As of 1Q2020, OCK owns and manages over 4200 telco sites in Malaysia (500 sites), Myanmar (1,000 sites) and Vietnam (2,700 sites) that will provide stream of recurring income over the long term. Moving forward, OCK’s plan to undertake brownfield acquisitions in Vietnam and greenfield acquisitions in Myanmar may see some delay. At the same time, the group remains committed to increase their tower tenancy ratios in Myanmar and Vietnam which could further strengthen their bottomline margins.
On the local front, we see the telecommunications sector to weather the economic weakness as the implementation of Movement Control Order (MCO) sees stronger demand for internet and mobile usage. Elsewhere, the impending rollout of 5G (slated in 3Q2020) may also provide a boost for OCK which has successfully developed a smart pole design to support the rollout.
As of 1Q2020, OCK operates 17 solar farms with a combined capacity of 11.2 MW in West Malaysia. Moving into 2H2020, we see the green energy and power solution business segment to see improved contribution, supported by the acquisition of Green Leadership Sdn Bhd, albeit the telecommunications network services segment remains as the bread and butter of the group’s operations.
With the reported earnings coming within our estimates, we made no changes to our earnings forecast as we reckon earnings will pick up in 2H2020. Hence, we maintain our BUY recommendation on OCK, with an unchanged target price of RM0.63. 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 2019. 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 May 2020
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