SINGAPORE (Fitch) – The swift conclusion of Indonesia’s 2100MHz and 2300MHz spectrum auctions is likely to provide greater clarity for both the telecommunications and tower sectors, says Fitch Ratings.

On 30 October 2017, the Ministry of Communications and Information Technology announced second-largest telco PT Indosat (Indosat, BBB+/Stable) and fourth-largest PT Hutchison 3 Indonesia (Hutch) as winners of the 2100MHz frequency band. Hutch and Indosat each bid IDR423 billion, which was 1.4x the reserve price.

Market-leader PT Telekomunikasi Selular Indonesia (Telkomsel, AAA(idn)/Stable) had won the auction for a block of 30MHz in the 2300MHz spectrum earlier in October, paying IDR1 trillion or around 2.7x of the reserve price.

The removal of the uncertainty which had surrounded the spectrum auctions means that mobile operators will now be intensifying 4G network expansion rather than just pursuing upgrades of existing network infrastructure.

However, operators would first need to refarm their 2100MHz spectrum to enable contiguous spectrum allocations for more efficient use of spectrum resources. The 2100MHz refarming process is likely to be completed by 1Q18, and to be relatively straightforward compared with the 1800MHz spectrum reassignment for 4G in 2015 – having already taken place once before, in 2013, for the 3G network rollout.

We expect the 2100MHz and 2300MHz frequencies to be deployed for 4G services as operators strive to increase network capacity in areas of high population density, while the lower frequencies may eventually be re-assigned to improve coverage outside the Java region.

We expect independent tower companies PT Tower Bersama Infrastructure (TBIG, BB-/Stable) and PT Profesional Telekomunikasi Indonesia (Protelindo, BBB-/Stable) to benefit from any accelerated capex expansion by their largest tower tenants – Telkomsel and Hutch, respectively.

Amongst the three largest independent tower companies, TBI has the greatest exposure to Telkomsel, at 45% of revenue in 1H17, while 10% emanated from Hutch. Protelindo derived 36% of its revenue from Hutch and 20% from Telkomsel.

Network expansion plans outside the Java region by Indosat and the third-largest telco, PT XL Axiata Tbk (EXCL, BBB/Stable), should also lead to tower additions in 2018. Possible additional growth catalysts for the tower sector may stem from M&A opportunities or sale of tower assets by mobile operators, but we believe industry consolidation may take place since smaller independent tower companies lack economies of scale.

Protelindo has the most resilient financial profile among the domestic peers, deepening its capacity to undertake future acquisitions.

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