Results Highlights

OCK’s 2Q2016 net profit gained 6.3% Y.o.Y to RM5.5 mln on higher contribution across all its four business segments. Revenue for the quarter added 62.2% Y.o.Y to RM114.0 mln.

For 1H2016, cumulative net profit climbed 11.8% Y.o.Y to RM9.2 mln. Revenue for the period increased 52.2% Y.o.Y to RM192.5 mln. The reported earnings only accounted to 31.5% of our previous full year estimated net profit of RM29.1 mln, while the reported revenue came within our estimates, accounting to 47.5% of our full year estimated revenue of RM404.8 mln.

In 2Q2016, the telecommunication network services segment’s pretax profit rose 73.7% Y.o.Y to RM8.9 mln, driven by improvement in both local and regional businesses. The green energy segment’s pretax profit added 14.4% Y.o.Y to RM0.6 mln, boosted by lower operating expenses. The mechanical & electrical engineering segment’s pretax profit jumped 153.7% Y.o.Y to RM0.4 mln on higher delivery of engineering works from current projects, while the trading segment’s pretax profit surged 180.6% Y.o.Y to RM1.2 mln on higher topline growth.

Meanwhile, the group continues to maintain a healthy balance sheet with a decent gearing at 0.3x, implying room to increase its financial leverage for business expansion, when required.

Prospects

We think that OCK’s plan to deliver 920 telecommunication towers to Telenor Myanmar by end-2016 remains on track. Already, 189 sites, representing 20.5% of the 920 sites have been erected and handed over to Telenor Myanmar as of 29th August 2016. Meanwhile, the group is committed to build additional sites in Malaysia for mobile operators, whilst looking for opportunities to increase its 28,000 tower maintenance in Indonesia.

We continue to like OCK as we believe it is a beneficiary for mobile operators’ aggressive 3G and LTE (Long-Term Evolution) expansion plan, given that the Malaysian Communications and Multimedia Commission (MCMC) has allocated RM1.20 bln to improve the aforementioned industry. Network infrastructure sharing amongst mobile operators is also an effective way to cut down coverage costs, reducing the operational expenditure. DiGi and Celcom have already implemented an integration project for infrastructure collaboration. As the mobile operators are gearing towards the network infrastructure sharing system, the rising tenancy ratio per telecommunication tower will serve as a catalyst for OCK’s domestic earnings growth.

While we view OCK’s venture into Vietnam to be earnings accretive in the long-term, earnings growth, however, will be offset by the dilution by the recent completion of its private placement which saw additional 10% or 79.1 mln shares being placed out to raise RM64.2 mln in gross proceeds. Part of the proceeds will be utilised to fund the Vietnam acquisition of Southeast Asia Telecommunications Holdings Pte Ltd (SEATH). Upon the completion of aforementioned acquisition, OCK will own 3,000 towers in Myanmar, Vietnam and Malaysia.

Valuation And Recommendation

Despite the reported earnings only amounting to 32.2% of our revised net profit forecast of RM28.5 mln in 2016 (after imputing a slightly higher effective tax rate), we think that earnings in 2H2016 will catch up, boosted by contribution of its Myanmar venture. We raised our earnings forecast by 2.5% to RM32.4 mln for 2017 to reflect the consolidation from the acquisition of SEATH and we maintain our BUY recommendation on OCK with a lower target price of RM0.95 (from RM1.00), taking into account of the dilution from recent completion of its private placement.

We adopted a sum-of-parts (SOP) approach as we valued its telecommunication network services and green energy & power solutions business segments on a discounted cash flow approach (key assumptions include a WACC of 9.0%, terminal growth rate of 1.5%) to reflect its ability to generate recurring revenues and steady earnings growth over the longer term. Meanwhile, we ascribe a 15.0x target PER to both its fully-diluted trading and mechanical & electrical engineering services businesses, based on their potential earnings contribution in 2017.

Risks to our recommendation include rising raw material costs. OCK’s business is heavily dependent on steel prices. Steel costs accounts to slightly below 40.0% of the group’s costs of construction in 2015. Any fluctuation in steel prices could dampen its margins growth going forward.

Any project delay could impact its income growth and cash flow as the group is operating in a capital intensive industry. Delays in project completion will result in cost overrun and penalties. These events could also damage the company’s reputation and affect the company’s ability in securing future contracts.

Source: M+ Online Research - 30 Aug 2016