Results Highlights

• OCK’s 4Q2017 net profit slipped 36.9% Y.o.Y to RM7.0 mln, dragged down higher depreciation charges, higher finance cost and a foreign exchange loss of RM1.7 mln vs. a foreign exchange gain of RM3.8 mln recognised in the previous corresponding quarter. Revenue for the quarter, however, climbed 19.2% Y.o.Y to RM134.4 mln.

• For 2017, cumulative net profit fell 7.5% Y.o.Y to RM24.6 mln. Revenue for the year, however, expanded 20.9% Y.o.Y to RM485.4 mln. The reported earnings fell short of our expectations, accounting to 73.5% of our previous full year estimated net profit of RM33.4 mln. Likewise, the reported revenue amounted to 91.5% of our estimated revenue forecast of RM530.8 mln.

• Segment wise, the telecommunication network services segment’s pretax profit added 15.0% Y.o.Y to RM37.7 mln, underpinned by the consolidation of SEATH, coupled with the contribution of its tower leasing business in Myanmar. The green energy segment’s pretax profit soared 235.0% Y.o.Y to RM3.7 mln, on the back of higher number of solar farms. The mechanical & electrical engineering segment’s pretax profit was flat at RM1.1 mln, but the trading segment pre-tax profit sank 53.4% Y.o.Y to RM1.3 mln.

• Meanwhile, the group’s 4Q2017 net gearing stood at 0.7x (unchanged from 3Q2017) – a reasonable level, given its CAPEX intensive business nature.

Prospects

OCK has delivered 713 towers in Myanmar – representing 77.5% of 920 towers under Phase 1 of its regional expansion in Myanmar. Telecom International Myanmar Company Limited (Mytel) – the fourth telco operator in Myanmar, held its First Call Announcement Ceremony on 11th February 2018 and will start selling SIM cards in Myanmar’s major cities over coming weeks. Already, OCK has constructed and handed 67 sites to Mytel at the end of 2017. Moving forward, we expect the total 300 built-tosuit sites under Phase 1 to be completed and handed over in 2018 with full contribution from the aforementioned towers to be realised in 2019.

In view of the global digital revolution, Vietnam has seen a constant spike in internet usage and social media presence. Out of a total of over 90.0 mln population, 53% are active internet users, 48% are active social media users, and 43% are active mobile social users. With the aforementioned market still relatively untapped, we reckon there is an enormous potential growth for OCK to increase both the number of towers and tenancy ratio. For now, the group tenancy ratio stands at 1.3x in both Myanmar and Vietnam.

On the green energy and power solutions segment, OCK is currently operating eleven solar farms with a combined capacity of 5.9 MW in West Malaysia. Despite the group’s effort on increasing its total capacity, we continue to expect minimal contribution over the forseeable future as the group’s emphasis remains on its core business – the telecommunication network services segment in its aspiration to be a leading telecommunication service provider in the ASEAN market.

Valuation And Recommendation

With the 4Q2017’s results coming below our expectations, we trimmed our earnings forecast by 12.7% and 15.5% to RM27.5 mln and RM34.8 mln for 2018 and 2019 respectively to reflect the higher depreciation charges. Nevertheless, we maintain our BUY recommendation on OCK with a lower target price of RM0.95 (from 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.

Risks to our recommendation include rising raw material costs. OCK’s business is heavily dependent on steel that accounts for slightly below 40.0% of the group’s costs of construction in 2017. 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 - 27 Feb 2018