Seeking to Expand Its Wings

Founded in 2000, PT Mora Telematika Indonesia Tbk (IDX: MORA), or Moratelindo, is an Indonesian privately-owned network access provider and internet service provider. It is owned by PT Gema Lintas Benua, PT Candrakarya Multikreasi, and PT Smart Telecom–a subsidiary of PT Smartfren Telecom Tbk (IDX: FREN). MORA owns five direct subsidiaries, including PT Palapa Ring Barat and PT Palapa Timur Telematika, and one indirect subsidiary.

 

Source: Company

 

As it stands, MORA is raising over Rp1 trillion by issuing a maximum of 2.6 billion new shares to the public. Of the Rp1 trillion proceeds, 85% will be for network expansion, including backbone, last mile, capacity upgrade, and passive infrastructure. The remaining 15% will be for working capital and general corporate purposes. You can see details of the IPO in Figures 2 and 3.

 

 

 

 

 

 

 

 

Get to Know the Company

In short, MORA builds fiber optic backbone networks and provides leased link services to its customers, including telco operators and internet service providers (ISPs). Fiber optic is preferable to its alternatives, such as coaxial cable and DSL, because it uses light pulses to transmit data and is immune to electromagnetic interference.

 

End users, in this case, internet users, do not connect directly to the backbone. Instead, ISPs connect their networks through the backbone at an internet exchange point, a neutral location, to exchange traffic. Then, ISPs will provide access to the internet to their customers (see Figure 4).

 

 

Source: Wikipedia

 

Furthermore, the company enters the fiber-to-the-X (FTTX) business to target enterprises and retail under Oxygen brand. Lastly, MORA owns six data centers and offers value-added solutions.

 

MORA divides its business into four segments based on its customers: telco, wholesale, retail and enterprise, and others.

 

Source: Company

 

Other segment, which is the biggest contributor to the revenue, dragged down MORA’s growth since the company has no longer accrued construction revenue following the completion of Palapa Ring Timur project (see Figure 6). However, telco, wholesale, and retail segments all provided cushions.

 

Strategy: Capturing the Opportunity from Data Traffic Acceleration

According to Analysys Mason, total addressable markets for fiber infrastructure, FTTX, and data center business are estimated to grow 16%, 9%, and 36% per year, respectively, until 2026. The rising popularity of over-the-top content (OTT) helps fuel data consumption, thus requiring more bandwidth provided by high-speed broadband.

 

Source: Company

 

To capture such opportunities, MORA unveiled four growth strategies:

1. “Continue to grow our business to strengthen our leadership position”

• Aiming to double its network length by 2026 and focusing on both populated cities in the near term and areas in which there are fewer incumbents in the long run
• Expanding metro and access network through shared ducting, infrastructure deployment, and construction activities
• Serving unserved and underserved areas with broadband satellite services

2. “Further expand retail and enterprise segments”

• Expanding the FTTH network (around 2.5 million homes passed by 2026) and strengthening cloud services and data center capabilities for the enterprise segment
• Cross-selling services to enterprise customers and possibly seeking partnerships for hyper scale data centers

3. “Continue to focus on technological innovation and cost improvement”

• Improving human resources and executing cost efficiency measures

4. “Further expand innovative and value-added services”

• Setting up strategic partnerships with other industry leaders to develop its value-added services and product offerings

Tough Competition in the Backbone Business…

According to Analysys Mason, MORA is one of the country’s three largest privately-owned telecommunication network and infrastructure providers, with a total cable length reaching over 50,000 kilometers, including backbone and last mile access. In addition, the company completed the Palapa Ring Timur and Barat projects, setting up more than 9,000 kilometers of fiber optic cables.

 

Source: Company

 

Moreover, MORA also built international backbone networks, such as MIC-1 (Moratelindo International Cable-system One), BDM (Batam-Dumai-Malacca), and B3JS (Jakarta-Bangka-Bintan-Batam-Singapore), that connects directly to Equinix (NASDAQ: EQIX), Global Switch, and the Singapore Internet Exchange.

 

Source: Company

 

Figure 12 shows MORA’s top ten clients based on segments in 2020. We can see four Indonesian telco operators, such as PT Smartfren Telecom Tbk (IDX: FREN), PT XL Axiata Tbk (IDX: EXCL), PT Telkom Indonesia Tbk (IDX: TLKM), and PT Indosat Tbk (IDX: ISAT), were also included in the list.

 

 

Yet, telco operators are also MORA’s direct competitors in the backbone network business. For example, as of 1H21, TLKM’s fiber-optic cable length reached 169,833 kilometers. EXCL also claimed that its fiber-optic cable spanned over 103 thousand kilometers. Finally, ICON+, a subsidiary of PT Perusahaan Listrik Negara (PLN), is also a competitor.

 

More players enter the backbone business, and as a result, fiber-optic lease rates become cheaper. Even PT Jasamarga Related Business, a subsidiary of PT Jasa Marga Tbk (IDX: JSMR), a toll road operator, plans to build a fiber optic backbone. Indeed, a price war indicates intense competition among players.

 

Perhaps the alternative is to build backbone networks in underserved markets. For example, MORA also stated that it plans to expand its backbone network in unserved and underserved areas where fewer incumbents are in the long run. Another player in the business also agreed to do so. However, whether such a project will be profitable remains in question, in our view. A backbone network needs the middle mile, or backhaul, for ISPs to connect their customers to the internet. For instance, the low utilization of Palapa Ring was partly due to the lack of backhaul.

