OCK is entering Vietnam in a big way via a proposed acquisition of Southeast Asia Telecommunications Holdings Pte Ltd (SEATH) for a total consideration of USD50.0m. We are positive on the proposed acquisition, which could provide an instant steady telecom tower income to the group. Post-review, we lowered our FY16E PATAMI by 1.6% but raised the FY17E numbers by 7.5%. We reiterate our OUTPERFORM call but with slightly lower DCF-driven (WACC: 9.1%, TG: 1.5%) TP of RM0.93 (vs. RM0.95 previously) after taking the soon-to-be-concluded private placement into the consideration.

Sign agreement with VNI for SEATH acquisition. Last week, OCK Vietnam Towers Pte Ltd (its 60%-owned subsidiary) signed a conditional share sale and purchase agreement with Vietnam Infrastructure Ltd to acquire the entire equity interest in SEATH for USD50m (or RM203.5m) in cash. The remaining 40% equity interest in OCK Vietnam is held by a Singapore-based fund - CapAsia Telecommunications Ltd, which is a wholly-owned company of the CapAsia ASEAN Infrastructure Fund III L.P. The SPA is set to be completed by 4QCY16 with a financial structure of 40% from the equity (USD12m from OCK, and USD8m from CapAsia) while the balance (c.USD30m) will be raised from financial institutions. The purchase price represents an EV/EBITDA multiple of c.7.98x and P/BV of 1.79x based on the pro-forma unaudited FY15 accounts.

Who is SEATH? SEATH is the largest independent base transceivers' station (BTS) owner in Vietnam, with 1,938 (accounted for c.19% of independent tower market share) telecommunications towers geographically dispersed throughout Vietnam. The towers are backed by long-term lease rentals (c.5- 10 years) from mobile network operators in Vietnam (i.e. MobiFone, VinaPhone, and Gmobile). The tenancy ratio of SEATH group is at 1.25x and expected to improve to at least 1.27x by end-CY16. SEATH has achieved an annual turnover of RM46-49m over the past three financial years with net profit of RM7.2-7.6m.

Rationale. The acquisition would provide OCK an opportunity to tap into the growing Vietnam telecommunication industry. Apart from the steady stream of telecom tower income, the group may also derive potential synergistic benefits via the expansion of business opportunities through cross-marketing of OCK group’s existing products and services. On top of that, in view of the fragmented independent tower market, management believes potential consolation among the industry players could provide an opportunity for growth moving forward.

Recent fund raising exercise is set to support its new venture in Vietnam. To recap, OCK has earlier announced to place out up to 105.6m, representing c.10%, of the issued and paid-up share capital in early June. While the final issue pricing of the proposed fund raising exercise has yet to be announced, we understand that management intends to utilise the partial proceeds for its business expansion in Vietnam. The proposed private placement is expected to boost its enlarged share base to 1,135.5m shares, based on our estimation.

Earnings revised. We have lowered our FY16E PATAMI by 1.6% after taking the proposed private placement expenses into consideration. Our FY17E PATAMI, however, is raised by 7.5% to RM31.7m, after imputing the group’s Vietnam venture (where management expects SEATH to record c.USD10-12m turnover per annum with c.50% EBTIDA margin) into our financial model. We continued to like OCK for: (i) its healthy cash flows on the back of escalating recurring income trend, (ii) spreading its wings in Myanmar and across Southeast Asia, (iii) its ability to ride with the passive infrastructure sharing trend, and (iv) its EBITDA margin expanding trend.

Source: Kenanga Research - 8 Aug 2016