Results Highlights

 OCK’s 3Q2019 net profit rose 9.0% Y.o.Y to RM8.5 mln, boosted by: (i) improved earnings from the green energy & power solution, mechanical & electrical engineering services and trading segment, (ii) lower tax expenses, and (iii) lower non-controlling interests. Revenue for the quarter increased 19.4% Y.o.Y to RM131.1 mln. For 9M2019, cumulative net profit grew 21.5% Y.o.Y to RM20.8 mln. Revenue for the period improved 8.5% Y.o.Y to RM350.4 mln.

 The reported earnings make up to 73.0% of our net profit forecast of RM28.5 mln for 2019. The reported revenue amounted to 70.2% 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 final quarter of the financial year, as traditionally displayed over the past years.

 In 9M2019, the telecommunication network services segment’s pretax profit fell 37.1% Y.o.Y to RM9.0 mln. However, both the green energy & power solution and trading segment pretax profit gained 80.2% Y.o.Y and 41.3% Y.o.Y to RM0.7 mln and RM1.1 mln respectively on lower operational expense. The mechanical & electrical engineering segment’s pretax profit surged 5.9x Y.o.Y to RM0.6 mln on improved topline contribution.

 Meanwhile, 3Q2019 net gearing has reduced to 0.8x (from 0.9x in 2Q2019), in line with the group’s target of staying below the 1.0x level.

Prospects

Todate, OCK has built over 4,200 towers across the ASEAN region. OCK owns and manages over 420 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. Already, OCK has delivered close to 1,000 telecommunication sites. 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 3Q2019, OCK operates eleven solar farms with a combined capacity of 5.9 MW in West Malaysia. We also note that OCK will be able to capitalise on the extension of the green tax exemptions to 2023 that was announced in Budget 2020. We reckon that the group is on track to becoming one of the key telecommunication infrastructure players in the ASEAN region as OCK looks to in increase its 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 the National Fiberisation Connectivity Program (NCFP), given its expertise in the segment.

Valuation And Recommendation

Although both the reported earnings and revenue came slightly below the 75.0% threshold, we deem the figures to be in line as the final quarter numbers are seasonally stronger. 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 - 22 Nov 2019