 

All in all, we believe there is still an upside thanks to the increasing data consumption. Yet, telco operators, also MORA’s clients, can build backbone networks. And new players can enter the industry as long as they have the capabilities to set up a backbone network, intensifying the competition.

 

…But FTTX Comes to the Rescue

MORA decided in 2015 to enter the Fiber-to-the-X (FTTX) business, including Fiber-to-the-Building (FTTB), under the brand Oxygen. In 2016, it finally targeted retail customers.

 

 

Source: Oxygen

 

We compiled residential fixed-broadband packages from providers, as seen in Figure 14. We can see that Oxygen offers competitive prices compared with its competitors. Furthermore, we see some favorable reviews on YouTube, mainly attributing its affordable prices and 1:1 download and upload speeds.

 

 

As a result, Oxygen gained popularity, with its subscriber base rising from just 45 thousand in 2019 to 112 thousand in 2021. Clearly, the business is growing and has been a tailwind to MORA’s top-line growth (see Figure 7). As cited in the prospectus, MORA hopes that broadband connection, both enterprise and retail, will be the main growth engine. However, Oxygen’s coverage is still limited, covering only Jakarta, Depok, Tangerang, Bekasi, Bogor, Bandung, and Pekalongan, as it stands.

 

 

Besides, the retail segment has produced higher margins than other segments, thus improving MORA’s gross margins.

 

 

However, a question remains whether such growth is sustainable in the long run. In its report titled Beyond Unicorns: Harnessing Digital Technologies for Inclusion in Indonesia,” the World Bank estimated that fixed broadband subscribers were only 9.7 million, equating 4% of the population or just 16% of households. Such a low penetration rate remains well below that of Singapore, Malaysia, and Thailand.

 

Through its survey in 2020, the World Bank also noted that affordability remains a barrier for Indonesians to subscribe to the fixed broadband internet. According to a study by Cable.co.uk, Indonesia ranked 67th in fixed broadband cost, with an average of US$31.2 per month. And data from International Telecommunication Union (ITU) suggest that subscription fees as a percentage of GNI per capita were at the high end of the spectrum (7.6% in 2021), compared with Singapore (0.8%), Malaysia (2.3%), and Thailand (3.5%). Unlike fixed broadband, mobile broadband usually offers more differentiated packages that cater to a wide range of individuals. High subscription fees, therefore, could be “a clear binding constraint for the adoption of fixed broadband” compared with other countries.

 

 

Why does this happen? According to the World Bank, a highly concentrated industry, where one player mainly dominates the market, limits “incentives to upgrade networks in a timely manner” and “to remain competitive in terms of pricing.” Utilizing the World Bank’s estimate of 9.7 million fixed broadband subscribers, we estimate Oxygen’s market share to be slightly above 1%.

 

 

Indeed, the establishment of Palapa Ring does help reach some of the underserved markets. Yet, as we mentioned before, access to the middle mile still needs improvement. As a result, Palapa Ring remains vastly underutilized.

 

While Oxygen will likely gain traction in the near term, things will get more competitive among smaller fixed broadband operators in the long run since a highly concentrated market might keep subscription fees high, thus limiting fixed broadband adoption. Moreover, although Oxygen does offer competitive prices among its competitors, its coverage is still limited to several cities. Therefore, we view that Oxygen is not in a much better position than its peers.

 

Expanding Margins and Positive Free Cash Flows, Yet No Dividends

We will compare MORA with IDX-listed telco operators, namely TLKM, EXCL, and ISAT. MORA’s EBITDA margin expanded thanks to expanding margins from wholesale and retail segments in the last few years. As a result, as of 2021, MORA’s EBITDA margin is comparable to its peers (see Figure 20).

 

 

In addition, MORA has generated positive free cash flows. MORA’s CapEx as a percentage of revenue stood at between 30%-40% as it is actively expanding its backbone network and developing the FTTX business. However, it remains to be seen how MORA will pay its debt worth Rp2 trillion (as of March 2022) that will be due in one year.

 

In addition, although the company is generating cash and is a profitable business, it does not plan to distribute dividends (see Figure 22). We believe that its obligation to pay its maturing debt and its ambition to expand its networks limit MORA’s ability to pay dividends for now.

 

 

Valuation

MORA’s offering price of Rp368-Rp396 per share implies an EV/EBITDA (annualized) of 7.0-7.3x. Figure 25 shows that MORA’s EV/EBITDA is higher than its peers.

 

 

Recap and Concluding Thought

MORA is raising over Rp1 billion through IPO mainly to expand its backbone networks and FTTX business. Although more demand for backbone networks is on the cards thanks to increasing data consumption, more players enter the industry, pressuring lease rates. Therefore, expanding to areas with fewer incumbents might be an alternative. But it is easier said than done, for backhaul is required to attract ISPs.

 

Fresh winds come from Oxygen, fixed broadband internet for enterprises and retail customers. With its competitive prices, Oxygen managed to gain traction in the last few years. Nevertheless, a low adoption rate will encourage competition among smaller players in a highly concentrated industry. Thus, we believe that Oxygen is not in a much better position than its peers.

 

Lastly, although we are seeing margins expansion and positive free cash flows, MORA decided not to distribute dividends. We believe this is also partly because MORA will have to pay its maturing debt worth Rp2 trillion, besides its ambition to expand its business. Furthermore, MORA’s offering price implies a higher EV/EBITDA multiple than its peers. Overall, we conservatively view MORA because of its highly competitive industry and rich valuations.

 

 

Photo by Pixabay

 

Disclosure

The writer did not submit a bid for MORA.

 

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