Results Highlights

• OCK’s 1Q2019 net profit added 4.0% Y.o.Y to RM5.3 mln, boosted by higher contribution from the telecommunication network services (TNS), trading & mechanical and engineering services segment. Revenue for the quarter climbed 6.1% Y.o.Y to RM103.5 mln.

• The reported earnings make up to 18.7% of our net profit forecast of RM28.5 mln for 2019. The reported revenue amounted to 20.7% of our estimated 2019 revenue of RM499.2 mln. The variance in the bottom line is mainly due to the higher depreciation and finance cost.

• In 1Q2019, the telecommunication network services segment’s pretax profit fell 20.4% Y.o.Y to RM7.6 mln on higher operating expenses that offset the improvement in the topline. The green energy and power solution segment’s pretax profit shrank 56.6% Y.o.Y to RM670,000, dragged down by lower topline contribution. On the brighter note, the mechanical & electrical engineering segment’s pretax loss narrowed to RM45,000 vs. a pretax loss of RM223,000 recorded in 1Q2018 on increased work orders, while the trading segment’s pretax profit jumped 146.0% Y.o.Y to RM1.2 mln on higher sales.

• Meanwhile, 1Q2019 net gearing stood at 0.8x (unchanged from 4Q2018), in line with the group’s target of staying below 1.0x.

Prospects

Following the delivery of over 900 telecommunication sites in Myanmar, OCK will concentrate on rolling out its current outstanding order book of over 500 built-to-suit telecommunication sites progressively in 2019. Elsewhere, the group will continue to undertake brownfield acquisitions, targeting additional 1,000 telecommunication sites in Vietnam. Apart from ramping up the number of telecommunication sites, OCK targets to improve the tenancy ratio that currently stands at 1.4x and 1.3x in Myanmar and Vietnam respectively by increasing the number of co-location contracts with the respective telecommunication operators.

As of 1Q2019, OCK operates eleven solar farms with a combined capacity of 5.9 MW in West Malaysia. Moving forward, OCK will be eyeing on a slice from the recent government announcement to open tender for the third round of the 500MW large scale solar projects worth an estimated value of RM2.00 bln.

We remain positive on OCK’s venture into the ASEAN region. This will be premised on the rapid development of 4G evolution markets and future deployment of 5G that bodes well for the group as one of the key telecommunication network and infrastructure player in the ASEAN region.

Valuation And Recommendation

Although both the reported earnings and revenue amounted to less than a quarter of our forecast, we deemed the figures to be in-line as OCK’s first quarter results traditionally make up about 15.0%-20.0% of its full year earnings. Consequently, we maintain our BUY recommendation on OCK with an unchanged target price of RM0.75. 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 - 30 May 2019