Summary

• OCK Group Bhd (OCK) has announced a series of corporate exercise that entails (i) rights issue on the basis of 1 rights shares for every 10 OCK shares together with free detachable warrants on the basis of 1 Warrant B for every 1 rights share subscribed, (ii) exemption to Aliran Armada Sdn Bhd (AASB) and Mr Ooi Chin Khoon and persons acting in concert with them, namely Ooi Cheng Wah, Low Hock Keong, Abdul Halim Bin Abdul Hamid, Chang Tan Chin and Chong Wai Yew from the obligation to undertake a mandatory offer for all the remaining OCK Shares and outstanding warrants 2015/2020 pursuant to the Proposed Rights Issue with warrants and (iii) implementation of employees share option scheme (ESOS).

• The rights issue exercise could raise as much as RM24.4m and is expected to be completed in 4Q2020. Proceeds from the aforementioned exercise would be used to reduce debts (RM10.0m), working capital (RM13.7m) and balance as expenses in relation to the proposals.

• We were surprised by corporate exercise as OCK has only completed the private placement to raise RM52.3m back in November 2019. Nevertheless, the impact would be miniscule considering the size of the cash call. The move would enable OCK to improve bottom line by approximately 0.6% and 1.1% to RM33.1m and RM35.1m for FY20f and FY21f respectively on the back of the interest cost saving but at the expense of dilution in EPS.

• Moving forward, we also see the tower segment spinoff likely to be delayed till FY21 following the recent cash call exercise. The group will now will remain focus on increase the tower portfolio, whilst targeting for more renewable energy acquisition.

Valuation & Recommendation

• Following the recent rise in share price, we think that valuations are close to fair now as we maintain our HOLD recommendation on OCK on a lower target price at RM0.59 (from 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 fully-diluted trading and mechanical & electrical engineering services businesses, based on their potential earnings contribution in FY21.

• 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 - 6 Jul 2020