Summary

• OCK Group Bhd (OCK) 3Q21 net profit declined 23.4% YoY to RM5.0m, dragged by the ringgit and Myanmar kyat currency exchange fluctuation and electricity supply disruptions from remote towers location that affected the telecommunication & network services (TNS) segment. Revenue for the quarter, however, improved marginally by 1.3% YoY to RM118.7m.

• For 9M21, cumulative net profit fell 2.1% YoY to RM19.1m. Revenue for the period, however, rose 4.2% YoY to RM348.5m. The reported earnings accounts to 54.1% of our net profit forecast of RM35.3m and 61.2% of consensus forecast of RM31.2m. The variance is due to the weaker-than-expected margins from the TNS segment.

• As of 3QFY21, OCK owns and manages over 4,330 telco sites in ASEAN regional with Malaysia (530 sites), Myanmar (1,100 sites) and Vietnam (2,700 sites) that will provide stream of recurring income over the long term. For the time being, there are more than 600 towers in the pipeline for OCK in 2022.

• Moving forward, OCK will be leveraging on the evolvement of 5G services, targeting 36.0% of high-density areas including in major cities in Johor, Selangor, Penang, Sabah and Sarawak in 2022. Under the JENDELA programme, OCK has an outstanding orderbook of RM80.0m. We also note that OCK has secured a turnkey contract for the implementation of broadband access service through satellite connectivity from Numix Engineering Sdn Bhd (Numix) valued at RM115.2m over 2 years.

• On the overseas ventures, OCK remains committed to drive the tenancy ratio in Vietnam by deploying more aggressive marketing strategy through brownfield expansions. Myanmar’s expansion plan has resume after being impacted by the imposition of martial law, with the focus now on delivery of existing orders in hand.

• On the green energy segment, we note that OCK has recently secured a project for the implementation of a new net energy metering (NEM) rooftop solar project in Terengganu. The project will bring 2.0MW capacity per annum for over a 25-year lease term that is expected to be operational by 2Q2022.

Valuation & Recommendation

• We revised our earnings forecast lower by 23.4% and 11.8% to RM27.0m and RM34.7m in FY21f and FY22f respectively. The downward revision is premised to margins contraction for the TNS segment that was affected by the Myanmar civil unrest, coupled with the higher effective tax rate assumption at 19.0% vis-à-vis our initial projection at 17.5%. Consequently, we downgrade OCK to HOLD (from Buy) with a lower target price of RM0.50 (from RM0.53).

• 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 3.0%). Meanwhile, we ascribed a target PER of 13.0x to both its fully diluted trading and mechanical & electrical engineering services businesses, based on their potential earnings contribution in FY22f.

• 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 FY20. 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 - 25 Nov 2021