Summary

• OCK Group Bhd (OCK) 3QFY22 core net profit improved 64.8% YoY to RM8.2m, driven by higher contribution from both the telecommunication network services and green energy and power solution segments. Revenue for the quarter rose 36.6% YoY to RM162.1m.

• For 9MFY22, cumulative core net profit added 23.9% YoY to RM23.7m. The reported earnings make up to 68.4% of our core net profit forecast of RM34.6m and 68.8% of consensus forecast of RM34.4m are deemed below our expectations. The variance is mainly due to higher effective tax rate that was reported at 22.4% in 9MFY22 vs our estimate of 16.0%.

• As at end-3QFY22, OCK owns and manages over 5,100 telco sites (Vietnam - 3,300 sites, Myanmar - 1,200 sites and Malaysia 600 sites) that will provide recurring income stream over the long term. Tenancy ratio across each geographical segment remains stable with Malaysia at 1.2x, Myanmar at 1.4x and Vietnam at 1.3x.

• OCK remains committed in the delivery of order book of more than RM410.0m, mainly from the JENDELA programme as well as the rollout of 5G network. With the Access Agreement (AA) with Digital Nasional Bhd (DNB) being completed, we expect the rollout of 5G network services to speed up over the foreseeable future to meet DNB’s target of reaching 80.0% of 5G population coverage by 2024.

• Elsewhere, OCK aims to replicate their successful venture into Myanmar and Vietnam into other regional markets. The group has signed a Shareholders Agreement with Laos People’s Democratic Republic’s Ministry of Finance in bid to tap into the telecommunications industry in Laos as OCK looks to cement their position as a key telecommunication network services player in the region.

• To reduce the reliance on telecommunication network services segment, OCK will continue to participate in large scale solar projects under the government initiatives. We gather that, OCK is operating 17 solar farms with a combined capacity of 11.3MW in the green energy segment and is actively looking to acquire additional sites.

Valuation & Recommendation

• Given that the reported earnings are deemed to be slightly below expectations, we tweaked our earnings forecast slightly lower by 6.0% and 6.3% to RM32.5m and RM37.7m for FY22f and FY23f respectively after we have pencilled a higher effective tax rate. Still, we maintained our BUY recommendation on OCK with a lower target price of RM0.48.

• 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 7.3%, 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 FY23f.

• 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 FY21. 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 - 30 Nov 2022