Results Highlights

• OCK’s 4Q2018 net profit declined marginally by 0.8% Y.o.Y to RM6.9 mln, dragged down by higher losses recorded in the green energy and power solutions segment. Revenue for the quarter, however, improved marginally by 0.1% Y.o.Y to RM134.5 mln.

• For 2018, cumulative net profit fell 2.3% Y.o.Y to RM24.1 mln. Revenue for the year decreased 7.1% Y.o.Y to RM457.4 mln. The reported earnings came below our expectations, making up to 87.6% of our net profit forecast of RM27.5 mln for 2018. The reported revenue, however, came slightly above expectations, making up to 102.5% of our estimated revenue of RM446.4 mln. The variance in the bottom line is mainly due to the higher finance cost, coupled with the higher-than-expected effective tax rate of 31.8% vis-à-vis our expectations of 28.5%.

• In 4Q2018, the telecommunication network services segment’s pretax profit jumped 128.8% Y.o.Y to RM11.2 mln on higher from contributions of its Myanmar and Vietnam operations that offset the sluggish local operations. The mechanical & electrical engineering segment’s pretax profit stood at RM0.9 mln vs. a pretax loss of RM10,000 in 4Q2017 on increased work orders, while the trading segment’s pretax profit stood at RM1.3 mln vs. a pretax loss of RM1.5 mln in 4Q2017 on higher sales. The green energy and power solution segment pretax loss stood at RM1.1 mln vs. a pretax profit of RM2.6 mln recorded in the previous corresponding quarter, dragged down by lower topline contribution.

• Meanwhile, the group’s 4Q2018 net gearing stood at 0.8x (down from 0.9x in 3Q2018), in line with the group’s target of staying below 1.0x.

Prospects

On its telecommunication network services segment, OCK now owns a total of 3,509 towers across Myanmar and Vietnam. In the meantime, the tower tenancy ratio in Myanmar and Vietnam stood at 1.4x and 1.3x respectively. At current juncture, there are more than 500 built-to-suit sites still outstanding in its Myanmar tower portfolio that will be delivered progressively from 2019. Back home, in a bid to match the increasing demand for data and network speed, OCK is in the midst of rolling out fiberisation work orders from major Mobile Network Operators (MNOs) in 2019. There are also numerous built-to-site sites orders in Malaysia that will be delivered progressively over the next 1-2 years.

As of 4Q2018, OCK is operating ten solar farms with a combined capacity of 5.9 MW in West Malaysia. Moving forward, OCK, via a joint venture with Ananda Agro Group, will invest US$100.0 mln in a 100MW solar power plant in Bangladesh. With construction yet to start, we reckon that contribution will only kick in after 2020.

Apart from ramping up the number of telco towers and targets to increase the tower tenancy ratio, OCK will be undertaking cost-cutting measures (mainly overhead costs) which could effectively boost its bottom-line margins. We expect its bottomline margins to see improvement between 1.0%-1.5% in 2019.

Valuation And Recommendation

With the 4Q2018’s results coming below our expectations, we trimmed our earnings forecast for 2019 and 2020 by 10.4% and 7.1% to RM29.4 mln and RM34.8 mln respectively to account for the higher finance cost. Nevertheless, we maintain our BUY recommendation on OCK with a lower target price of RM0.75 (from 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 target PER of 13.0x to both its fullydiluted 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 - 27 Feb 2019