Results Highlights

• OCK’s 3Q2018 net profit added 13.0% Y.o.Y to RM7.8 mln, lifted by the improved margins from the telecommunication network services segment, coupled with lower operating expenses as a result of cost rationalisation. Revenue for the quarter, however, fell 12.3% Y.o.Y to RM109.8 mln on lower contribution from the telecommunication network services, green energy and power solution and mechanical and electrical engineering services segments.

• For 9M2018, however, net profit declined 2.6% Y.o.Y to RM17.1 mln. Revenue for the period decreased 8.0% Y.o.Y to RM322.8 mln. Although the reported earnings and revenue only amounted to 62.9% and 59.2% 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 nine-months results traditionally make up about 60.0%-70.0% of its full year earnings.

• In 3Q2018, the telecommunication network services division’s pretax profit added 2.1% Y.o.Y to RM14.3 mln on improved margins from contributions of its Vietnam operations. The mechanical & electrical engineering segment’s pretax profit stood at RM0.1 mln vs. a pretax loss of RM72,000 on increased work orders, while the trading segment’s pretax profit jumped 119.6% Y.o.Y to RM762,000, boosted by higher topline. The green energy segment’s pretax profit, however, sank 67.3% Y.o.Y to RM394,000, dragged down lower topline contribution.

• Meanwhile, the group’s 3Q2018 net gearing stood at 0.9x (unchanged from the previous quarter), as the group continue to hinge on external funds to cater for its overseas expansion plans.

Prospects

Following the recent completion of the acquisition of South East Asia Telecommunication Holdings Pte. Ltd. (SEATH) with additional 399 towers, OCK now owns 2,400 towers with a tenancy ratio of 1.3x in Vietnam. Moving forward, OCK aims to increase the number of towers via acquisition of additional 500 telecommunication tower assets, of which the final stages of discussion are being held with several telecommunication tower companies. The group is also in negotiations with several telecommunication network operators for the sale and leaseback of approximately 4,500 sites.

Over at Myanmar, OCK has delivered 870 telecommunication sites (tenancy ratio at 1.4x) to Telenor Myanmar Ltd with the balance 50 sites under Phase 1 of Myanmar expansion plan plus an additional 500 sites to be delivered progressively towards 2019. On the local front, the government aims to boost broadband speeds in rural areas to 30Mbps within five years via an allocation of RM1.00 bln under the National Fiberisation and Connectivity Plan (NFCP) in Budget 2019. We reckon that OCK, as an infrastructure service provider, will be able to capitalise on the deployment of fibre works for NFCP. Moving forward, OCK aims to ramp up the number of its telecommunication towers to 5,000 by 2020 (from approximately 3,500 currently).

As of 3Q2018, OCK is operating eleven solar farms with a combined capacity of 5.9 MW in West Malaysia. Moving forward, OCK will be aiming for a slice of the third round of the 500MW large-scale solar projects worth an estimated value of RM2.00 bln announced in Budget 2019.

Valuation And Recommendation

With the 3Q2018’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 RM0.80. We continue to like OCK for its position as one of the leading telecommunication network services provider in the ASEAN region where 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 9.5%, terminal growth rate of 1.5%) to reflect its ability to generate recurring revenues and steady earnings growth over the longer term. Meanwhile, we ascribed an unchanged 13.0x target PER to both its fully diluted trading and mechanical & electrical engineering services businesses, based on their potential earnings contribution in 2019. We believe that its recent share price weakness stemmed from the potential removal of OCK from the Shariah compliant list in the upcoming semi-annual review as offshore loans in Myanmar and Vietnam are deemed to be non-Shariah compliant. Nevertheless, OCK’s valuations are attractive at current juncture, trading at prospective PERs of 13.8x and 11.6x for 2018 and 2019 respectively – below its five-year average of 25.5x.

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 Nov 2018