Results Highlights

• OCK’s 1Q2018 net profit climbed 8.6% Y.o.Y to RM5.1 mln, mainly due to a lower effective tax rate of 20.4% vs. 26.3% recorded in previous corresponding quarter. Revenue for the quarter, however, fell 8.5% Y.o.Y to RM97.5 mln on lower contribution from the telecommunication network services segment.

• Although the reported earnings and revenue only amounted to 18.7% and 17.9% of our full year forecast at RM27.5 mln and RM545.3 mln respectively, we deem the aforementioned figures to be in line as OCK’s first quarter results traditionally make up about 15.0%-20.0% of its full year earnings.

• Segment wise, the telecommunication network services division’s pretax profit gained 10.1% Y.o.Y to RM9.6 mln, lifted by lower operational expenses. The green energy segment’s pretax profit added 15.1% Y.o.Y to RM1.5 mln, on the back of the higher number of solar farms. The trading segment’s pretax profit rose 37.0% Y.o.Y to RM0.5 mln, but the mechanical & electrical engineering segment reported a pretax loss of RM0.2 mln vs. a pretax profit of RM0.2 mln in the previous corresponding quarter.

• Meanwhile, the group’s 1Q2018 net gearing rose to 0.8x (from 0.7x in 4Q2017), as the group gears up to increase the number of telco towers, given its CAPEX intensive business nature.

Prospects

As of end-May 2018, OCK has delivered 830 towers under Phase 1 of its regional expansion in Myanmar for Telenor. In the meantime, we expect the total 300 built-tosuit sites under Phase 1 for Mytel to be completed and handed over in 2018 with full contribution from the aforementioned towers to be realised in 2019. Moving forward, OCK’s over 2,900 towers located across South East Asia will generate recurring income to the group’s telecommunication network services segment. The group is also aiming to boost its tower’s tenancy ratio that currently stands at 1.4x and 1.3x in Myanmar and Vietnam respectively.

In the meantime, we note that OCK Vietnam Towers Pte Ltd has signed a Memorandum of Understanding (MoU) with ISOC Infrastructures Inc (ISOC) to jointly pursue a telecom tower business in the Philippines. Both parties will acquire, install, operate, maintain and manage telecom tower assets in the Philippines. We reckon that this is a positive move for OCK to move into an up-tapped market where it has the lowest telecom towers per capita at 152 towers per 1.0 mln capita against the ASEAN average of 579 towers.

As of 1Q2018, OCK is operating eleven solar farms with a combined capacity of 5.9 MW in West Malaysia. We anticipate minimal contribution from the green energy segment 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 1Q2018’s results coming within our expectations, we leave our earnings forecast unchanged and we maintain our BUY recommendation on OCK with an unchanged target price of 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 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.

Source: Mplus Research - 31 May 2018