Results Highlights

• OCK’s 1Q2020 net profit rose 23.3% Y.o.Y to RM6.6 mln, supported by higher contribution from the telecommunications network services (TNS) and mechanical & electrical engineering services business segments. Revenue for the quarter added 5.5% Y.o.Y to RM109.2 mln.
• The reported earnings make up to 20.0% of our net profit forecast of RM33.0 mln for 2020. The reported revenue amounted to 20.6% of our estimated 2020 revenue of RM530.1 mln. Although 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.

• In 1Q2020, the TNS segment’s pretax profit added 35.1% Y.o.Y to RM10.3 mln due to higher topline contribution on the progressive roll-out of new telco towers. The mechanical & electrical engineering segment pretax profit stood at RM189,000 vs. a pretax loss of RM45,000 in the previous corresponding quarter on improved margins. On the flipside, the green energy & power solution and trading segments pretax profit fell 91.8% Y.o.Y and 34.0% Y.o.Y to RM55,000 and RM769,000 respectively on lower topline contribution.

• Meanwhile, 1Q2020 net gearing was stable at to 0.9x (slightly up from 0.8x in 4Q2019) but remains within the group’s target of staying below the 1.0x level.

Prospects

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.

Valuation And Recommendation

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