Karachi, December 07, 2022 (PPI-OT): ENGRO: Telecom vertical to unlock value in the long-run
The telecom industry has seen a massive shift in the recent past with Telecom companies (Telcos) now globally selling their towers to tower management companies which are dedicated Tower managers with expertise in the area to focus on core business of mobile data services.
To benefit from the same, Engro’s Enfrashare, a 100% owned company by Engro Corporation Limited (ENGRO) through Engro Connect, is constantly on the look to buy existing towers owned by Telcos across the country and is also reportedly interested to buy c. 10,500 towers up for sale by a Telecom company.
Following on from a Rs21bn commitment to towers’ business, ENGRO continues to remain among our top picks as the stock trades at a discount to our SoTP based valuation of Rs353/share.
Engro’s Enfrashare on the path of growth
Engro Corporation Limited’s (ENGRO) wholly owned subsidiary, Engro Connect (EConnect) provides a unique platform for telecom and connectivity initiatives. EConnect also houses the flagship Enfrashare. ENGRO has made an equity commitment of Rs21.5 bn in the business. By the conclusion of CY25, management projects that Enfrashare would be able to accommodate more than 5,000 towers.
Enfrashare has established strong relationships with all MNOs of Pakistan and is working closely with them to build new cell sites. The company is also eyeing to buy the existing towers owned by Telcos across the country. The largest MNO, Jazz is looking to sell its c. 10,500 towers in the country and ENGRO has reportedly showed intent to acquire these towers.
Enfrashare added additional towers during 9MCY22 taking the total operational sites to 3,132 towers. The company witnessed highest tenancy growth in 9MCY22 and closed the period with a 61% market share in the segment. Enfrashare achieved a tenancy ratio of 1.14x during the on-going year. The company targets a tenancy ratio of 1.33x by 2025. The company expects the EBITDA to magnify due to economies of scale as more tenants come in at a marginal cost. Enfrashare is also going for Solarization to save energy costs. Greater solarization of sites will generate energy cost savings, contributing further to the EBITDA. At present, close to 40% sites are energized by solar power.
Telcos are selling their towers to tower operators
The global telecom industry has seen a massive shift in the recent past with Telecom companies focusing more on mobile data services compared to voice and text services. This has created a demand for more coverage or in essence more towers which would in turn create huge CAPEX requirements for these companies. Telecom industry is hence a capital-intensive industry and capital requirements compound as technology advances. For this reason, Telcos are now globally selling their towers to tower management companies which are dedicated Tower managers with expertise in the area.
This concept gained popularity when major telecom firms saw the benefit of maximising the potential of tower assets by selling space to various tenants. Since it is their core business, Tower Companies concentrate on making operational advancements, such as more efficient energy solutions, remote monitoring services and work to reduce maintenance expenses. While on the other hand, it helps mobile network companies focus on generating core revenue through improvement and enhancement in telecom services.
How does it work
The Tower company business model has two forms, (1) entering into a sale and lease-back arrangement with the Telco and (2) agreement of a Built-to-suit where a Tower company would enter into a contract with a Telco to build, own and operate its towers.
The tower company however may offer multiple Telcos to share space on the towers it owns resulting in economies of scale. The Telcos pay a lease fee in return against the tenancy occupied on towers. The contracts are Long-term in nature and have clauses for annual revenue escalations along with renewal options providing greater visibility of cash flows.
Pakistan also sees growing acceptance for the idea
Tower company business model is also gaining support in the local landscape and mobile operators now support the development of independent Tower companies in Pakistan. Pakistan currently has four major Mobile network operators which cater to Pakistan’s mobile subscriber base. The largest player is Jazz, followed by Telenor, Zong and Ufone. These companies collectively have close to 47,000 cell sites. Whereas, Pakistan’s tower count is expected to increase significantly during the ongoing decade as demand grows in response to the need to spread 4G technology across the country. The arrival of 5G and Governmental push for connectivity will further add to the demand. There are two prominent players in the tower management space in Pakistan of now, Engro’s Enfrashare and Edotco (a Malaysian company).
ENGRO – well diversified portfolio at a discount
We believe ENGRO offers a well-diversified portfolio (exposure to Pakistan agriculture, consumer, connectivity, energy and chemicals space) and is currently trading at a discount. With a number of prospective fruitful investments, ENGRO’s dividend stream is expected to continue to remain on a sustainable track with a 2023E D/Y of 14% and leads us to maintain our “Overweight” stance on the conglomerate. We have an SoTP based TP of Rs353, which does not include potential investment in the Petrochemicals space and the potential additional tower portfolio acquisition by Enfrashare. We incorporate Enfrashare value at its book value for now given more clarity and disclosures are required to quantify the impact from the same. We do not rule out contribution to the conglomerate’s total value by Enfrashare being higher than its BV in the longer run.