Results Highlights  

• OCK's 3Q2017 net profit gained 26.3% Y.o.Y to RM6.9 mln, lifted by higher  contributions from its telecommunication network services segment, particularly  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 grew 22.9% Y.o.Y to RM125.2 mln. 
• For 9M2017, cumulative net profit improved 20.3% Y.o.Y to RM17.6 mln. Revenue  for the period climbed 19.2% Y.o.Y to RM351.0 mln. The reported earnings  accounted to 52.7% of our full year estimated net profit of RM33.4 mln, while the  reported revenue was at 66.1% of our estimated revenue forecast of RM530.8 mln. 
• In 3Q2017, the telecommunication network services segment's pretax profit added  36.0% Y.o.Y to RM14.0 mln, underpinned by the consolidation of SEATH, coupled  with contribution of its tower leasing business in Myanmar. The green energy  segment's pretax profit increased 42.1% Y.o.Y to RM1.2 mln, on the back of higher  number of solar farms. The trading segment's pretax profit gained rose 86.6% Y.o.Y  to RM0.3 mln, but the mechanical & electrical engineering segment reported a  pretax loss of RM72,000 as oppose to a pretax profit of RM42,000 in the previous  corresponding quarter due to lower topline growth. 
• Meanwhile, the group’s net gearing stood at 0.7x - a reasonable level, given its CAPEX intensive business nature.

Prospects

As part of the group’s regional expansion plan, OCK has delivered 642 sites to Telenor Myanmar year-to-date. Moving forward, the group aims to increase the tenancy ratio that is currently standing at 1.3x. Already, OCK has roped-in Myanmar Post and Telecommunications (MPT) as the second tenant for its telecommunication towers in Myanmar in April 2017 for duration of 10 years, while Telecom International Myanmar Company Limited (Mytel) has allocated 300 telecommunication sites to be built by OCK under Phase 1.

Ever since the telecommunication sector was opened to foreign competition in Myanmar back in 2014, thousands of mobile towers have been erected around the country with over 30,000 km of fiber cable being connected. Since then, mobile penetration has jumped from 10.0% to 80%, but is still well below the 133% average level in South East Asia. Therefore, we believe that OCK will continue to capitalise on the potential telecommunication industry growth in Myanmar.

Similarly, Vietnam's mobile market has grown rapidly over the years with the dynamics shifting to value added services, with the arrival of 3G and 3G+ and ahead of the launch of 4G. The Vietnamese mobile market has shown moderate growth over the past few years, increasing from mobile penetration of 135% in 2013 to 147% in 2016, of which OCK could tap into.

On the green energy and power solutions segment, OCK is currently operating nine solar farms with a combined capacity of 5.3 MW 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

We view 3Q2017’s results to be largely in line with our expectations as the cumulative nine-month results traditionally makes up slightly above 50.0% of its full year earnings over the past few years due to seasonal factors. Hence, we leave our earnings estimates unchanged and we maintain our BUY recommendation on OCK with an unchanged target price of RM1.00.

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.

Source: Mplus Research - 29 Nov 2017