Results Highlights

• OCK’s 2Q2018 net profit declined 29.4% Y.o.Y to RM4.2 mln, mainly due to a lower contribution from the telecommunication network services, green energy and mechanical & electrical engineering segments. Revenue for the quarter fell 3.1% Y.o.Y to RM97.5 mln on lower contribution from the telecommunication network services segment.

• For 1H2018, cumulative net profit decreased 12.6% Y.o.Y to RM9.4 mln. Revenue for the period contracted 5.6% Y.o.Y to RM213.0 mln. Although the reported earnings and revenue only amounted to 34.4% and 39.1% of our full year forecast of RM27.2 mln and RM545.3 mln respectively, we deem the aforementioned figures to be in line as OCK’s first half results traditionally make up about 30.0%-40.0% of its full year earnings.

• Segmentally, the telecommunication network services division’s pretax profit fell 5.4% Y.o.Y to RM9.3 mln on margin compression from local operators and higher operating cost. The green energy segment’s pretax profit sank 81.0% Y.o.Y to RM267,000, on lower topline contribution. The mechanical & electrical engineering segment reported a pretax loss of RM0.3 mln vs. a pretax profit of RM20,000 on slower work orders, while the trading segment’s pretax profit fell 33.3% Y.o.Y to RM302,000 on higher overhead cost that offset the improvement in its topline.

• Meanwhile, the group’s 2Q2018 net gearing rose to 0.9x (from 0.8x in 1Q2018), as the group gears up to increase the number of telco towers, given its CAPEX intensive business nature.

Prospects

Moving into 3Q2018, OCK aims to deliver all the remaining sites (delivered 850 of the 920 sites) to Telenor under Phase 1 of Myanmar expansion plan. Elsewhere, the group’s 60.0% owned unit, Southeast Asia Telecommunication Holdings Pte. Ltd. (SEATH) has signed an agreement to acquire 399 towers in Vietnam. Upon completion, OCK will own a total of over 3,000 towers. In the meantime, the focus on boosting its tower’s tenancy ratio currently at 1.4x and 1.3x in Myanmar and Vietnam respectively remains in focus.

Aside from the recent venture into Philippines, OCK is actively looking to penetrate new regional markets such as Nepal and Sri Lanka in bid to drive the group’s regional growth. Already, the group has submitted letter of interest for the application of towerco licenses both the aforementioned countries. On the local front, OCK is in the midst of rolling-out fiberisation work orders from major Mobile Network Operators (MNOs) to cater for the increase in data demand and network speed.

As of 2Q2018, 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 minimal CAPEX will be spent in the aforementioned segment due to the competitive Feed-in-Tariff rates. In the meantime, the group’s emphasis lies 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 largely within our expectations, we leave our earnings forecast unchanged and we maintain our BUY recommendation on OCK with an unchanged target price of RM0.90. We continue to like OCK for its position as one of the leading telecommunication network services provider in the ASEAN region whereby its business model would provide a stream of recurring earnings over the next decade.

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 13.0x target PER to both its fully-diluted trading and mechanical & electrical engineering services businesses, based on their potential earnings contribution in 2019.

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 - 29 Aug 2018