Results Highlights

• OCK’s 1Q2017 net profit gained 27.3% Y.o.Y to RM4.7 mln, driven by higher contribution from its Myanmar venture, coupled with the consolidation of newly acquired South East Asia Telecommunication Holdings Pte Ltd (SEATH). Revenue for the quarter added 35.8% Y.o.Y to RM106.5 mln.

• Despite that, the reported earnings was within our estimates as it accounted to 14.3% of our full year estimated net profit of RM33.1 mln, while the reported revenue was at 20.1% of our estimated revenue forecast of RM528.6 mln.

• In 1Q2017, the telecommunication network services segment’s pretax profit surged 199.3% Y.o.Y to RM15.3 mln, mainly due to the consolidation of SEATH, coupled with contribution from 610 towers in Myanmar. The green energy segment’s pretax profit jumped 222.3% Y.o.Y to RM1.7 mln, driven by higher number of solar farms. The mechanical & electrical engineering and trading segment’s pretax loss stood at RM4.1 mln and RM0.4 mln respectively.

• The group’s overseas revenue contribution rose to 37.6% in 1Q2017 (from 19.9% in 2016) in line with the group’s aim to increase its geographical presence in the ASEAN market. Meanwhile, the group continues to maintain a healthy balance sheet with a decent net gearing at 0.6x

Prospects

As of 31st March 2017, OCK has delivered approximately 610 sites; representing 84.7% 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 which is still at the planning stage. We also note that OCK is gearing to increase its tenancy ratio (currently at 1.15x) of its telecommunication towers. This is below the country’s average of 1.8x-2.0x – implying room for future improvement to drive its earnings growth.

Following the completion of the SEATH acquisition which owns 1,983 telecommunication towers in Vietnam, the group now owns approximately 2,800 towers in Myanmar, Vietnam and Malaysia. On the local front, OCK will ride on the telecommunication network service providers’ expansion into the 4th Generation Long Term Evolution (4G LTE) network which translates to increasing demand for mobile data.

On the green energy and power solutions segment, OCK is currently operating nine solar farms with a combined capacity of 5.3MW in West Malaysia. Moving forward, OCK will continue to participate in tenders to expand the green energy’s segment revenue as part of its growth strategy to generate a stream of recurring income.

Valuation And Recommendation

As the 1Q2017 results were largely in line with our expectations, we leave our earnings estimates unchanged as the first quarter results traditionally makes up about 15.0% of its full year earnings. Consequently, we also maintain our BUY recommendation on OCK with an unchanged target price of RM0.95.

We continue to adopt 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 - 1 Jun 2017