Highlights 

XL  has  announced  the  sale  of  3.5k  telco  towers   (~35%  of XL’s  existing tower assets)  to PT Solusi Tunas Pratama Tbk. (STP),  third  largest  independent  tower  company  in Indonesia,  through  an  open  tender  for  a  total  all  cash consideration  of IDR5.6tr  (USD460.5m  or RM1.5bn).

XL  will  lease  back  these  towers  under  preferential  anchor tenant  terms , including:

• Flat  month  rental  of  IDR10m/month  per  tower  locked in for 10 years;
• No separate operation  and maintenance  component;
• No escalators (including  for inflation);  and
• 100% in IDR.

Unlocked  attractive  valuation  (~9x  EV/EBITDA)  makes  the transaction significantly NPV positive  for XL.

Sale  proceeds  will  be used to pare down debts which mainly arose from Axis acquisition.

A  positive  step  towards  asset  light  strategy  and  allow  XL  to monetize  additional  resources  (non-core  assets)  to  focus  on its  core  business.   Moreover,  this  would  cement  enhanced partnership  with STP.

Transaction  is expected to be closed by 31 Dec 2014.

Financial impact

Improvement  in  gearing  (net   debt/ EBITDA) from 3.2x to 2.5x (pro forma).

Reduction  in  interest  cost,  depreciation  and  CAPEX  partly offset  by the additional  monthly rental expense.

XL  foresees  limited EBITDA impact, ~200bps dilution in 2015 but expected to be EPS accretive  in the medium term.

Comments 

A  positive  development  allowing  XL  to  minimize  duplication and  right  size  its  tower  portfolio,  especially  after  Axis consolidation  which came along with additional  ~1.6k towers.

Partial  outsourcing  model  with  full  O&M  cost  savings  for these towers  – an optimum business model for  telco.

Better  average  pricing  per  tower  –  sold  at  USD132k  per tower  (+5.6%)  compared  to  purchase  consideration  of USD125k  per tower in Axis deal.

Catalysts 

• Higher  smartphone  penetration  boosting data ARPU.
• Strong growth  in low penetration  developing  markets.
• More cost savings from  collaboration  with DiGi.

Risks 

• Regulatory  risks, FOREX  fluctuations and  competitive  risks.

Forecasts 

• Maintained  pending  further  guidance.

Rating  HOLD, TP: RM6.92

• Positives  –  mobile  internet  growth,  margin  improvements through  collaborations/sharing,  recoups  prepaid  tax  via  GST, unlock value  through  tower listing.
• Negatives  –  Challenging  operating  environment  in  Indonesia, Axis  to  weigh  down  XL  in  the  short  term,  OTT  substituting voice  and SMS, unable to monetize data.

Valuation 

• Maintain  HOLD  with  unchanged  SOP-derived  TP  of  RM6.92

Source: Hong Leong Investment Bank Research - 2 Oct 2014