Our optimistic view on OCK remains unchanged after we attended the group’s 1H16 results’ briefing. The group has delivered 20% of 920 towers to Telenor Myanmar and is set to complete the project by end-CY16. Post-results’ briefing, we made no changes to our FY16/FY17E earnings forecast. Maintain OUTPERFORM call with an unchanged TP of RM0.93 based on DCF valuation (WACC: 9.1%, TG: 1.5%).

Best ever 1H numbers. OCK reported its best ever 1H results in 1H16 with RM192.5m (+52% YoY) turnover and RM9.2m (+12% YoY) in PATAMI. Turnover was mainly driven by a stronger telecommunication network services contribution (+59% to RM1551m) on the back of higher contribution from its regional operations in Indonesia, Cambodia and Myanmar as well as contracting works in Malaysia, thanks to higher network configuration jobs from major Cellcos. The M&E Engineering service's division meanwhile, performed better (+73% to RM14m) due to higher delivery of engineering works on the existing project. PBT improved 28% to RM15.2m (thanks to the higher turnover) but with margin lowered to 12.4% as compared to 14.2% a year ago, no thanks to the higher depreciation expenses and finance costs as a result of larger towers portfolio. Despite recording a stronger turnover and PBT growth, the group’s PATAMI climbed merely by 12%, due to higher minority interest as well as the effective tax rate of 26.5% (vs. 23.7% a year ago).

Handover to Telenor Myanmar started. OCK has identified more than 880 telecommunication tower sites thus far and is on-track to deliver 920 towers (albeit the Norwegian-owned Celco is only aiming to receive a minimum 720 towers by end-CY16) to Telenor Myanmar by end-CY16 under the built-and-lease-back business model. OCK Yangon has erected 201 towers (of which 189 had been delivered to Telenor Myanmar by end- August), and is set to ramp up delivery in the remaining months. All the telecommunication towers have installed sufficient specification to cater for three players. The Myanmar project is expected to contribute c.RM60m revenue per annum with a lucrative targeted EBITDA margin of c.60%. We understand that management has an intention to build up to 3,000 telecommunication towers over the next five years after delivering the initial 920 telecom towers to the Norwegian telecommunication providers.

Update on Vietnam venture. OCK has received several offers from both local and overseas lenders in respect of the USD30m loan utilised to finance its acquisition in Southeast Asian Telecommunications Holdings Pte Ltd (SEATH). Meanwhile, OCK is aiming to seek shareholders’ approval (on the above proposed acquisition) during the EGM in October and set to complete the exercise by November 2016. To recap, SEATH is the largest independent base transceivers' station (BTS) owner in Vietnam, with 1,938 (accounting 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. All in all, we are positive on the proposed acquisition, which could provide an instant steady telecom tower income to the group.

Inroad to expand its recurring income base. Management is keeping no secret of finding ways of further strengthening its recurring revenue base. Based on our estimate, the group’s recurring income base is likely to account for 21% (to its top line) by end FY16 and 36% a year later after delivering 920 towers to Telenor Myanmar and upon the completion of the acquisition of 60% in SEATH.

Source: Kenanga Research - 1 Sep 2016