• OCK’s 2Q2017 net profit added 9.6% Y.o.Y to RM6.0 mln, lifted by higher contribution from its telecommunication network services segment from the Myanmar venture, coupled with the consolidation of newly acquired South East Asia Telecommunication Holdings Pte Ltd’s (SEATH) earnings. Revenue for the quarter gained 4.6% Y.o.Y to RM119.3 mln.

• For 1H2017, cumulative net profit grew 16.8% Y.o.Y to RM10.7 mln. Revenue for the period climbed 17.3% Y.o.Y to RM225.8 mln. The reported earnings accounted to 32.3% of our previous full year estimated net profit of RM32.5 mln, while the reported revenue was at 42.7% of our previous estimated revenue forecast of RM528.6 mln.

• In 1H2017, the telecommunication network services segment’s pretax profit rose 35.6% Y.o.Y to RM18.6 mln, mainly due to the consolidation of SEATH, coupled with contribution from 616 towers in Myanmar. The green energy segment’s pretax profit jumped 155.0% Y.o.Y to RM2.8 mln, driven by higher number of solar farms. The mechanical & electrical engineering and trading segment’s pretax profit, however, fell 50.0% Y.o.Y and 67.1% Y.o.Y to RM4.1 mln and RM0.4 mln respectively on lower topline growth.

• Meanwhile, the group continues to maintain a healthy balance sheet with a decent net gearing at 0.6x.

Prospects

As of 30th June 2017, OCK has delivered 640 sites – representing 88.9% of Phase 1 of the targeted 720 sites to be delivered to Telenor Myanmar. Although there were some hiccups in the delivery due to re-location of sites as per Telenor Myanmar request, earnings growth will be mitigated by the group’s efforts to boost its tenancy ratio in Myanmar, which is at 1.1x as of 1H2017. Already, OCK has secured a new co-location agreement with Myanmar Post and Telecommunications (MPT) as the second tenant for its telecommunication towers in Myanmar in April 2017. With the consolidation of the SEATH acquisition, the group now owns approximately 2,000 telecommunication towers across South East Asia. Moving forward, OCK will continue to expand its geographical presence as the regional contribution from the telecommunication network services segment has risen to 35.8% in 1H2017 (from 17.7% in 1H2016). 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. The group aims 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

Despite the 2Q2017 results largely in line with our expectations as the first half results traditionally makes up just slightly above 30.0% of its full year earnings, we tweak our net earnings higher by 2.7% and 3.1% for 2017 and 2018 to RM33.4 mln and RM38.5 mln respectively to account for the higher tenancy ratio on its telecommunication towers in Myanmar and Vietnam. Consequently, we upgrade our recommendation on OCK to BUY (from Hold) with a higher target price of RM1.00 (from RM0.95).

We 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 2018.

Risks to our recommendation include rising raw material costs. OCK’s business is heavily dependent on steel prices that accounts for 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 - 30 Aug 2017