Results Highlights

• OCK’s 3Q2016 net profit increased 11.6% Y.o.Y to RM5.5 mln on higher contribution across the telecommunication network services and green energy and power solutions segments which offset the weaker trading and mechanical & electrical engineering services segment. Revenue for the quarter added 21.8% Y.o.Y to RM101.9 mln.

• For 9M2016, cumulative net profit rose 11.8% Y.o.Y to RM14.6 mln. Revenue for the period increased 40.1% Y.o.Y to RM294.4 mln. The reported earnings only accounted to 51.4% of our full year estimated net profit of RM28.5 mln, while the reported revenue came in within our estimates, accounting to 72.7% of our full year estimated revenue of RM404.8 mln.

• In 3Q2016, the telecommunication network services segment’s pretax profit gained 40.5% Y.o.Y to RM11.0 mln, spurred by higher local contracting works coupled with stronger growth in regional businesses. The green energy segment’s pretax profit jumped 234.1% Y.o.Y to RM0.9 mln, due to lower operating expenses. The mechanical & electrical engineering segment’s pretax profit, however, sank 84.7% Y.o.Y to RM0.3 mln as several major projects are at their tail end, while the trading segment’s pretax profit slumped 84.7% Y.o.Y to RM0.2 mln on slower sales.

• The group continues to maintain a healthy balance sheet with a decent gearing at 0.3x, making room for the upcoming loan tranches from the syndicated facility worth US$42.0 mln obtained in mid-2016 to finance the Myanmar venture.

Prospects

On the local front, OCK will be capitalising on the Malaysian Communications and Multimedia Commission’s (MCMC) RM1.0 bln allocation in Budget 2017 to improve both the coverage and the quality of broadband services nationwide. In spite of margin pressures amongst telco operators, network infrastructure sharing amongst mobile operators serves as recourse to mitigate the rising cost.

As of end November 2016, OCK has delivered 405 sites; representing 56.3% of Phase 1 of the targeted 720 sites to be delivered to Telenor Myanmar. Moving forward, we believe that the company will be committed to accelerate its’ development in order to meet Telenor Myanmar’s target of 720 sites by 1Q2017. The mobile penetration in Myanmar has been on upswing trajectory, jumping to 89.4% in May 2016 (from 54.5% in 2015). Still, the aforementioned figure is below neighboring countries such as Philippines (113.0%), Indonesia (126.4%), Malaysia (143.8%) and Thailand (158.0%), implying room for expansion.

Meanwhile, the foray into Vietnam through acquisition of Southeast Asia Telecommunications Holdings Pte Ltd (SEATH), which owns 1,938 telecommunication towers in Vietnam is expected to be completed by 1Q2017. Upon the completion of aforementioned acquisition, OCK will own 3,000 towers in Myanmar, Vietnam and Malaysia. In the meantime, the third mobile operator, MobiFone (one of the major customers of SEATH) has been granted a license from the Information Ministry to provide 4G services. The migration to 4G services translates to additional demand for telecommunication tower stations, which in turn benefits OCK.

Valuation And Recommendation

Despite the reported earnings only amounting to 51.4% of our net profit forecast of RM28.5 mln in 2016, we think that earnings in 4Q2016 will catch up, boosted by increase CAPEX from telco operators to expand their Long Term Evolution (4G/LTE) coverage coupled with higher contributions from Myanmar venture. Over the past three years (2013-2015), OCK’s final quarter earnings are traditionally higher as the cumulative nine-month net profit only made up to an average 55.3% of their full year net profits. Hence, we made no changes to our earnings forecast and we maintain our BUY recommendation on OCK with an unchanged target price of RM0.95.

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.

Source: Mplus Research - 30 Nov 2016