Results Highlights

• OCK’s 2Q2019 net profit climbed 65.6% Y.o.Y to RM7.0 mln, boosted by improved contribution from the mechanical & electrical engineering services and trading segment. Revenue for the quarter rose marginally by 0.3% Y.o.Y to RM115.8 mln. For 1H2019, cumulative net profit added 31.8% Y.o.Y to RM12.3 mln. Revenue for the period increased 2.9% Y.o.Y to RM219.3 mln.

• The reported earnings make up to 43.2% of our net profit forecast of RM28.5 mln for 2019. The reported revenue amounted to 43.9% of our estimated 2019 revenue of RM499.2 mln. We deem the results to be in line as we expect a stronger performance in the second half of the financial year, as traditionally displayed over the past years.

• In 1H2019, both the the telecommunication network services and green energy and power solution segment’s pretax profit fell 18.9% Y.o.Y and 55.6% Y.o.Y to RM15.4 mln and RM803,000 respectively, as the former is undergoing restructuring in its Malaysia operations. However, the trading segment’s pretax profit jumped 120.6% Y.o.Y to RM1.7 mln. The mechanical & electrical engineering segment’s pretax profit stood at RM2.3 mln vs. a pretax loss of RM0.5 mln recorded in 1H2018 on improved topline contribution.

• Meanwhile, 2Q2019 net gearing reduced to 0.9x (from 1.0x in 1Q2019), in line with the group’s target of staying below 1.0x level.

Prospects

OCK owns and manages over 4,000 telco sites in Malaysia that will provide stream of recurring income over the long term. Overseas, the group’s long-term recurring income will be boosted by the roll-out its outstanding built-to-suit telecommunication sites in Myanmar. Elsewhere, the group plans 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 to 1.6x, from 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 2Q2019, OCK operates eleven solar farms with a combined capacity of 5.9 MW in West Malaysia. Moving forward, OCK will be eyeing a slice of the recent government plan to open tender for the third round of the 500MW large scale solar projects worth an estimated RM2.00 bln.

We reckon that the group is on track becoming one of the key telecommunication infrastructure players in the ASEAN region as OCK looks to in increase their geographical presence in neighbouring countries such as the Philippines, Bangladesh and China. In the meantime, OCK will also be able to leverage on the recent announcement of National Fiberisation Connectivity Program (NCFP), given its expertise in the segment.

Valuation And Recommendation

Although both the reported earnings and revenue amounted to less than half of our forecast, we deemed the figures to be in-line as OCK’s first half results traditionally make up about 35%-45.0% 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 2020.

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 2019