion until 2032, with an average remaining contract period of 8.2 years.
“The demand for fiberization is supported by strong growth in internet traffic and is expected to continue to grow with demand for wider network coverage under 4G-LTE. We expect to grow over the next few years, in line with the growth of the telco industry and the technological developments driven by the increase in internet usage,” says Adam.
To further support its growth plans, the company plans to optimize its free cash flow and loans to finance business expansion, including completing 2,000 tower acquisitions this year. So far, SMN has also been able to maintain a stable investment-grade balance sheet. The company obtained a rating upgrade from S&P to BBB from BBB- and gained a positive outlook from Fitch (BBB-) and maintained a Baa3 rating from Moody’s. Fitch Ratings has also upgraded Protelindo’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to BBB with a stable outlook from BBB- last May. The improvement is underpinned by its better tenancy mix, lower contract renewal risk, healthy growth, and increasing revenue diversification.