Summary

• OCK Group Bhd (OCK) 2QFY20 net profit declined 8.5% YoY to RM6.4m, mainly dragged by the weakness in mechanical & electrical engineering services segment on the back of closure of project sites due to implementation of Movement Control Order. Revenue for the quarter slipped 6.8% YoY to RM108.0m. For 1HFY20, cumulative net profit climbed 5.3% YoY to RM13.0m. Revenue for the period, however, contracted 1.0% YoY to RM217.2m.

• The reported earnings make up 39.5% of our net profit forecast of RM32.9m and 43.4% of consensus forecast of RM29.9m for FY20f. The reported revenue amounted to 43.2% of our estimated revenue of RM503.3 mln and 43.4% of consensus forecast of RM501.0m for the year. Although the reported earnings and revenue amounted to less than half of our forecast, we deemed the figures to be in line as OCK’s earnings tends to be seasonally stronger in 2H with telco operators ramping up their capex towards the end of the year.

• Moving forward, OCK remain committed to undertake brownfield acquisitions in Vietnam and greenfield acquisitions in Myanmar in order to expand their tower leasing business to other telco operators. 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) ensure stronger demand for internet and mobile usage on the back of the rising adoption of digitalisation. Elsewhere, the impending rollout of 5G may also provide a boost for OCK which has successfully developed a smart pole design to support the rollout.

• As of 2QFY20, OCK operates 17 solar farms with a combined capacity of 11.2 MW in West Malaysia. Moving into 2H2020, OCK aims to participate in bid for the large scale solar 4 (LSS4) that entails 1GW of national solar energy tender. Still, we reckon that the telecommunications network services segment remains as the key revenue driver in coming years owing to their regional expansion plans.

Valuation & Recommendation

• Following the retracement on its share price, we think that valuations are now turned more attractive and we upgrade our recommendation on OCK to BUY (from Hold) with an unchanged target price at RM0.59. 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%). 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 FY21f.

• 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 FY19. Any project delay could also impact its income growth and cash flow as the group is operating in a capital intensive industry.

Source: Mplus Research - 28 Aug 2020