• We visited OCK’s telecommunication tower operation in Ho Chi Minh, Vietnam and came away feeling positive about its venture. To recap, the group completed the acquisition of 60.0% stake in South East Asia Telecommunication Holdings Pte. Ltd. (SEATH) back in January 2017 from Vietnam Infrastructure Ltd (VNI), Subsequently, OCK now owns 2,397 towers (from 1,995 towers since the acquisition) in Vietnam. Meanwhile, its tenancy ratio stands at 1.3x.

• At present, OCK’s Vietnam operations has a workforce of 150 staff located in all three offices in major states, allowing for efficient management on each site. Its current organisation is able to deliver additional 200 sites per annum and capable of maintaining 3,000 sites. SEATH contributed approximately 10.0% to OCK’s total revenue of RM213.1 mln in 1H2018 and has an established business relationship with top tier telecommunication operators of which 92% of its total revenue derived from: (i) MobiFone – the second largest telecommunication operator in Vietnam with over 30% of the market share, and (ii) Vietnam Posts and Telecommunications Group (VNPT) – a state backed telecommunication operator that commands a 22% market share.

• We note that the majority (80.7%) of SEATH’s tower portfolio comprises of Guy Mast Tower (refer to Figure 1), followed by Roof Top (18.3%) (refer to Figure 2) and the remainder from self-supporting tower (1.0%). The telecommunication towers are powered by a generator set which combines diesel engine and electric generator to generate electricity.

• Although there are 75,000 towers in Vietnam, smartphone penetration only stood at 52% – among the lowest in the region. This offer ample of room for expansion in view that the introduction of LTE/4G services in 2017 has ramped up the number of smart phone users. We reckon that the increasing number of high capacity users will drive demand for network expansion, resulting in the increase in network infrastructures.

• Meanwhile, several major challenges in its Vietnam’s operations were highlighted:

(i) Loose Regulatory. There is no specific license required to operate as infrastructure service provider in Vietnam. As such, there are numerous small scale telecommunication tower operators ranging from dozens to hundreds of sites located across the country.

(ii) Site acquisition. Due to the complex landscape, telecommunication towers were built inside of house compounds or extremely close to residential area. In order to acquire a site, the purchaser would require government and neighbours approval for a No Objection Certificate.

(iii) Local technical expertise and language barrier. The process of managing telecommunication towers requires local technical expertise due to complexity of the towers installation and maintenance works. The linguistic barrier is deemed as an obstacle in effective communication due to limitation of the local workers’ English proficiency.

• Unlike its venture into Myanmar that focuses on build and lease business model, OCK’s Vietnam business expansion is derive via acquisition of small scale telecommunication tower operators. To-date, a total of six companies with a combined 581 sites that has 790 tenants, translating to a tenancy ratio of 1.4x, have been short listed for acquisition. Moving forward, the group aims to achieve a tenancy ratio of 1.5-1.6x over the next five years, premised to the increase in colocation of telecommunication operators.

Valuation And Recommendation

We leave our earnings forecast unchanged and we maintain our BUY recommendation on OCK with an unchanged target price of RM0.80. 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 - 9 Oct 2018