Summary

• OCK Group Bhd (OCK) 3QFY20 net profit declined 23.1% YoY to RM6.5m, owing to the weaker contribution from the green energy & power solution, trading and mechanical & electrical engineering services business segments that offset the improvement from the telecommunication network services segment. Revenue for the quarter slipped 10.5% YoY to RM117.2m. For 9MFY20, cumulative net profit fell 6.3% YoY to RM19.5m. Revenue for the period contracted 4.6% YoY to RM334.4m.

• The reported earnings make up to 59.3% of our net profit forecast of RM32.9m and 67.0% of consensus forecast of RM29.9m for FY20f. The reported revenue amounted to 66.4% of our estimated revenue of RM503.3 mln and 68.2% of consensus forecast of RM490.7m for the year. We deemed the figures to be below expectations due to the higher depreciation charges.

• As of 3QFY20, 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 remain committed to drive their overseas expansion via brownfield acquisitions in Vietnam and greenfield acquisitions in Myanmar. 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 believe that OCK will be able to tap into the allocation of RM7.4bn for 2021 and 2022 to expand broadband services in rural areas under Budget 2021. Elsewhere, we note that the impending rollout of 5G has been delayed to end-2022 as the government will focus on expansion of existing 4G coverage and increasing mobile broadband speed under the National Digital Network Initiative (Jendela) plan with tenders amounting to RM4.6bn infrastructure works for 1,661 sites to be tendered by 1Q2021.

• As of 3QFY20, OCK operates 17 solar farms with a combined capacity of 11.2MW in West Malaysia. In bid to reduce the reliance on TNS segment, OCK aims to participate in bid for the large-scale solar 4 (LSS4) that entails 1GW of national solar energy tender.

Valuation & Recommendation

• We trimmed our earnings forecast by 17.6% and 15.1% to RM27.2m and RM28.2m for FY20f and FY21f respectively to account for the higher depreciation charges. Following the earnings revision, we maintain our BUY recommendation on OCK, but with a lower target price at RM0.56 (from RM0.59).

• 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 - 26 Nov 2020