Results Highlights

• OCK’s 4Q2016 net profit declined 10.7% Y.o.Y to RM11.2 mln on higher depreciation expenses coupled with expenses incurred for the acquisition of South East Asia Telecommunication Holdings Pte Ltd (SEATH). Revenue for the quarter, however, gained 6.6% Y.o.Y to RM112.7 mln.

• For 2016, cumulative net profit improved marginally by 0.8% Y.o.Y to RM25.8 mln. Revenue for the year climbed 28.9% Y.o.Y to RM407.1 mln. The reported earnings fell short of our estimates as it accounted to 90.5% of our full year estimated net profit of RM28.5 mln, while the reported revenue came in within our estimated revenue forecast of RM404.8 mln.

• In 4Q2016, the telecommunication network services segment’s pretax profit sank 60.6% Y.o.Y to RM6.5 mln, dragged down by pre-acquisition expenses for SEATH amounting to RM2.9 mln. The green energy segment’s pretax loss widened to RM1.1 mln, due to a one-time write-off for an overdue prepayment. The mechanical & electrical engineering segment’s pretax profit, however, jumped 53.2% Y.o.Y to RM0.7 mln on higher contracting works, while the trading segment’s pretax profit was flat at RM1.1 mln.

• The group’s overseas revenue contribution rose to 19.9% in 2016 (from 16.8% in 2015) owing to the contributions from its Myanmar venture. Meanwhile, the group continues to maintain a healthy balance sheet with a decent gearing at 0.3x, leaving room to increase financial leverage for business expansion, when required.

Prospects

As of end December 2016, OCK has delivered approximately 600 sites; representing 83.3% of Phase 1 of the targeted 720 sites to be delivered to Telenor Myanmar. There was a slight delay due to re-location of sites as per Telenor Myanmar’s request. Meanwhile, the Myanmar National Tele & Communications (MNTC) became the fourth firm in mid-January 2017 to obtain a telecommunication operator license in Myanmar. The introduction of the additional telco operator potentially increases the tenancy ratio of telecommunication towers that could drive OCK’s earnings growth in the foreseeable future.

We note that OCK’s 60.0%-owned subsidiary, OCK Vietnam Towers Pte Ltd has completed the acquisition of Southeast Asia Telecommunications Holdings Pte Ltd (SEATH), which owns 1,972 telecommunication towers in Vietnam in mid-January 2017 for approximately RM206.3 mln. SEATH has delivered a three-year (2013-2015) average net profit of RM7.4 mln on the back of average revenue of RM47.9 mln recorded over the same period. The acquisition will increase OCK’s bottom line by approximately RM4.4 mln or 13.0% in 2017. With the acquisition of SEATH, the group now owns approximately 2,800 towers in Myanmar, Vietnam and Malaysia.

On the green energy and power solutions segment, OCK has secured two rooftop solar farms with a combined capacity of 2.0MW in West Malaysia with commercial production commencing in November-December 2016. Moving forward, OCK will be capitalising on the Energy Commission’s initiative to build large scale solar (LSS) photovoltaic (PV) plants in Peninsular Malaysia and Sabah/ Labuan. The LSS capacity ranges from 1MW-30MW with a target aggregate capacity of 360MW in Peninsular Malaysia and 100MW in Sabah/Labuan, which is expected to commence operations by 2019.

Valuation And Recommendation

Although the reported earnings came in below our estimates, we leave our earnings estimates unchanged as we reckon that 2017’s earnings growth will be boosted by the full contribution from the incorporation of SEATH’s acquisition and progressive developments in Myanmar. Consequently, we also 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.

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 also 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: Mplus Research - 28 Feb 2017